<PAGE>   1

                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

     For the fiscal year ended December 31, 1999

                                       OR

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

     For the transition period from ________________ to _______________

                         Commission file number 0-27309

                        AAVID THERMAL TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
<S>                                                                                     <C>
                        DELAWARE                                                                    02-0466826
(State or other jurisdiction of incorporation or organization)                          I.R.S. Employer Identification No.)

      EAGLE SQUARE, SUITE 509, CONCORD, NEW HAMPSHIRE                                                  03301
         (Address of principal executive offices)                                                   (Zip Code)
</TABLE>

Registrant's telephone number, including area code: (603) 224-1117

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

Securities registered pursuant to Section 12(g)of the Act: COMMON STOCK, 0.01
PAR VALUE

     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 shorted period that the
registrant was required to file such report, and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes [X] No [ ]

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

     Aggregate market value of the Registrant's common stock held by
non-affiliates: N/A. The number of outstanding shares of the registrant's Common
Stock as of March 31, 2000 was 940 shares of class A, 1000 shares of Class B and
40 shares of Class H, all of which are owned by Heat Holdings Corp. On February
2, 2000, a wholly-owned subsidiary of Heat Holdings Corp. was merged with and
into the Registrant with the Registrant becoming a wholly-owned subsidiary of
Heat Holdings Corp. and each share of Registrant's then outstanding common stock
was converted into $25.50 in cash.

     Documents incorporated by reference: none


<PAGE>   2


                                     PART I

ITEM 1. BUSINESS

COMPANY INTRODUCTION

     We are the leading global provider of thermal management solutions for
electronic products and the leading developer and marketer of CFD software. Each
of these businesses has an established reputation for high product quality,
service excellence and engineering innovation in its market. We design,
manufacture and distribute on a worldwide basis thermal management products that
dissipate unwanted heat, which can degrade system performance and reliability,
from microprocessors and industrial electronics products. Our products, which
include heat sinks, interface materials and attachment accessories, fans, heat
spreaders and liquid cooling and phase change devices that we configure to meet
customer-specific needs, serve the critical function of conducting, convecting
and radiating away unwanted heat. CFD software is used in complex
computer-generated modeling of fluid flows, heat and mass transfer and chemical
reactions. Our CFD software is used in a variety of industries, including the
automotive, aerospace, chemical processing, power generation, material
processing, electronics and HVAC industries.

     We believe the demand for thermal management products and CFD software is
growing. The increase in unwanted heat generated in electronic and other
products is primarily a result of more powerful semiconductors and the growing
number of semiconductors being used in individual products. The growing demand
for our thermal management products is driven by the need to dissipate the
increasing amount of heat generated by electronic products, as well as strong
unit growth. The increase in heat requires more complex thermal solutions, which
in turn is driving the trend among our customers and other electronics
manufacturers to outsource development of thermal management solutions. Through
our product design capabilities and customer relationships, we lead the thermal
management industry in meeting this growing demand. The demand for CFD software
is driven by the need to reduce product development costs, minimize
time-to-market for new products and improve product performance. Through our
technological leadership in CFD software, we will continue to develop software
to meet the needs of our customers and others in this growing market. These
trends have contributed to the growth in our net sales.

     Our thermal management products are used in a wide variety and growing
number of computer and networking and industrial electronics applications,
including computer systems (desktops, laptops, disk drives, printers and
peripheral cards), network devices (servers, routers, set top boxes and local
area networks), telecommunications equipment (wireless base stations, satellite
stations and PBXs), instrumentation (semiconductor test equipment, medical
equipment and power supplies), transportation and motor drives (braking and
traction systems) and consumer electronics (stereo systems and video games). Our
CFD software is used for a wide variety of computer-based analyses, including
the design of electronic components and systems, automotive design, combustion
systems modeling and process plant troubleshooting. We have longstanding
relationships with a highly diversified base of more than 3,500 national and
international customers, including original equipment manufacturers (commonly
referred to as OEMs), electronics distributors and contract manufacturers. Our
customers include Acer, Apple, Arrow, AT&T, Cisco Systems, Compaq Computer,
DaimlerChrysler, Dell, Dow Chemical, Ericsson, Ford, Fujitsu, General Electric,
Harmon-Kardon, Hewlett-Packard, IBM, Intel, Lockheed Martin, Lucent, Motorola,
Nortel, Rockwell Automation, Rolls Royce, SCI Systems, Siemens, Silicon
Graphics, Solectron and Sun Microsystems.

     In October 1999, we completed the acquisition of the Thermalloy Division of
Bowthorpe plc ("Thermalloy") for a total purchase price of $84.6 million
(including transaction costs of $2.8 million). Thermalloy designs, manufactures
and sells a wide variety of standard and proprietary heat sinks and associated
products, similar to those designed and manufactured by Aavid Thermal Products,
our thermal management business, within the computer and networking and
industrial electronics (including telecommunications) industries. Thermalloy has
manufacturing facilities in Dallas, Texas; Monterrey, Mexico; Corby and Swindon,
England; Bologna, Italy; and Malacca, Malaysia. As part of this acquisition from
Bowthorpe, we acquired 65.2%, representing Bowthorpe's entire shareholding, of
Curamik Electronics GmbH ("Curamik"), as well as an additional 20.2% of Curamik
from two minority shareholders for approximately $2.7 million, thereby
increasing our ownership to 85.4%. Curamik is a German corporation that
manufactures direct bonded copper substrates used in the packaging and cooling
of high power electronic devices.

     On August 23, 1999, we entered into an Agreement and Plan of Merger
("Merger Agreement") with Heat Holdings Corp., a corporation newly formed by
Willis Stein & Partners II, L.P. ("the Purchaser"), and Heat Merger Corp., a
wholly owned subsidiary of the Purchaser ("Merger Sub"), providing for the
merger of the Merger Sub with and into Aavid ("the Merger"), with Aavid being
the surviving corporation. The Merger was approved by the Company's stockholders
on January 29, 2000 and consummated on February 2, 2000. Pursuant to the Merger,
Aavid stockholders received $25.50 in cash for each outstanding share of common
stock, and outstanding stock options and warrants were cashed out. The Merger
will be accounted for using the purchase method. In connection with the Merger,
we consolidated our business into two operating segments: Aavid Thermalloy LLC,
which designs, manufacturers and distributes


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thermal management products that dissipate unwanted heat from microprocessors
and industrial electronics products, and include Applied Thermal Technologies,
Inc.'s thermal design, validation and consulting services; and Fluent, which
develops and markets CFD software.

INDUSTRY OVERVIEW(1)

THERMAL MANAGEMENT

     In today's electronic environment, microprocessors and their associated
power supplies, hard drives, advanced video chips and other peripheral devices
draw large amounts of power and, consequently, must dissipate a significant
amount of heat. The same heat generation occurs in semiconductors and integrated
circuits in motor controls, telecommunications switches and other electronics.
Because these electronic components can only operate efficiently in narrow
temperature bands, heat is an absolute constraint in electronic system design.
The excessive heat generated within a component not only degrades semiconductor
and system performance and reliability, but can also cause semiconductor and
system failure.

     Increasingly, neither externally generated off-the-shelf thermal management
products nor internally designed and produced parts have been able to
effectively address the expanding complexity of thermal management problems
resulting from the increasing amount of heat required to be dissipated by
electronic products. The complexity of thermal management problems has been
intensified by reductions in system size, shorter time-to-market, shorter
product life cycles and more demanding operating environments.

     These factors have led to the development and growth of the thermal
management industry. We estimate that the size of the worldwide thermal
management market was approximately $4.1 billion in 1999. This $4.1 billion
market can be broken down into eight industry types as illustrated in the table
below. We further estimate that the worldwide thermal management market will
grow at a compound annual growth rate of approximately 12.8% to $6.6 billion in
2003.

     The worldwide electronic thermal management market is divided between
solutions that are internally designed and produced by OEMs (i.e., "in-house"
thermal solutions) and those that are externally supplied by thermal management
companies (i.e., "outsourced" thermal solutions). Based on our experience in the
industry and industry data, we estimate that the size of the in-house thermal
solutions market is approximately $1.2 billion and the size of the outsourced
thermal solutions market is approximately $2.9 billion, or 72% of the worldwide
electronic thermal management market. As thermal management problems become
increasingly complex, we believe that manufacturers will increasingly outsource
their thermal management design and production in order to focus on their core
competencies. We further believe that the market for the types of thermal
management products and services we offer in our existing geographic locations
comprises only 45% of the $2.9 billion outsourced thermal solutions market. We
believe that, as the market leader, we will benefit from the expected growth in
the worldwide electronic thermal management market and that, through geographic
and product expansion, we have a significant opportunity to address a larger
portion of the outsourced segment of this market than we currently address.

     Electronics manufacturers seek to respond to end user demands and
increasing competition by offering new products with improved performance
(functionality and speed) and greater reliability in smaller forms and at lower
prices. This greater functionality, speed and the miniaturization of component
housing has resulted in an increase in unwanted heat generated by electronics
products. The demand for thermal management products is driven by the need to
dissipate the increasing amount of heat generated by electronic products.

     We believe that future growth of the thermal management products market
will be driven by the following factors:

     -    Inherent unit growth in end-user products, such as desktop computers,
          laptops and telecommunications equipment. In particular, the volume of
          microprocessors and support chip units is increasing on an absolute
          and on a per product basis.

     -    The wider use of electronic controls in numerous areas due to the
          general increase in automation.

-----------------------------
     (1) Unless otherwise indicated, all industry data and statistics relating
to the thermal management industry and its segments contained in this Annual
Report on Form 10-K are management estimates that are based on its experience
and independent reports on the electronics industry periodically issued by
Electronics Industry Outlook, together with a study on thermal content in
electronics products conducted by International Interconnection Intelligence for
Aavid in 1996. Information relating to the existing computational fluid
dynamics, or CFD, software market is based on publicly available information
about our key competitors and internal management estimates; and information
relating to the potential CFD software market is based on a study we conducted
at the time we acquired our CFD software business. Although we believe the
information on which we have based our estimates is reliable, we cannot
guarantee the accuracy or completeness of such information and have not
independently verified any of it.


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<PAGE>   4


     -    The increasing use of microprocessors in industrial electronics
          applications, fueling the need for thermal management products to
          manage the different operating temperature characteristics of these
          devices.

     -    The increased need for reliable power supplies. The quality of power
          can be adversely affected by thermal overload arising from ineffective
          thermal management. This is becoming increasingly important within the
          industrial, computer and telecommunications sectors where "irregular"
          power surges can damage equipment and cause productivity loss.

     -    The complexity of thermal management problems, which has been
          intensified by the increasing amount of heat to be dissipated,
          reductions in system size, shorter time-to-market product cycles and
          more demanding temperature operating environments.

COMPUTATIONAL FLUID DYNAMICS SOFTWARE

     CFD software is used in a wide range of industries for complex
computer-based analysis of engineering designs involving fluid flows, heat and
mass transfer, chemical reaction and other fluid flow phenomena. CFD software
tools allow the analysis and evaluation of design modifications without the
physical prototyping of each design modification, thereby reducing engineering
cost, improving product performance and decreasing time-to-market for new
products. Specific uses of CFD-based flow analysis include the design of
electronic components and systems, automotive design, combustion systems
modeling and process plant troubleshooting.

     Over the past decade, increases in computing power have made CFD-based
computer analysis of complex fluid flows feasible on computers that are readily
available to research and development and engineering departments. Development
of CFD software technology is expanding that market beyond its traditional user
base of Ph.D-level engineers in corporate research and development centers to
the larger base of design engineers working in product development. Finally, CFD
software tools are part of the growing trend toward improved engineering
efficiency through computer-aided analysis and design by integrating CFD
software with geometric modeling and design.

     The CFD software market has been growing rapidly during the past decade.
Based on publicly available information from a number of our key competitors and
internal management estimates, we believe that in 1998 the size of the developed
market for CFD software applications was approximately $100 million. We further
believe that this market has grown approximately 20% annually since 1992 and we
expect to benefit from the anticipated continued growth of this market. Based on
a market study we conducted in connection with our acquisition of Fluent, we
estimate that the size of the potential market for CFD software products is
currently approximately $500 million. We also believe that, through Fluent, we
have approximately 40% of the developed market for CFD software applications.

     We expect that future growth of the CFD software market will be driven by
the following factors:

     -    The ability of customers using CFD software to reduce their product
          development costs, minimize time-to-market for their new products and
          improve product performance.

     -    The ability to analyze fluid flows is becoming increasingly important
          across a wide range of industries.

     -    The development of more powerful and affordable computers that are
          capable of running CFD software.

     -    The growing trend among customers to improve the engineering
          efficiency of product development and improvement through
          computer-aided analysis and design.

     -    Expansion of the traditional user base for CFD software beyond
          Ph.D.-level engineers in corporate research and development centers to
          the larger base of design engineers.


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<PAGE>   5
COMPETITIVE STRENGTHS

     We believe that the following competitive strengths have enabled us to
become a worldwide leader in both the thermal management market and the CFD
software market.

TOTAL INTEGRATED SOLUTIONS PROVIDER

     The increasing complexity of heat dissipation problems and the growing
trend among manufacturers to outsource development of thermal management
solutions has stimulated demand for total integrated solutions. We provide total
integrated solutions by analyzing customers' thermal management problems at the
device-, board- and system-level, designing, simulating and prototyping thermal
management solutions and manufacturing, distributing and supporting these
solutions worldwide.

VALUE-ADDED PARTNERING WITH OUR CUSTOMERS

     We work closely with our customers to develop customized thermal management
solutions. We believe that our close relationships with customers and their
design and development teams, as well as our worldwide manufacturing
capabilities, allow us to anticipate customers' needs and, through our
engineering expertise and experience, provide quality product solutions more
quickly than our competitors.

WORLDWIDE LOW COST MANUFACTURER

     We have state-of-the-art manufacturing operations in the United States,
Canada, Mexico, Europe and Asia, including China. As an increasing number of
electronics systems are being manufactured outside the United States, our low
cost foreign manufacturing operations enable us to supply products directly to
our customers at their geographically dispersed manufacturing locations.

LEADERSHIP IN CFD TECHNOLOGY

     We believe that we are the technology leader in CFD software. As a result
of our technological leadership, we develop software that enables our customers
to generate the increasingly complex computer models they demand for more
cost-efficient product design. This factor, as well as the relative ease-of-use
and predictive accuracy of our CFD software, are of primary importance to our
customers.

RECURRING REVENUES FROM SOFTWARE BUSINESS

     Our CFD software business is characterized by high customer retention and
recurring revenues. In recent years, approximately 80% of our annual software
license revenue was renewed in the following year. This is driven by the
significant value added by our CFD software to the design process and the high
cost of switching to a competitor's software.

EXPERIENCED MANAGEMENT TEAM

     Our senior management team has extensive operating and marketing experience
in the thermal management and CFD software markets. This management team has
grown our business, both organically and through strategic acquisitions, and has
been responsible for improving operating efficiencies. Bharatan R. Patel, our
chief executive officer who founded our CFD software business, has 27 years of
experience in the area of fluid flows and thermal management, George P.
Dannecker, president of our thermal management business, has 27 years of
electronics industry experience, and H. Ferit Boysan, president of our CFD
software business, has 20 years of experience in the area of fluid flows and CFD
software.

BUSINESS STRATEGY

     Our business strategy is to continue to be the market leader in both the
thermal management and CFD software markets. We intend to continue this business
strategy and strengthen our competitive position through the following
initiatives:

CAPITALIZE ON STRONG THERMAL MANAGEMENT INDUSTRY GROWTH

     We believe that our existing thermal management markets will continue to
experience strong growth. Growth will be driven by the need to dissipate the
increasing amount of heat being generated by electronic products, as well as
unit growth in these products. We believe our competitive strengths position us
to capitalize on these growth trends.

TAKE ADVANTAGE OF OUTSOURCING TREND

     The increasing complexity of heat dissipation problems is driving a trend
among manufacturers to outsource the development of thermal management solutions
to companies with high levels of expertise in solving these problems. We intend
to capitalize on this trend by leveraging our technical expertise in designing
thermal management products and through continuing to partner with our customers
in creating customized solutions.

EXPAND OUR ADDRESSED THERMAL MANAGEMENT MARKET

     We believe we have significant opportunities to expand the portion of the
outsourced thermal management market that we address. Our strategy is to expand
into the $1.6 billion part of the outsourced thermal management market that we
do not currently serve by entering into new geographic markets and introducing
new products that complement our existing product offerings.


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ACCELERATE GROWTH IN THE COMPUTATIONAL FLUID DYNAMICS SOFTWARE MARKET

     Growth in the CFD software market will be driven by customers' needs to
reduce product development costs, minimize the time-to-market for their new
products and improve product performance, as well as by increasing applications
for CFD software. We intend to grow our CFD software business through internal
product development and possibly strategic acquisitions to leverage our core
technological competence in the development of computerized design and
simulation software. Our goal is to further expand this market beyond its
traditional user base of Ph.D.-level engineers in corporate research and
development centers to the larger base of design engineers by providing them
relatively easy-to-use industry-specific software.

PROVIDE TOTAL THERMAL MANAGEMENT SOLUTIONS ON A GLOBAL BASIS

     We intend to continue capitalizing on our state-of-the-art worldwide
manufacturing capabilities and to further leverage our expertise and technology
to offer our customers a complete global solution to their thermal management
problems. The increasing number of electronics systems manufactured outside of
the United States has forced many electronics manufacturers to seek a highly
integrated, worldwide provider of thermal solutions. We plan to continue to
expand our quick-ramp, high-volume manufacturing and our design, sales and
distribution activities globally as our customers continue to expand their
operations overseas.

LEVERAGE OUR TECHNOLOGICAL LEADERSHIP

     Our approximately 100 Ph.D.s and 230 engineers focus on new technology
initiatives as well as developing new and enhancing existing products, processes
and materials to address the evolving needs of our customers. We seek to enhance
our internal research and development activities through collaborations with our
customers and third parties in order to gain access to, or to pursue the
development of, new technologies for thermal management applications and CFD
software.

MARKETS AND CUSTOMERS

     We sell our thermal management products and services to a
highly-diversified base of customers across a wide range of industries and
applications. We currently sell our thermal management products and services to
over 2,500 customers. The following chart shows our largest customers for
thermal management products and services by market sector:

<TABLE>
<CAPTION>
                              MARKET                                               CUSTOMERS
                              ------                                               ---------


<S>                                                                <C>                            <C>
COMPUTERS AND NETWORKING:
  Computers......................................................  Acer                           Hewlett-Packard
                                                                   Apple                          IBM
                                                                   Compaq Computer                Intel
                                                                   Dell                           Silicon Graphics
                                                                   Gateway

  Contract Manufacturing.........................................  Celestica                      SCI Systems
                                                                   Jabil Circuit                  Solectron

  Networking.....................................................  Cisco Systems                  Sun Microsystems

INDUSTRIAL ELECTRONICS:
  Automotive.....................................................  DaimlerChrysler                Motorola
  Communications.................................................  AT&T                           Motorola
                                                                   Ericsson                       Nortel
                                                                   Lucent
  Electronics Distributors.......................................  Arrow                          Future Electronics
                                                                   Avnet
  Instrumentation (including power supply).......................  AT&T                           Lucent
                                                                   General Electric               Motorola
                                                                   Harmon-Kardon                  Nortel
  Transportation and Motor Drives................................  ABB Daimler Benz               Rockwell Automation
                                                                   General Electric               Siemens
                                                                   Marconi
</TABLE>


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     Except for Intel, no customer represented more than 5% of our thermal
management net sales during 1999, 1998 or 1997. Intel accounted for
approximately 3%, 22% and 15% of net sales during 1999, 1998 and 1997,
respectively.

     We currently have more than 2,000 licensees of our CFD software. License
revenue is diversified by market sector and geographical market. The following
chart shows our largest customers for CFD software applications by market
sector:

<TABLE>
<CAPTION>
                          MARKET                                             CUSTOMERS
                          ------                                             ---------


<S>                                                         <C>                           <C>
Aerospace................................................   Boeing                        Lockheed Martin
                                                            British Aerospace             NASA
                                                            Komatsu
Automotive...............................................   Cummins Engine                Mitsubishi Motor Corporation
                                                            Ford                          Renault
                                                            General Motors
Chemical Process.........................................   Bayer                         3M
                                                            Dow Chemical                  Shell KSLA
                                                            DuPont
Electronics..............................................   Fujitsu                       IBM
                                                            Hewlett-Packard               Motorola
HVAC/Appliance...........................................   Carrier                       Welbilt
                                                            Hoover                        Whirlpool
                                                            Osram/Sylvania
Power Generation.........................................   Asea Brown Boveri             Mitsubishi Heavy Industries
                                                            General Electric Power        Rolls Royce
                                                             Systems                      Westinghouse
</TABLE>

THERMAL MANAGEMENT PRODUCTS AND SERVICES

     We provide total integrated solutions to our thermal management customers.
We have the thermal design know-how to first analyze customers' thermal
management problems at the device-, board- and system-level, to then design,
simulate and prototype thermal management solutions and to finally manufacture,
distribute and support these solutions around the world.

     Our design and applications engineers work concurrently with our customers'
design teams to develop optimal thermal solutions, which are increasingly being
outsourced by our customers. Working as an extension of the product design team,
Applied Thermal Technologies' engineers give customers easy access to our system
design expertise in thermal management on a time-and-materials consulting basis.
Additionally, Applied Thermal Technologies provides for a smooth transition from
system design and validation to complete outsourced product solutions provided
by Aavid Thermalloy.

     We design, manufacture and sell both standard and customized thermal
management products. We seek to become a strategic supplier to our customers and
to differentiate ourselves from our competitors by offering a higher level of
service. We currently offer heat sinks, interface materials and attachment
accessories, fans, heat spreaders and liquid cooling and phase change devices
that we configure to meet customer-specific needs. The prices for our thermal
management products (including attachment devices and interface materials),
depend primarily on cost, the technology used to make the part and its value in
the customer's application. Because of the continued shrinking time-to-market
for most new products and the corresponding contraction of design cycles, we
also offer simulation and modeling software to assist our customers in handling
the complexity of the design of a thermal solution. The following is a brief
description of our thermal management products and services:


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<PAGE>   8


<TABLE>
<CAPTION>
PRODUCT OR SERVICE                                   DESCRIPTION                                      APPLICATION
------------------                                   -----------                                      -----------

<S>                            <C>                                                          <C>
Heat Sinks, Fan Heat           These products are typically made from aluminum              - Removes potentially damaging heat from
Sinks and Heat Spreaders       extrusions, stampings, castings or multi-technology            microprocessors and integrated
                               assemblies. These products have high surface area              circuits in electronics applications
                               to volume ratios and may rely on a fan mounted
                               directly on the heat sink to increase the movement
                               of air.

Interface Materials and        Attachment devices are the spring clips, tapes,              - Increases the effectiveness of heat
  Attachment Accessories       adhesives, tabs and similar devices which are                  sinks
                               used to attach the heat sink to the                          - Promotes a highly efficient thermal
                               semiconductor or integrated circuit device                     transfer between the microprocessor or
                               and/or to the customer's printed circuit board                 integrated circuit and heat sink
                               or system chassis. Interface materials include               - Reduces the cost of the customer's
                               greases, silicon pads and other materials which                installation and repair
                               have desirable thermal and electrical                        - Transfers heat from the component
                               properties. We purchase most of these materials                being cooled to the heat sink
                               on a private label basis from a number of
                               suppliers.

Liquid Cooling and Phase       These devices include cold plates, heat pipes and            - Moves highly concentrated heat from
 Change Devices                other liquid cooling designs that dissipate heat by            microprocessors and integrated
                               conducting or convecting the heat into a liquid,               circuits to a location where a
                               which then transfers the heat away from the source             traditional heat sink can dissipate
                               to the ultimate heat sink.                                     heat

Applied Thermal Technologies'  Applied Thermal Technologies' facilities are                 - Analyzes customers' thermal problems
  Design Centers               staffed by technicians with thermal engineering                at the device-, board-and
                               and flow analysis expertise and utilize a                      system-level
                               variety of sophisticated design, test and                    - Designs, simulates and prototypes
                               validation hardware and software.                              thermal management solutions
                                                                                              efficiently
</TABLE>


COMPUTATIONAL FLUID DYNAMICS SOFTWARE PRODUCTS

     We are the leading provider of general purpose CFD software used to predict
fluid flow, heat and mass transfer, chemical reaction and related phenomena. We
provide CFD-based flow analysis software and consulting services that are used
by engineers in corporations worldwide for the design and analysis of products
and processes. Our software and services help engineers reduce engineering and
product development costs, improve product performance and reduce time-to-market
for new products.

     We currently license our software products to more than 2,000 licensees
worldwide. In North America, we typically license our software products under
one year, renewable agreements. In Europe and the Far East, a significant
portion of our CFD software sales are derived from licenses of this software for
one-time fees; in such situations, we also typically receive annual maintenance
and support fees.

     We have also introduced CFD-based industry-specific products, such as
Icepak, for use by designers and engineers in the electronics cooling industry,
and Mixsim, for use by designers and engineers in the chemical mixing industry.
We believe that our relatively easy-to-use, industry-specific products are
expanding the CFD total market beyond its traditional user base of Ph.D.-level
engineers in corporate research and development centers to the larger base of
design engineers.

     We also market engineering consulting services. With over 15 years of CFD
and engineering consulting experience, our worldwide team of CFD professionals
supports clients with senior engineering consultants, experienced CFD analysts,
leading CFD software developers and mesh generation experts. Support services
include expertise in the physics of heat, fluid flow and related phenomena, in
CFD modeling and analysis, and in selection of engineering design solutions. In
addition to providing CFD software expertise and access to high-performance
computing systems, our CFD software consulting group works under contract to
develop software with specific features required by individual clients.


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     We provide a complete suite of CFD software products, with each product
designed for a specific task or for optimal performance on a specific class of
problems. The following is a brief description of our CFD software products:

<TABLE>
<CAPTION>
PRODUCT                                              DESCRIPTION                                        FEATURES
-------                                              -----------                                        --------

<S>                               <C>                                                     <C>
Fluent                            Fluent is general purpose CFD software used             - Provides a choice of solver options
                                  across a wide range of industries and is ideally          for optimum convergence and accuracy for
                                  suited for incompressible and mildly                      a wide range of flow regimes
                                  compressible (transonic) and highly compressible        - Structured and solution-adaptive
                                  (supersonic and hypersonic) flows. Fluent                 unstructured mesh capability
                                  contains physical models for a wide range of            - Enables easier problem setup
                                  applications including turbulent flows, heat
                                  transfer, reacting flows, chemical mixing,
                                  combustion and multi-phase flows.

Fidap                             Fidap is general purpose CFD software for the           - Offers complete mesh flexibility
                                  simulation of incompressible or compressible            - Provides a wide range of physical
                                  flows, including prediction of liquid-free                models, with particular strength for
                                  surfaces, non-Newtonion rheology and advanced             application in the materials processing,
                                  radiation modeling.                                       biomedical, semiconductor, food paper
                                                                                            and chemical industries

Icepak                            Icepak is a fully-interactive, object-based CFD         - Used for component-, board- and
                                  software tool specifically designed to analyze            cabinet- level design
                                  air flow and thermal management in electronics          - Reduces design costs
                                  design.                                                 - Reduces the time-to-market of high-
                                                                                            performance electronic systems

Polyflow                          Polyflow is CFD software capable of "inverse"           - Analysis of polymer processing,
                                  die design. This allows designers to compute the          including extrusion die design, blow
                                  die shape required for a desired extrudate                molding, thermoforming, plastic film
                                  shape.   Polyflow is used by major resin                  casting, float glass production, thin
                                  producers and major plastics and rubber                   sheet forming, fiber drawing, wire
                                  producers.                                                coating and related materials processing
                                                                                            flows

Mixsim                            Based on inputs from the designer, Mixsim               - Eliminates the need for process plant
                                  automates the CFD model generation and                    engineers to learn the more complex
                                  simulation process for computer analysis of               usage of general purpose CFD software by
                                  agitated mixing vessels used in the chemical and          building CFD software specifically for
                                  process industries.                                       computer analysis of agitated mixing
                                                                                            vessels

GAMBIT                            GAMBIT supports a single user interface for             - Reduces the time to create a CFD model
                                  geometry creation and meshing. Different CFD            - Allows users to import geometries
                                  problems require different mesh types, and                created under other CAD/CAE packages
                                  GAMBIT brings together all of Fluent's options            into the Fluent suite of software
                                  in one environment.                                       products.
                                                                                          - Enables users to automatically create
                                                                                            unstructured tetrahedral meshes for
                                                                                            extremely complex geometries
                                                                                          - Provides a concise and powerful set of
                                                                                            solid modeling-based geometry tools with
                                                                                            both geometry and "clean-up" functions
</TABLE>


                                       9
<PAGE>   10


SALES AND SUPPORT

     We sell our thermal management products and CFD software primarily through
a global network of direct sales personnel, manufacturers' representatives,
agents and a network of independent distributors. We provide support services to
our customers, particularly in the CFD software area where we believe that
high-quality support service is critical to the success of the CFD software
business. Aavid Thermalloy (including Applied Thermal Technologies) and Fluent
both have their own sales, support and marketing personnel, all of whom
cross-sell each other's products and services where appropriate. We currently
employ approximately 240 sales, support and marketing personnel.

TECHNOLOGY

     We believe that technology leadership is essential to our growth strategy
and have focused our approximately 100 Ph.D.s and 230 engineers on the
development of technology in two areas:

THERMAL MANAGEMENT TECHNOLOGY

     We believe that we are a technology leader in thermal management due to our
extensive design expertise, technical manufacturing capabilities and process
technology. We intend to develop new technologies and to enhance existing
technologies in order to meet our customers' needs for higher performance
products on a timely basis.

     We have developed proprietary software tools (analytical models) which
enable fast approximation answers for a large class of thermal management
problems which, in turn, permits quicker design and prototyping of thermal
solutions. We have extensive prototyping capabilities and state-of-the-art
thermal laboratory facilities, including a wind tunnel which allows us to test
and validate the design of thermal solutions.

     As part of Aavid Thermalloy, Applied Thermal Technologies leverages Aavid
Thermalloy's capabilities and Icepak's technology to assist customers in
analyzing their thermal problems at the device-, board- and system-levels and to
efficiently design, simulate and prototype thermal management solutions. By
entering into the customer relationship at the onset of the product design
cycle, Applied Thermal Technologies greatly enhances our knowledge of future
industry trends, including technology development and acceptance. Additionally,
Applied Thermal Technologies provides a smooth transition from design and
validation to outsourced manufacturing with Aavid Thermalloy.

COMPUTATIONAL FLUID DYNAMICS SOFTWARE TECHNOLOGY

     We believe that we are the technology leader in CFD software. Fluent's CFD
software includes:

     -    automatic unstructured mesh generation, which allows the automatic
          creation of meshes,

     -    numerical algorithms for the accurate solution of fluid flow equations
          on structured and unstructured meshes,

     -    solution adaptive mesh which allows for interactive mesh refinement to
          provide improved solution accuracy,

     -    state-of-the-art physical models for important fluid flow phenomena
          such as turbulence, turbulence-chemistry interactions, free surface
          flows and multiphase flows,

     -    algorithms for efficient execution on multi-processor computers and
          distributed computer networks,

     -    interactive client/server architecture with a flexible and
          customizable user interface, and

     -    post-processing and data analysis tools.


                                       10
<PAGE>   11


PRODUCT DEVELOPMENT

     Our thermal management product development activities are focused on
lowering production costs, improving thermal characteristics and ease of
attachment of conventional heat sinks, and developing new thermal management
products and technologies to address the emerging and anticipated thermal
management problems of our customers. We are developing new products, both
internally as well as through collaborative efforts with third parties. These
development efforts are directed toward: heat sink characterization and
optimization; fan designs; air flow management; boundary layer optimization and
focused flow; recirculating passive and active cooling systems including heat
pipes; thermoelectric coolers, which use electricity to create a temperature
difference across an interface between the electronic device and a heat sink;
liquid and sub-ambient cooling systems; tab and surface mount heat sink
attachment methods; vacuum die casting; engineered materials and net shape part
manufacturing technology; direct chip mounting to extruded heat sinks; and
highly thermally conductive adhesive and interface systems.

     Our CFD product development activities are focused on enhancing the
capabilities of its solvers, implementing new physical models to increase the
range of applications and developing front-end user interfaces that are easy to
use for engineers in specific industries. We are also focusing on various
application and industry-specific CFD software projects which we believe will
enable us to penetrate the design engineering market.

SUPPLIERS

     We purchase raw aluminum, aluminum extrusion, aluminum coil and various
components from a limited number of outside sources. We purchase substantially
all of our aluminum coil stock from a single supplier. We believe that
purchasing aluminum extrusion and coil stock from a limited number of suppliers
is necessary to obtain lower prices and to consistently achieve the tolerances
and design and delivery flexibility that we require.

     For raw aluminum extrusion and coil stock, we typically make purchasing
commitments to key suppliers of up to 24 months. In return, these suppliers
commit to maintaining local inventory and to reserving run-time on their
critical machines. The cost of aluminum extrusion is generally negotiated
annually, with the price adjusted monthly, based upon the changes in the price
of aluminum ingot, which has historically been highly cyclical. In addition, we
produce approximately 50% of our domestic aluminum extrusion requirements at our
extrusion facility in Franklin, New Hampshire, which has two extrusion presses.

COMPETITION

     Our thermal management products business competes with a number of major
providers of thermal management products located in the United States, Asia and
Europe. Two of our most significant competitors are Hon Hai Precision Components
Manufacturing (d/b/a Foxconn) and Wakefield Engineering, Inc. Foxconn is a
Taiwan-based company that sells thermal management products as part of its
broader electronic components products portfolio. Wakefield is a subsidiary of
publicly traded Alpha Technologies Group, Inc. and mainly focuses on thermal
management products for industrial electronics applications.

     In addition, there are a large number of smaller heat sink companies, as
well as hundreds of machine shops, that fabricate heat sinks, usually under
subcontract with an OEM customer. Further, some aluminum die casters offer cast
heat sinks, and a number of aluminum extruders sell heat sink products and
fabrication capability, including aluminum extruders serving the automotive
industry and the power conversion market.

     Fluent currently competes with a number of privately held companies,
primarily on the basis of product performance. To the extent that Fluent expands
into additional application and industry-specific markets, it will encounter
additional competition from software companies already serving such specific
markets. In addition, certain CFD software is available in the public domain.

BACKLOG AND LICENSE RENEWAL

     Our hardware products typically are produced and shipped within two months
of the receipt of orders and, accordingly, we operate with little backlog. As a
result, net sales in any quarter generally are dependent on orders booked and
shipped in that quarter. All orders are subject to cancellation or rescheduling
by customers. Because of our quick turn of orders to shipments, the timing of
orders, delivery intervals, customer and product mix and the possibility of
customer changes in delivery schedules, we do not believe our backlog at a
particular date is a reliable indicator of actual sales for any succeeding
period.


                                       11
<PAGE>   12


     Our software products are typically sold under annual license agreements.
In recent years, approximately 80% of our annual software license revenue was
renewed in the following year.

EMPLOYEES

     As of December 31, 1999 we had a total of 3,012 employees including
approximately 790 contract employees in China. Except for the employees in our
newly acquired manufacturing facility in Mexico, none of our employees is
represented by labor unions or collective bargaining units. We believe that our
relationship with our employees is good.

RISK FACTORS

     This Annual Report on Form 10-K contains certain 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. All statements regarding our expected
future financial position, results of operations, cash flows, financing plans,
business strategy, competitive position, plans and objectives and words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan" and other
similar expressions are forward-looking statements. Such forward looking
statements are inherently uncertain, and holders of our securities must
recognize that actual results could differ materially from those projected or
contemplated in the forward-looking statements as a result of a variety of
factors, including the factors set forth below. Holders of our securities should
not place undue reliance on these forward-looking statements.

     The forward-looking statements speak only as of the date on which they are
made, and we undertake no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which the statement is made or
to reflect the occurrence of unanticipated events. In addition, we cannot assess
the effect of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.

RISKS RELATING TO OUR BUSINESS

WE MAY FAIL TO SUCCESSFULLY INTEGRATE THERMALLOY.

     The success of the Thermalloy acquisition will depend, in part, on our
ability to fully integrate the operations and management of Thermalloy. A
successful integration requires, among other things, the integration of
Thermalloy's product offerings and technology into ours and the coordination of
their sales and marketing and financial reporting efforts with ours. We cannot
provide assurance that we will accomplish the integration smoothly or
successfully. Therefore, we cannot provide assurance that we will realize the
anticipated benefits of the Thermalloy acquisition. The success of the
integration will require the dedication of management and other personnel
resources, which may temporarily distract their attention from our day-to-day
business and could adversely affect our financial results. We may experience
reductions in our combined revenue as a result of potential customer dislocation
and loss due to the integration of Thermalloy's operations with ours, plant
closures and the merger.

WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR INTERNAL GROWTH.

     We have recently experienced substantial growth in our thermal management
products business and have significantly expanded our operations through
manufacturing capacity additions, the acquisition of Thermalloy and geographic
expansion. We intend to continue to increase our thermal products and software
businesses overseas, expand the products and services we offer, and possibly
make selective acquisitions. This growth and expansion has placed, and will
continue to place, a significant strain on our production, technical, financial
and other management resources. To manage growth effectively, we must maintain a
high level of manufacturing quality, efficiency, delivery and performance and
must continue to enhance our operational, financial and management systems, and
attract, train, motivate and manage our employees. We may not be able to
effectively manage this expansion, and any failure to do so could have a
material adverse effect on our business and financial condition.


                                       12
<PAGE>   13


OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.

     Our quarterly and annual operating results are affected by a wide variety
of factors, many of which are outside our control, that have in the past and
could in the future materially and adversely affect our net sales, gross margins
and profitability. These factors include:

     -    the volume and timing of orders received;
     -    competitive pricing pressures;
     -    the availability and cost of raw materials;
     -    changes in the mix of products and services sold;
     -    potential cancellation or rescheduling of orders;
     -    changes in the level of customer inventories of our products;
     -    the timing of new product and manufacturing process technology
          introductions by us or our competitors;
     -    the availability of manufacturing capacity; and
     -    market acceptance of new or enhanced products introduced by us.

     Additionally, our growth and results of operations have in the past been,
and would in the future be, adversely affected by downturns in the semiconductor
or electronics industries. Our ability to reduce costs quickly in response to
revenue shortfalls is limited, and this limitation will be exacerbated to the
extent we continue to add additional manufacturing capacity. The need for
continued investment in research and development could also limit our ability to
reduce expenses accordingly. As a result of these factors, we expect our
operating results to continue to fluctuate. Results of operations in any one
quarter should not be considered indicative of results to be expected for any
future period, and fluctuations in operating results may also cause fluctuations
in the market price of the senior notes. We cannot provide assurance that the
overall thermal management market, the segments of the market served by us or we
will continue to grow in the future. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."

OUR BUSINESS IS DEPENDENT ON THE SEMICONDUCTOR MARKET.

     A significant portion of our net sales has been, and is expected to
continue to be, dependent upon sales of thermal management products for
industrial electronics applications, consisting primarily of integrated
circuits. However, a significant portion of the recent growth in our net sales
has been, and is expected to continue to be, dependent upon sales of thermal
management products for computer and networking applications, consisting
primarily of microprocessors and related chip sets. Our sales for industrial
electronics applications accounted for approximately 34%, 37% and 44% of our net
sales (excluding sales of a special product we manufactured for Intel (the
"Intel Special Product")), in 1999, 1998 and 1997, respectively. Our sales for
computer and networking applications (excluding sales of the Intel Special
Product) accounted for approximately 41%, 38% and 33% of our net sales in 1999,
1998 and 1997, respectively. The thermal management market for computer and
networking applications is characterized by rapid technological change, short
product life cycles, greater pricing pressure and increasing foreign and
domestic competition as compared to the thermal management market for industrial
electronics applications.

     Our continued growth will, to a significant extent, depend upon increased
demand for semiconductor devices and products that require thermal solutions.
The semiconductor industry (both computer and networking and industrial) has
historically been cyclical and subject to significant economic downturns
characterized by diminished product demand and eroding average selling prices. A
decrease in demand for semiconductor products would reduce demand for our
products and have an adverse impact on our results of operations. Further,
semiconductor manufacturers and their customers, in developing and designing new
products, typically seek to eliminate or minimize thermal problems, and such
efforts could have the effect of reducing or eliminating demand for certain of
our products. Additionally, we believe that many of our OEM customers compete in
intensely competitive markets characterized by declining prices and low margins.

     These OEMs apply continued pricing pressure on their component suppliers,
including us. We cannot provide assurance that we will not be adversely affected
by cyclical conditions in the semiconductor and electronics industries.

CHANGES IN THE AVAILABILITY OR PRICE OF ALUMINUM CAN SIGNIFICANTLY AFFECT OUR
BUSINESS AND RESULTS OF OPERATIONS.

     Aluminum is the principal raw material used in our products and represents
a significant portion of our cost of goods sold. We purchase raw aluminum,
aluminum extrusion, aluminum coil and various components from a limited number
of outside sources. During the years ended December 31, 1999 and 1998, we
purchased a significant portion of our aluminum coil stock from a single


                                       13
<PAGE>   14


supplier. We believe that purchasing aluminum extrusion and coil stock from a
limited number of suppliers is necessary in order to obtain lower prices and to
achieve, consistently, the tolerances and design and delivery flexibility that
we require. If the available supply of aluminum declines, or if one or more of
our current suppliers is unable for any reason to meet our requirements, is
acquired by a competitor or determines to compete with us, we could experience
cost increases, a deterioration of service from our suppliers, or interruptions,
delays or a reduction in raw material supply that may cause us to fail to meet
delivery schedules to customers. Although we believe that viable alternate
suppliers exist for the aluminum coil stock and components, any unanticipated
interruption of supply would have a short-term material adverse effect on us.

     In addition, our ability to pass price increases for aluminum or other raw
materials along to our customers may be limited by competitive pressures,
customer resistance and price adjustment limitations in our product purchase
contracts with our customers. Even if we are able to pass along all or a portion
of raw material price increases, there is typically a lag of three to twelve
months between the actual cost increase of raw material and the corresponding
increase in the prices of our products. We cannot provide assurance that in the
future we will be able to recover increased aluminum or other raw material costs
through higher prices to our customers. Market prices for raw aluminum, which
have historically been cyclical and highly volatile, have a significant effect
on our gross margin. An increase in the market price for aluminum could have a
material adverse effect upon our results of operations and business. See "Our
operating results may fluctuate significantly."

WE SUPPLY PRODUCTS AND SERVICES TO INDUSTRIES THAT EXPERIENCE RAPID
TECHNOLOGICAL CHANGE, WHICH MAY MAKE OUR PRODUCTS OBSOLETE.

     The markets for our products are characterized by rapidly changing
technology, frequent new product introductions and enhancements and rapid
product obsolescence. Our future success will be highly dependent upon our
ability to continually enhance or develop new thermal and software products,
materials, manufacturing processes and services in order to keep pace with the
technological advancements of our customers and their corresponding increasingly
complex thermal management and computational fluid dynamics software needs. We
may not be able to identify new product trends or opportunities, develop and
bring to market new products or respond effectively to new technological changes
or product announcements by others, develop or obtain access to advanced
materials, or achieve commercial acceptance of our products. In addition, other
companies, including our customers, may develop products or technologies which
render our products or technologies noncompetitive or obsolete.

WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
MAINTAIN OR INCREASE SALES OF OUR PRODUCTS.

     The markets for thermal management products and computational fluid
dynamics software are highly competitive. Certain of our competitors, which
include divisions or subsidiaries of large companies, may have greater
technical, financial, research and development and marketing resources than we
do. Further, we expect that as the trend toward outsourcing continues, a number
of new competitors may emerge, some of which may have greater technical,
financial, research and development and marketing resources than we do. Our
ability to compete successfully depends upon a number of factors, including
price, customer acceptance of our products, cost effective high-volume
manufacturing, proximity to customers, lead times, ease of installation of our
products, new product and manufacturing process technology introductions by us
and our competitors, access to new technologies and general market and economic
conditions. We cannot provide assurance that we will be able to compete
successfully in the future against existing or potential competitors, or that
our operating results will not be adversely affected by increased price
competition. In addition, our customers for thermal management and software
products may manufacture or develop such products internally or actively support
new entrants into our market rather than purchase thermal products from us.
Further, many of our customers like to maintain dual sources for thermal
management products. To the extent that we and Thermalloy serve as the two
sources of supply for customers, it is possible that these customers will use
one of our competitors as a second source of supply and our combined business
with these customers may decrease.

OUR BUSINESS EXPERIENCES SEASONAL VARIATIONS.

     Our CFD software business has experienced and is expected to continue to
experience significant seasonality due to, among other things, the second and
third quarter slowdown in software revenues primarily due to the purchasing and
budgeting patterns of Fluent's software customers. In addition, our thermal
management business has experienced slight seasonal variations due to the
slowdown during the third quarter's summer months which historically has
occurred in the electronics industry. Typically, our revenues are lowest during
the second and third quarters of the fiscal year, which ends in December.


                                       14
<PAGE>   15


WE DEPEND ON KEY PERSONNEL AND SKILLED EMPLOYEES WHO MAY NOT REMAIN WITH US IN
THE FUTURE.

     Our success depends to a large extent upon the continued services of our
senior management and technical personnel. Ronald Borelli resigned from his
position as Chief Executive Officer when his employment agreement expired in
December 1999. Additionally, we cannot provide assurance that our senior
management will remain with us following the merger. The loss of such personnel,
particularly before Thermalloy's operations are integrated with ours, could have
a material adverse effect on our business and our ability to realize the
benefits of the Thermalloy acquisition. Our business also depends upon our
ability to retain skilled and semi-skilled employees. There is intense
competition for qualified management and skilled and semi-skilled employees and
our failure to recruit, train and retain such employees could adversely affect
our business.

OUR INTERNATIONAL OPERATIONS EXPOSE US TO ADDITIONAL RISKS.

     We have been expanding our manufacturing capacity internationally to better
service our customers, many of whom have moved their manufacturing operations
and expanded their business overseas. Our acquisition of Thermalloy
significantly increases the scope of our international operations. We have had
only limited experience to date operating outside the United States. We cannot
provide assurance that the expansion of our international operations will be
successful. International operations are subject to a number of risks,
including:

     -    greater difficulties in controlling and administering business;
     -    less familiarity with business customs and practices;
     -    increased reliance on key local personnel;
     -    the imposition of tariffs and import and export controls;
     -    changes in governmental policies (including U.S. policy toward these
          countries);
     -    difficulties caused by language barriers;
     -    increased difficulty in collecting receivables;
     -    availability of, and time required for, the transportation of products
          to and from foreign countries;
     -    political instability; - foreign currency fluctuations; and
     -    expropriation and nationalization.

     The occurrence of any of these or other factors may have a material adverse
effect on our results of operations and could have an adverse effect on our
relationships with our customers. Furthermore, the occurrence of certain of
these factors in countries in which we operate could result in the impairment or
loss of our investment in such countries. The trend by our customers to move
manufacturing operations and expand their business overseas may have an adverse
impact on our sales of domestically manufactured products.

WE DEPEND ON A LIMITED NUMBER OF MANUFACTURING FACILITIES.

     A significant part of our net sales is currently derived from products
manufactured at our manufacturing facility in Guang Dong Province in The
People's Republic of China. We commenced manufacturing at this facility in early
1998 and have expanded this facility to 120,000 square feet. This facility has
grown to generate significant revenues for us, representing 6.4% of net sales in
1998 and 14.0% of net sales in 1999. We only have limited experience in managing
operations in China and, although we have focused significant management
resources on this operation, we cannot provide assurance that this business will
be successful. Because of the growth of our operations in China and the
increasing percentage of net sales from China, an inability to successfully
manage this business or an interruption in the operations at this facility could
have a material adverse effect on our overall financial performance until we are
able to obtain substitute production capability with similar low operating
costs.

     We produce approximately 50% of our domestic aluminum extrusion
requirements on two presses at our extrusion facility in Franklin, New
Hampshire. Any extended interruptions to the operation of the presses could have
a material adverse on our business and results of operations.

WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY.

     Our success depends in part on our proprietary technology. We attempt to
protect our proprietary technology through patents, copyrights, trademarks,
trade secrets and license agreements. We believe, however, that our success will
depend to a greater extent upon innovation, technological expertise and
distribution strength. We cannot provide assurance that we will be able to
protect


                                       15
<PAGE>   16


our technology, or that our competitors will not be able to develop similar
technology independently. We cannot provide assurance that the claims allowed on
any patents held by us will be sufficiently broad to protect our technology. In
addition, no assurance can be given that any patents issued to us will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide competitive advantages to us. In addition, effective patent,
copyright and trade secret protection may be unavailable or limited in certain
foreign countries in which we conduct business. Although we believe that our
products and technology do not infringe upon proprietary rights of others, there
can be no assurance that third parties will not assert infringement claims in
the future. Moreover, litigation may be necessary in the future to enforce our
patents, copyrights and other intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our financial condition and results of
operations.

WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL AND OTHER REGULATIONS.

     We are subject to a variety of United States and foreign environmental laws
and regulations, including those relating to the use, storage, treatment,
discharge and disposal of hazardous materials, substances and wastes used to
manufacture our products and remediation of soil and groundwater contamination.
Public attention has increasingly been focused on the environmental impact of
operations that use hazardous materials. Some of the environmental laws impose
strict, and in certain cases joint and several, liability for response costs at
contaminated properties on their owners or operators, or on persons who arranged
for the disposal of regulated materials at these properties. Our operations are
also governed by laws and regulations relating to workplace safety and worker
health, principally the Occupational Safety and Health Act and regulations
thereunder which, among other requirements, establish noise and dust standards.
We believe we are in material compliance with applicable environmental, health
and safety requirements. Our failure to comply with present or future laws or
regulations could result in substantial liability to us. We cannot predict the
nature, scope or effect of legislation or regulatory requirements that could be
imposed or how existing or future laws or regulations will be administered or
interpreted with respect to products or activities to which they have not
previously applied. Enactment of more stringent laws or regulations, as well as
more vigorous enforcement policies of regulatory agencies or discovery of
previously unknown conditions requiring remediation, could require substantial
expenditures by us and could adversely affect our results of operations.

RISKS RELATED TO OUR INDEBTEDNESS

OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND PREVENT
US FROM FULFILLING OUR OBLIGATIONS UNDER THE SENIOR NOTES.

     We have a substantial amount of debt. The following chart shows certain
important credit statistics and is presented assuming we had completed the
merger pursuant to which we became a subsidiary of Heat Holdings Corp. and
related financing transactions as of the date specified below and applied the
proceeds as intended:

<TABLE>
<CAPTION>
                                                                    AS OF DECEMBER 31, 1999
                                                                    -----------------------
                                                                    ACTUAL        PRO FORMA
                                                                    ------        ---------
(DOLLARS IN THOUSANDS)
<S>                                                                 <C>           <C>
Total debt (including current portion)                              $88,945       $201,203
Stockholders' equity                                                 79,568        155,431
Debt to total capitalization                                           52.8%          56.4%
</TABLE>

     Our substantial indebtedness could have important consequences to holders
of our senior notes. For example, it could:
     -    make it more difficult for us to satisfy our obligations with respect
          to the senior notes and our obligations under our amended and restated
          credit facility;
     -    require us to dedicate a substantial portion of our cash flow from
          operations to payments on our debt, which will reduce amounts
          available for working capital, capital expenditures, research and
          development and other general corporate purposes;
     -    limit our flexibility in planning for, or reacting to, changes in our
          business and the industry in which we operate;
     -    increase our vulnerability to general adverse economic and industry
          conditions;
     -    place us at a competitive disadvantage compared to our competitors
          with less debt; and
     -    limit our ability to borrow additional funds.


                                       16
<PAGE>   17


     The terms of the indenture governing our senior notes do not fully prohibit
us or our subsidiaries from incurring substantial additional debt in the future.
Our amended and restated credit facility also permits additional borrowing. All
of the borrowings under the amended and restated credit facility are senior to
the senior notes. If new debt is added to our current debt levels, the related
risks that we now face could intensify.

     In addition, a portion of our debt, including debt incurred under our
amended and restated credit facility, bears interest at variable rates. An
increase in the interest rates on our debt will reduce the funds available to
repay the senior notes and our other debt and for operations and future business
opportunities and will intensify the consequences of our leveraged capital
structure. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a description of our amended and
restated credit facility and the senior notes.

TO SERVICE OUR DEBT, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH, WHICH DEPENDS
ON MANY FACTORS BEYOND OUR CONTROL.

     Our ability to make payments on and to refinance our debt, including the
senior notes and the amended and restated credit facility, will depend on our
ability to generate cash in the future. This, to an extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control.

     We cannot provide assurance that our business will generate sufficient cash
flow or that future borrowings will be available to us in an amount sufficient
to enable us to pay our debt, including the senior notes, or to fund our other
liquidity needs. If our future cash flow from operations and other capital
resources are insufficient to pay our obligations as they mature or to fund our
liquidity needs, we may be forced to reduce or delay our business activities and
capital expenditures, sell assets, obtain additional equity capital or
restructure or refinance all or a portion of our debt, including the senior
notes, on or before maturity. We cannot assure noteholders that we will be able
to refinance any of our debt, including the senior notes, on a timely basis or
on satisfactory terms if at all.

     In addition, the terms of our existing debt, including the senior notes and
the amended and restated credit facility, and other future debt may limit our
ability to pursue any of these alternatives.

OUR AMENDED AND RESTATED CREDIT FACILITY AND THE INDENTURE IMPOSE OPERATIONAL
AND FINANCIAL RESTRICTIONS ON US.

Our amended and restated credit facility and the indenture under which our
senior notes were issued include restrictive covenants that, among other things,
restrict our ability to:

     -    incur more debt;
     -    pay dividends and make distributions;
     -    issue stock of subsidiaries;
     -    make certain investments;
     -    repurchase stock;
     -    create liens;
     -    enter into transactions with affiliates;
     -    enter into sale-leaseback transactions;
     -    merge or consolidate; and
     -    transfer and sell assets.

     Our amended and restated credit facility also requires us to maintain
financial ratios. All of these restrictive covenants may restrict our ability to
expand or to pursue our business strategies. Our ability to comply with these
and other provisions of our indenture and amended and restated credit facility
may be affected by changes in our business condition or results of operations,
adverse regulatory developments or other events beyond our control. The breach
of any of these covenants would result in a default under our debt. If we
default, we could be prohibited from making payments with respect to the senior
notes until the default is cured or all debt under the amended and restated
credit facility or other senior debt is paid in full. This default could allow
our creditors to accelerate the related debt, as well as any other debt to which
a cross-acceleration or cross-default provision applies. If our indebtedness
were to be accelerated, we cannot provide assurance that we would be able to
repay it. In addition, a default could give the lenders the right to terminate
any commitments they had made to provide us with further funds.

RISKS RELATED TO THE SENIOR NOTES

OUR CONTROLLING STOCKHOLDER, WILLIS STEIN, MAY HAVE INTERESTS THAT CONFLICT WITH
HOLDERS OF THE SENIOR NOTES.


                                       17
<PAGE>   18


     We are a wholly owned subsidiary of Heat Holdings Corp., whose equity
securities are held by Willis Stein and some co-investors. Through its
controlling interest in Aavid and pursuant to the terms of the security holders'
agreement among the equity investors, Willis Stein has the ability to control
the operations and policies of Aavid. Circumstances may occur in which the
interests of Willis Stein, as the controlling equity holder, could be in
conflict with the interests of the holders of the senior notes. In addition, the
equity investors may have an interest in pursuing acquisitions, divestitures or
other transactions that, in their judgment, could enhance their equity
investment, even though such transactions might involve risks to the holders of
the senior notes.

THE SENIOR NOTES ARE CONTRACTUALLY SUBORDINATED IN RIGHT OF PAYMENT TO OUR
SENIOR DEBT.

     The senior notes are senior subordinated obligations of Aavid ranking
junior to all of our existing and future senior debt, equal in right of payment
with all of our existing and future senior subordinated debt and senior in right
of payment to any of our subordinated debt. The senior notes are contractually
subordinated in right of payment to borrowings under our amended and restated
credit facility.

     As of December 31, 1999, on a pro forma basis, we would have had $54.7
million of senior debt outstanding, all of which would have been secured debt.
The indenture limits, and in some (but not all) instances prohibits, the
incurrence of additional debt.

     In addition, all payments on the senior notes will be blocked in the event
of a payment default under the amended and restated credit facility and may be
blocked for up to 179 consecutive days in any given year in the event of
non-payment defaults on senior debt. In the event of a default on the senior
notes and any resulting acceleration of the senior notes, the holders of senior
debt then outstanding will be entitled to payment in full in cash of all
obligations in respect of such senior debt before any payment or distribution
may be made with respect to the senior notes.

     In a bankruptcy, liquidation or reorganization or similar proceeding
relating to us, holders of the senior notes will participate with trade
creditors and all other holders of subordinated debt in the assets remaining
after we have paid all of the senior debt. However, because the indenture
requires that amounts otherwise payable to holders of the senior notes in a
bankruptcy or similar proceeding be paid to holders of senior debt instead,
holders of the senior notes may receive proportionately less than holders of
trade payables in any such proceeding. In any of these cases, we cannot provide
assurance that sufficient assets will remain to make any payments on the senior
notes.

WE ARE A HOLDING COMPANY AND OUR ONLY SOURCE OF CASH TO PAY INTEREST ON AND THE
PRINCIPAL OF THE SENIOR NOTES IS DISTRIBUTIONS FROM OUR SUBSIDIARIES.

     We are a holding company with no business operations of our own. Our only
significant asset is and will be our equity interests in our subsidiaries. We
conduct all of our business operations through our subsidiaries. Accordingly,
our only source of cash to make payments of interest on and principal of the
senior notes is distributions with respect to our ownership interest in our
subsidiaries from the net earnings and cash flows generated by such
subsidiaries.

WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE
OF CONTROL OFFER REQUIRED BY THE INDENTURE.

     If we undergo a "change of control," as defined in the indenture under
which the senior notes were issued, we must offer to buy back the senior notes
for a price equal to 101% of the principal amount, plus interest that has
accrued but has not been paid as of the repurchase date. We cannot assure note
holders that we will have sufficient funds available to make the required
repurchases of the senior notes in that event, or that we will have sufficient
funds to pay our other debts. In addition, our amended and restated credit
facility prohibits us from repurchasing the senior notes after a change of
control until we have repaid in full our debt under such credit facility. If we
fail to repurchase the senior notes upon a change of control, we will be in
default under both the senior notes and our amended and restated credit
facility. Any future debt that we incur may also contain restrictions on
repurchases in the event of a change of control or similar event.

THE SENIOR NOTES AND THE GUARANTEES COULD BE VOIDED OR SUBORDINATED TO OUR OTHER
DEBT IF THE ISSUANCE OF THE SENIOR NOTES OR THE GUARANTEES CONSTITUTED A
FRAUDULENT CONVEYANCE.

     If a bankruptcy case or lawsuit is initiated by our unpaid creditors, the
debt represented by the senior notes and the guarantees of the senior notes by
certain of our subsidiaries may be reviewed under the federal bankruptcy laws
and comparable provisions of state fraudulent transfer laws. Under these laws,
the debt could be voided, or claims in respect of the senior notes and the
guarantees


                                       18
<PAGE>   19


could be subordinated to all other debts of Aavid or its subsidiaries if, among
other things, the court found that, at the time we incurred the debt represented
by the senior notes and the subsidiaries incurred the debt represented by the
guarantee, we or any subsidiary:
     -    received less than reasonably equivalent value or fair consideration
          for the incurrence of such debt; and
     -    were insolvent or rendered insolvent by reason of such incurrence; or
     -    were engaged in a business or transaction for which the remaining
          assets constituted unreasonably small capital; or
     -    intended to incur, or believed that we or a subsidiary executing a
          guarantee thereof would incur, debts beyond the ability to pay such
          debts as they matured; or
     -    intended to hinder, delay or defraud creditors.

     The measure of insolvency for purposes of fraudulent transfer laws varies
depending on the law applied. Generally, however, a debtor would be considered
insolvent if:

     -    the sum of its debts, including contingent liabilities, were greater
          than the fair saleable value of all of its assets; or
     -    the present fair saleable value of its assets was less than the amount
          that would be required to pay its probable liability on its existing
          debts, including contingent liabilities, as they become absolute and
          mature; or
     -    it could not pay its debts as they become due.

EFFECT OF ORIGINAL ISSUE DISCOUNT ON HOLDERS OF THE SENIOR NOTES.

     The senior notes are considered to have been issued with original issue
discount. Holders of the senior notes are required to include the accretion of
the original issue discount in gross income for U.S. federal income tax purposes
in advance of receipt of the cash payments to which such income is attributable.
If a bankruptcy case is commenced by or against us under the United States
Bankruptcy Code, the claim of a holder of senior notes with respect to the
principal amount thereof may be limited to an amount equal to the sum of (i) the
purchase price and (ii) that portion of the original issue discount which has
been amortized as of the date of any such bankruptcy filing.

ITEM 2. PROPERTIES

     A key element of our business strategy has been to expand internationally.
Many of our customers have short product cycles that demand facilities to
support quick-ramp, high-volume, high-quality manufacturing at their
geographically dispersed manufacturing locations. Our acquisition of Thermalloy,
which has manufacturing facilities in Italy, Malaysia, Mexico and the United
Kingdom, significantly expands our manufacturing operations outside the United
States. We plan to continue to build or acquire additional manufacturing
facilities overseas to better service our customers, many of whom have moved
manufacturing operations and expanded their business overseas.

     There can be no assurance that our expansion of our foreign operations will
be successful. Foreign operations are subject to a number of risks including:
work stoppages; transportation delays and interruptions; expropriation;
nationalization; misappropriation of intellectual property; imposition of
tariffs and import and export controls; changes in governmental policies
(including U.S. policy toward these countries); and other factors which could
have an adverse effect on our business. In addition, we may be subject to risks
associated with the availability of, and time required for, the transportation
of products to and from foreign countries. The occurrence of any of these
factors may delay or prevent the delivery of goods ordered by customers, and
such delay or inability to meet customers' requirements would have a materially
adverse effect our results of operations and could have an adverse effect on the
our relationships with our customers. Furthermore, the occurrence of certain of
these factors in countries in where we own or operate manufacturing facilities
could result in the impairment or loss of our investment in such countries.

     Aavid Thermalloy has a total of approximately 1,335,000 square feet of
manufacturing facilities with locations in Laconia and Franklin, New Hampshire;
Santa Ana, California; Dallas and Terrell, Texas; Mexico; the United Kingdom (3
facilities); Italy; Germany (Curamik facility); Malaysia; Singapore; Taiwan;
China; and Toronto, Canada. We employ a broad range of aluminum fabrication and
processing capabilities. Manufacturing operations consist of extrusion, cutting,
stamping, machining, assembling and finishing, including anodizing capabilities.
We have a substantial in-house tool and die capability that enables us to create
our own extrusion and progressive stamping dies and other production tooling.

     Aavid Thermalloy closed down its manufacturing facility in Manchester, New
Hampshire at the end of 1998 due to a change in product mix at a major customer.
Fluent's total sales, marketing, development, and support facilities consist of
approximately 94,000 square feet.


                                       19
<PAGE>   20


     We operate in the following locations:

<TABLE>
<CAPTION>
U.S. LOCATIONS                                                     PRINCIPAL ACTIVITY
--------------                                                     ------------------

<S>                                                                <C>
Concord, NH......................................................  Corporate Offices
Chicago, IL......................................................  Fluent-Software Development, Sales and Marketing
Dallas, TX*......................................................  Aavid Thermalloy -Manufacturing;
                                                                      Curamik-Sales and Marketing
Franklin, NH.....................................................  Aavid Thermalloy -Aluminum Extrusion
Laconia, NH......................................................  Aavid Thermalloy -Manufacturing
Lebanon, NH......................................................  Fluent-Software Development, Sales and Marketing
Santa Ana, CA**..................................................  Aavid Thermalloy -Manufacturing
Santa Clara, CA..................................................  Applied Thermal Technologies-Research and
                                                                      Development and Consulting
Terrell, TX......................................................  Aavid Thermalloy -Manufacturing

INTERNATIONAL LOCATIONS                                            PRINCIPAL ACTIVITY
-----------------------                                            ------------------
Toronto, Canada..................................................  Aavid Thermalloy -Manufacturing
Eschenbach, Germany*.............................................  Curamik-Manufacturing
Kowloon, Hong Kong*, **..........................................  Aavid Thermalloy-Manufacturing
Pune, India......................................................  Fluent-Software Development, Sales and Marketing
Bologna, Italy*..................................................  Aavid Thermalloy-Manufacturing
Malacca, Malaysia*...............................................  Aavid Thermalloy-Manufacturing
Monterrey, Mexico*...............................................  Aavid Thermalloy-Manufacturing
Guang Dong Prov., PRC............................................  Aavid Thermalloy-Manufacturing
Singapore........................................................  Aavid Thermalloy-Manufacturing
Taipei, Taiwan...................................................  Aavid Thermalloy-Manufacturing
Swindon, U.K.*...................................................  Aavid Thermalloy-Manufacturing
Corby, U.K.*.....................................................  Aavid Thermalloy-Manufacturing
High Wycombe, U.K.**.............................................  Aavid Thermalloy-Manufacturing
Sheffield, U.K...................................................  Fluent-Software Development, Sales and Marketing
</TABLE>

-----------

*    Indicates facility acquired in the Thermalloy acquisition.
**   Indicates facility expected to be closed in 2000.

ITEM 3. LEGAL PROCEEDINGS

     Following the public announcement of the merger with Heat Merger Corp.,
lawsuits were filed against us, Willis Stein, our directors, and one former
director in the Court of Chancery of the State of Delaware by certain of our
stockholders. The complaints allege, among other things, that our directors have
breached their fiduciary duties and seek to enjoin, preliminarily and
permanently, the merger and also seek compensatory damages. The stockholder
plaintiffs, on behalf of our public stockholders, also seek class action
certification for their lawsuits. We believe the actions to be without merit and
intend to contest the actions vigorously. See "Item 4. Submission Of Matters To
a Vote Of Security Holders" for further discussion of the Merger.

     On March 4, 1998, Materials Innovation, Inc. of Lebanon, New Hampshire and
two of its principals, Alan Beane and Glenn Beane, filed a petition for
declaratory judgment against Aavid Thermalloy in Grafton County (New Hampshire)
Superior Court. The petitioners have asked the court to declare as terminated an
agreement between Petitioners and Aavid dated October 14, 1993. Petitioner Alan
Beane was formerly our Chief Executive Officer and one of our directors and,
prior to the Merger, was a principal stockholder.

     The agreement grants to Aavid Thermalloy licenses for two patents, one
involving a clamp for attaching heatsinks to semiconductors, and the other
involving a process to make heatsinks by vacuum die casting. The agreement also
provides Aavid


                                       20
<PAGE>   21


Thermalloy with rights to potential technology of Materials Innovation relating
to its thermal products business, and prohibits Petitioners from competing
against Aavid Thermalloy for the ten-year term of the Agreement. Petitioners
claim that Aavid Thermalloy has failed to pay royalties associated with the
vacuum die cast patent. The petition does not seek monetary damages from Aavid.

     On January 29, 1999, the Grafton County Superior Court granted our motion
to dismiss the Petitioner's declaratory judgment petition. The petitioners
appealed that dismissal but then subsequently withdrew that appeal. Materials
Innovation then commenced arbitration of the same issue; however, the
arbitration and a related declaratory judgment action brought by us to have the
Materials Innovation vacuum die cast patent declared invalid was stayed by
agreement pending completion or termination of the merger. Although we believe
that the termination of the agreement with Materials Innovation would not have a
materially adverse effect on our business, there can be no assurance it will not
have such a materially adverse effect in the future.

     We are involved in various other legal proceedings that are incidental to
the conduct of our business, none of which we believe could reasonably be
expected to have a materially adverse effect on our financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On January 29, 2000, a special meeting of our stockholders was held to consider
and approve the proposed merger pursuant to which we would become a wholly-owned
subsidiary of Heat Holdings Corp. The Merger was approved, with 6,622,985 shares
voted in favor, 132,812 shares voted against and 430 shares abstained.

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS.

                       MARKET PRICES OF AAVID COMMON STOCK

Our Common Stock traded on the Nasdaq National Market under the symbol "AATT"
until February 2, 2000, the date we were acquired by Heat Holdings. As a result
of the merger, our Common Stock is no longer publicly traded. Our Common Stock
was initially offered to the public on January 29, 1996 at a price of $9.50 per
share. The following table sets forth, for the fiscal periods indicated, the
range of high and low sales prices of our Common Stock as reported on the Nasdaq
National Market:

<TABLE>
<CAPTION>
FISCAL 1998                                                          HIGH        LOW
                                                                     ----        ---
<S>                                                                 <C>         <C>
Quarter ended March 28, 1998 .............................          $35.75      $22.50
Quarter ended June 27, 1998 ..............................           36.94       21.50
Quarter ended September 26, 1998..........................           32.13        8.69
Quarter ended December 31, 1998 ..........................           19.00       10.94

FISCAL 1999
Quarter ended April 3, 1999...............................          $18.00      $11.88
Quarter ended July 3, 1999................................           25.00       11.38
Quarter ended October 2, 1999.............................           23.75       16.75
Quarter ended December 31, 1999...........................           24.13       21.38
</TABLE>


     We have never paid a cash dividend on our Common Stock, and we currently
intend to retain all earnings for use in our business and do not anticipate
paying cash dividends in the foreseeable future. Our current credit facility and
senior notes indenture contain restrictive covenants which, among other things,
impose limitations on the payment of dividends.


                                       21
<PAGE>   22


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

     The following tables set forth selected statement of operations and balance
sheet data derived from the consolidated financial statements of the Company for
the periods indicated. The following tables should be read in conjunction with
"Management Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements, and related Notes thereto of
the Company included elsewhere herein.

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                                   ------------------------
                                          1995(1)         1996 (2)          1997            1998          1999 (3)
                                          -------         --------          ----            ----          --------
STATEMENT OF OPERATIONS DATA:
(AMOUNTS IN THOUSANDS)

<S>                                      <C>             <C>             <C>             <C>             <C>
Net sales ..........................     $  90,944       $ 106,995       $ 167,745       $ 209,078       $ 214,243
Cost of goods sold .................        60,680          66,002         107,401         138,431         138,558
                                         ---------       ---------       ---------       ---------       ---------


   Gross profit ....................        30,264          40,993          60,344          70,647          75,685
Selling, general and
   administrative expenses .........        19,347          27,562          36,709          43,783          51,970
Research and development ...........         2,594           5,674           6,939           6,756           7,528
Restructuring and buyout of
   compensation agreement
   charges (credit)(4) .............         2,770              --              --           5,740            (630)
Purchased undeveloped
   technology charge(5) ............         2,649           3,446              --              --              --
                                         ---------       ---------       ---------       ---------       ---------


   Income from operations ..........         2,904           4,311          16,696          14,368          16,817
Interest expense, net ..............        (2,611)         (1,591)         (2,178)         (1,342)         (1,629)
Other income (expense), net ........          (177)           (577)         (1,201)           (520)            218
                                         ---------       ---------       ---------       ---------       ---------


   Income before income taxes,
minority interest, and extraordinary
item ...............................           116           2,143          13,317          12,506          15,406
Provision for income tax
  expense ..........................          (831)         (2,002)         (4,824)         (4,385)         (8,852)
                                         ---------       ---------       ---------       ---------       ---------


   Income (loss) before
   minority interest and
   extraordinary item ..............          (715)            141           8,493           8,121           6,554
Minority interest ..................            --              --              --              --             132
                                         ---------       ---------       ---------       ---------       ---------
   Income (loss) before
   extraordinary item ..............          (715)            141           8,493           8,121           6,686


Extraordinary item (6) .............            --            (171)             --              --              --
                                         ---------       ---------       ---------       ---------       ---------


Net income (loss) ..................     $    (715)      $     (30)      $   8,493       $   8,121       $   6,686
                                         =========       =========       =========       =========       =========

OTHER FINANCIAL DATA:
EBITDA(7) ..........................     $   5,228       $   7,836       $  23,135       $  23,728       $  27,239
EBITDA margin(8) ...................           5.7%            7.3%           13.8%           11.3%           12.7%
Depreciation and amortization ......     $   2,501       $   4,102       $   7,640       $   9,880       $  10,072
Capital expenditures ...............         8,454           7,029          15,992          10,407          12,364
BALANCE SHEET DATA AT YEAR END (9):
Working capital ....................     $   6,301       $   9,374       $  22,296       $  30,635       $  47,050
Total assets .......................        56,499          80,221         110,796         126,866         228,952
Total long term debt,
  including current portion ........        29,514          23,320          23,956          14,650          88,945
Stockholders' equity ...............         5,433          29,353          50,415          71,351          79,568
</TABLE>


NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (amounts in thousands)

(1)  Includes the results of operations of Fluent from August 24, 1995 (the date
     of the acquisition of Fluent).

(2)  Includes the results of operations of Fluid Dynamics International from May
     16, 1996 (the date of the acquisition of Fluid Dynamics International).

(3)  Includes the results of operations of Thermalloy and Curamik from October
     21, 1999 (the date of acquisition of Thermalloy).


                                       22
<PAGE>   23


(4)  Represents the expense for (a) the buyout in 1995 of a portion of the
     expected future payments required under the employment agreement with Mr.
     Beane, our former President and Chief Executive Officer, and the
     bonus-based portion of the management fee due Sterling Venture Limited,
     each of which was established at the time of the acquisition of Aavid
     Thermalloy in October 1993, and (b) in 1998 (i) the charge related to the
     estimated restructuring costs incurred with our closure of our Manchester,
     New Hampshire facility, (ii) the termination of the management agreement
     with Sterling Ventures and (iii) a bonus due Mr. Beane based on profits in
     excess of certain thresholds. The 1999 credit of $630 relates to the
     reversal of excess restructuring reserves which were no longer required
     upon the completion of the Manchester restructuring in the fourth quarter
     of 1999.

(5)  Represents a non-recurring charge equal to the amount of the purchase price
     allocated to technology acquired in the acquisition of Fluent in 1995 and
     the acquisition of Fluid Dynamics International in 1996, which was not
     fully commercially developed and had no alternative future use at the time
     of acquisition.

(6)  Represents charge related to early retirement of debt, net of related tax
     effect.

(7)  Represents net income before interest, income taxes, depreciation and
     amortization and extraordinary items, each of which can significantly
     affect our results of operations and liquidity and should be considered in
     evaluating our financial performance. EBITDA is included because we
     understand that such information is considered to be an additional basis on
     which to evaluate our ability to pay interest, repay debt and make capital
     expenditures. EBITDA is not intended to represent and should not be
     considered more meaningful than, or as an alternative to, measures of
     performance, profitability or liquidity determined in accordance with
     generally accepted accounting principles.

(8)  Represents EBITDA as a percentage of net sales.

(9)  Balance sheet data at December 31, 1999 does not give effect to the merger
     pursuant to which we became a wholly-owned subsidiary of Heat Holdings
     Corp. and the related financing transactions. On a pro forma basis, after
     giving effect to the merger and the related financing transactions as if
     they had occurred as of December 31, 1999, our working capital, total
     assets, total long term debt (including current portion) and stockholder's
     equity would have been $34,550, $415,755, $201,203 and $155,431,
     respectively.

ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS

     You should read the following discussion of our financial condition and
results of operations together with the financial statements and the notes to
such statements included elsewhere in this Annual Report on Form 10-K. This
discussion contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our
industries. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these
forward-looking statements, as more fully described in "Item 1. Business - Risk
Factors". We undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.

OVERVIEW

     We are the leading global provider of thermal management solutions for
electronic products and the leading developer and marketer of CFD software.
Historically, we were organized as three operating segments: Aavid Thermal
Products, Fluent and Applied Thermal Technologies; however, in connection with
the merger, we consolidated our business into two operating units: Aavid Thermal
Products (including Applied Thermal Technologies), which following the merger is
known as Aavid Thermalloy, and Fluent. Aavid Thermalloy designs, manufactures
and distributes thermal management products that dissipate unwanted heat from
microprocessors and industrial electronics products. Fluent develops and markets
CFD software that is used in complex computer-generated modeling of fluid flows,
heat and mass transfer and chemical reactions for a variety of industries
including, among others, the automotive, aerospace, chemical processing, power
generation, material processing, electronics and HVAC industries. Applied
Thermal Technologies offers thermal design, validation and consulting services,
leveraging on technical and manufacturing capabilities gained from both Fluent
and Aavid Thermalloy, to develop, test and validate Thermal solutions for third
parties.

     We and our predecessors have been engaged in the development and
manufacture of heat sinks and related thermal management products since 1964. In
August 1995, we acquired all the outstanding capital stock of Fluent for $12.8
million. In February 1996, we completed our initial public offering, whereby we
sold an aggregate of 2,645,000 shares of common stock at a price of $9.50 per


                                       23
<PAGE>   24


share, from which we received net proceeds of approximately $21.7 million.
During 1996, we further expanded our operations through the acquisitions of (1)
Fluid Dynamics International, Inc., a provider of computational fluid dynamics
software, (2) an aluminum extrusion manufacturing facility located in Franklin,
New Hampshire and (3) Beaver Industries, a manufacturer of heat sinks and
related thermal management products for electrical and electronics parts,
components, ensembles and systems in Toronto, Canada.

     On October 21, 1999, the Company purchased all of the stock of the
Thermalloy Division of Bowthorpe plc (Thermalloy) and 85.4% of the stock of
Curamik Electronics Gmbh (Curamik) (the Thermalloy acquisition) for a cash
purchase of $84.6 million, including transaction costs of $2.8 million.
Thermalloy designs, manufactures and sells a wide variety of standard and
proprietary heat sinks and associated products, similar to those produced by
Aavid Thermal Products, our thermal management business, within the computer and
networking and industrial electronics (including telecommunications) industries.
Curamik is a German corporation that manufactures direct bonded copper ceramic
substrates that are used in the power semiconductor and other industrial
electronics industries. Aavid used $12.6 million of its cash on hand and $84.6
million of borrowings under its new credit facility to complete the Thermalloy
acquisition, repay $12.6 million of outstanding debt, and pay transaction costs.
The new credit facility is further described in footnote I., "Debt Obligations".
We believe the acquisition of Thermalloy will create significant opportunities
to realize cost savings through certain plant closings, the elimination of
duplicative selling, general and administrative functions and the reduction of
unnecessary corporate expenses. The increased goodwill amortization and other
purchase accounting adjustments resulting from our acquisition of Thermalloy
decreased our net income in the fourth quarter of 1999 and will decrease our net
income in 2000 as compared to the respective prior year periods. Following the
acquisition of Thermalloy, we changed the name of Aavid Thermal Products to
Aavid Thermalloy. See Note C. of notes to our consolidated financial statements
for pro forma information for the acquisition.

     Our future success will depend, in part, on our ability to fully integrate
the operations and management of the Thermalloy acquisition with Aavid. A
successful integration requires, among other things, the integration of
Thermalloy's product offerings and technology into Aavid's and the coordination
of their sales and marketing and financial reporting efforts with Aavid's. There
can be no assurance that we will accomplish the integration smoothly or
successfully or that we will realize the anticipated benefits of this
acquisition. The success of the integration will require the dedication of
management and other personnel resources, which may temporarily distract their
attention from our day-to-day business.

     On August 23, 1999, we entered into an Agreement and Plan of Merger (the
"Merger Agreement") by and among the Company, Heat Holdings Corp., a corporation
newly formed by Willis Stein & Partners II, L.P. (the "Purchaser"), and Heat
Merger Corp., a wholly owned subsidiary of the Purchaser (the "Merger Sub"),
providing for the merger of the Merger Sub with and into Aavid (the "Merger"),
with Aavid being the surviving corporation. The Merger was approved by the
Company's stockholders on January 29, 2000 and consummated on February 2, 2000.
Pursuant to the merger, Aavid stockholders received $25.50 in cash for each
outstanding share of common stock, and outstanding stock options and warrants
were cashed out. The Merger will be accounted for using the purchase method.


                                       24
<PAGE>   25


RESULTS OF OPERATIONS

     The following table is derived from our consolidated statements of
operations and sets forth the percentage relationship of certain items to net
sales for the periods indicated:

<TABLE>
<CAPTION>
                                                                                              YEAR ENDED DECEMBER 31,
                                                                                              -----------------------
                                                                                           1997        1998        1999
                                                                                           ----        ----        ----

<S>                                                                                       <C>         <C>         <C>
Net sales .........................................................................       100.0%      100.0%      100.0%
Cost of goods sold ................................................................        64.0        66.2        64.7
                                                                                          -----       -----       -----

  Gross profit ....................................................................        36.0        33.8        35.3
Selling, general and administrative expenses ......................................        21.9        20.9        24.3
Research and development ..........................................................         4.1         3.2         3.5
Purchased undeveloped technology charge ...........................................          --          --          --
Restructuring and buyout of compensation arrangements .............................          --         2.8        (0.3)
                                                                                          -----       -----       -----

   Income from operations .........................................................        10.0         6.9         7.8
Interest expense, net .............................................................        (1.3)       (0.6)       (0.7)
Other  income (expense) and net ...................................................        (0.8)       (0.3)        0.1
                                                                                          -----       -----       -----
  Income before income taxes and minority interest ................................         7.9         6.0         7.2
Provision for income taxes ........................................................        (2.8)       (2.1)       (4.1)
                                                                                          -----       -----       -----
  Income before minority interest .................................................         5.1         3.9         3.1
Minority interest in loss of consolidated
  subsidiaries ....................................................................          --          --          --
                                                                                          -----       -----       -----
   Net Income (loss) ..............................................................         5.1%        3.9%        3.1%
                                                                                          =====       =====       =====
</TABLE>


1999 COMPARED WITH 1998

Our results of operations in 1999 include the operations of Thermalloy and
Curamik from October 21, 1999, the date of acquisition of the business.

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED
   NET SALES (DOLLARS IN MILLIONS)                                               DECEMBER 31,
   ------------------------------                                                ------------
                                                                             1998            1999          CHANGE
                                                                             ----            ----           ------

<S>                                                                        <C>             <C>                <C>
Computer and Networking .........................................          $   62.4        $   88.0           41.0%
Industrial Electronics ..........................................              60.2            73.0           21.3%
Consulting and Design (Applied) .................................               1.2             1.4           16.7%
                                                                           --------        --------         ------

                                                                              123.8           162.4           31.2%
Computer and Networking-Intel Special Product....................              47.0             2.6          (94.5%)
                                                                           --------        --------         ------
  Total Aavid Thermalloy ........................................             170.8           165.0           (3.4%)
  Total Fluent ..................................................              38.3            49.2           28.5%
                                                                           --------        --------         ------
  Total Aavid Thermal Technologies
(including Intel Special Product) ...............................          $  209.1        $  214.2            2.4%
                                                                           ========        ========         ======
  Total Aavid Thermal Technologies
(excluding Intel Special Product) ...............................          $  162.1        $  211.6           30.5%
                                                                           ========        ========         ======
</TABLE>

     Net sales for 1999 were $214.2 million, an increase of $5.1 million, or
2.4%, compared with $209.1 million for 1998. This increase in net sales was the
result of $19.4 million from Thermalloy's operations for the period October 21,
1999 (the date of acquisition) through December 31, 1999 which are included in
our 1999 results and organic revenue growth of approximately $30.1 million
offset in large part by the result of the impact of the one-time reduction in
sales volume of $44.4 million for the Intel Special Product.

     Aavid Thermalloy's net sales were $165.0 million for 1999, a decrease of
$5.8 million, or 3.4%, compared with $170.8 million for 1998. This decrease was
the result of the one-time reduction in sales volume of $44.4 million for the
Intel Special Product, which was offset by revenues of $19.4 million from
Thermalloy's operations for the period October 21, 1999 through December 31,
1999 which are included in Aavid Thermalloy's 1999 results, as well as $19.2
million of organic revenue growth.

     Net sales from computer and networking products (excluding the Intel
Special Product) showed strong growth in the year ended December 31, 1999,
increasing 41.0% over the year ended December 31, 1998. Of the increase, $11.5
million, or 45% resulted from revenues from the Thermalloy division from the
date of acquisition through year end. Industrial electronics net sales increased
21.3% for the year ended December 31, 1999 compared to the year ended December
31, 1998. Industrial electronics net sales were significantly


                                       25
<PAGE>   26


impacted in the third quarter and fourth quarters of 1998 and to a lesser extent
in the first quarter of 1999 by the Asian economic slowdown.

     Fluent's net sales were $49.2 million for 1999, an increase of $10.9
million, or 28.5%, over $38.3 million for 1998. Of this increase, approximately
28% was the result of net sales by Fluent's new subsidiary in Japan, which
became operational in the first quarter of 1999. The remaining 72% increase was
spread among all product offerings due primarily to increased sales to new
customers for computational fluid dynamics software, as well as the success of
application-specific products.

     Excluding net sales for the Intel Special Product, international net sales
(which include North American exports) increased to 37.7% of net sales for the
year ended December 31, 1999 as compared with 36.4% for the year ended December
31, 1998.

     Our gross profit in 1999 was $75.7 million, an increase of $5.1 million, or
7.1% higher than $70.6 million in 1998. Our gross margin increased from 33.8% in
1998 to 35.3% in 1999. Our gross margin in the fourth quarter of 1999 was
negatively impacted by certain purchase accounting and acquisition related
adjustments which decreased gross profit by $3.8 million. Excluding these
purchase accounting and acquisition related adjustments, gross margin for 1999
was 37.1%. This increase in gross margin resulted from a decrease in the
percentage of overall gross profit derived from the Intel Special Product (which
had a lower gross margin than our other products) and an increase in the
percentage of overall gross margin derived from Fluent, which has significantly
higher overall gross margin percentages than Aavid Thermalloy.

     Our selling, general and administrative expenses were $52.0 million, or
24.3% of net sales, for 1999 as compared to $43.8 million, or 20.9% of net
sales, for 1998. The increase in selling, general and administrative expenses
resulted from $4.3 million from Thermalloy's operations for the period October
21, 1999 through December 31, 1999 which are included in Aavid Thermalloy's 1999
results, an increase of $6.4 million at Fluent which was partially offset by a
decline at Aavid Thermalloy of $2.5 million resulting from cost reductions in
response to lower sales from the loss of the Intel Special Product.

     Our research and development expenses consist primarily of funding for
internal product development activities as well as product development
activities conducted by third parties on our behalf. Research and development
expenses also include the costs of obtaining patents on the technology developed
in research and development activities. Research and development expenses were
$7.5 million, or 3.5% of net sales, in 1999 as compared to $6.8 million, or 3.2%
of net sales, in 1998. The increase in research and development expenses was
primarily due to increased expenditures at Fluent.

     In 1997, we opened a facility in Manchester, New Hampshire specifically for
the production of a special heat dissipating plate for Intel Corporation (the
"Intel Special Product"). In the second half of July 1998, Intel notified us of
significant reductions in expected purchases of the Intel Special Product. As a
result, during the third quarter of 1998, we decided to close our Manchester
facility and we recorded a non-recurring pre-tax charge of $4.9 million,
reflecting the costs associated with such closure. The non-recurring revenues
related to the Intel Special Product were approximately $2.6 million, or 1% of
net sales in 1999, $47.0 million, or 22% of net sales in 1998, and approximately
$24.7 million, or 15% of sales in 1997. The Intel Special Product had a lower
gross margin than our other thermal management products. Intel remains one of
our major customers, although sales to Intel in 1999 were less than 5% of total
sales. No customer generated more than 5% of sales in 1999.

     Our income from operations in 1999 was $16.8 million, a decline of $3.3
million, or 16.4%, from $20.1 million in 1998 (excluding non-recurring charges
(credits)). Our income from operations as a percentage of net sales was 7.8% in
1999 as compared with 9.6% in 1998 (excluding non-recurring charges). The
decrease in income from operations as a percentage of net sales is primarily the
result of the $3.8 million in purchase accounting and related adjustments
discussed above, recorded as a reduction in gross profit in the fourth quarter
of 1999, as well as $0.4 million of goodwill amortization recorded in selling,
general and administrative expenses related to the Thermalloy acquisition. The
impact of these additional expenses was mitigated somewhat because the
percentage of overall operating profit derived from Fluent increased in 1999.
Income from operations as a percentage of net sales at Aavid Thermalloy for the
year ended December 31, 1999 was 6.0%, compared with 8.0% in 1998. This decrease
in margin was the direct result of the purchase accounting effects and increased
amortization discussed above. Fluent's income from operations as a percentage of
net sales decreased to 15.3% in 1999, compared with 16.0% in 1998. Fluent's
operating margins decreased primarily because selling, general and
administrative expenditures grew at a faster rate than sales.

     Our interest charges were $1.6 million in 1999, a $0.3 million increase
over interest charges of $1.3 million in 1998. Interest charges in the fourth
quarter of 1999 were $1.4 million, a $1.2 million increase over the fourth
quarter of 1998. This increase in interest charges resulted from the $88.2
million of indebtedness incurred in connection with the Thermalloy acquisition.
Future interest charges are expected to be significantly higher as a result of
the $150 million senior subordinated notes issued subsequent to year end.


                                       26
<PAGE>   27


     The effective tax rate for the year ended December 31, 1999 was 57.5%
compared with 35.1% for 1998. The primary reason for the increase in effective
tax rates occurred because we had to record a tax provision on certain foreign
earnings which are expected to be repatriated into the U.S. to service debt
incurred subsequent to year end. Because the Company is in a net operating loss
carryforward position for U.S. tax purposes, the Company will not receive any
tax benefit from foreign tax credits. However, the Company will receive a
deduction for cash paid related to foreign taxes and this benefit has been
reflected in the 1999 tax provision. These repatriated earnings will therefore
incur both foreign income taxes and U.S. income taxes, effectively doubling up
the tax rate. The significant net operating loss carryforwards in the U.S. will
help offset the actual cash paid for taxes in the U.S. when the foreign earnings
are repatriated. In addition, a small portion of the increase in the effective
tax rate resulted from the increase in non-deductible goodwill amortization
expense resulting from the Thermalloy acquisition.

1998 COMPARED WITH 1997

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED
  NET SALES (DOLLARS IN MILLIONS)                                                 DECEMBER 31,
  -------------------------------                                               ---------------
                                                                                1997       1998      CHANGE
                                                                                ----       ----      ------

<S>                                                                          <C>        <C>            <C>
Computer and Networking...................................................   $    47.4  $    62.4      31.6%
Industrial Electronics....................................................        62.6       60.2      (3.8)%
Consulting and Design (Applied)...........................................         0.5        1.2     140.0%
                                                                             ---------  ---------  --------

                                                                                 110.5      123.8      12.0%
Computer and Networking-Intel Special Product.............................        24.7       47.0      90.3%
                                                                             ---------  ---------  --------
  Total Aavid Thermalloy..................................................       135.2      170.8      26.3%
  Total Fluent............................................................        32.5       38.3      17.8%
                                                                             ---------  ---------  --------
  Total Aavid Thermal Technologies
  (including Intel Special Product).......................................   $   167.7  $   209.1      24.7%
                                                                             =========  =========  ========
  Total Aavid Thermal Technologies
  (excluding Intel Special Product).......................................   $   143.0  $   162.1      13.4%
                                                                             =========  =========  ========
</TABLE>


     Our net sales for 1998 were $209.1 million, an increase of $41.4 million,
or 24.7%, compared with $167.7 million for 1997. The increase in net sales was
primarily the result of the strong growth of both Aavid Thermalloy and Fluent.

     Net sales for Aavid Thermalloy were $170.8 million in 1998, an increase of
$35.6 million, or 26.3%, compared with $135.2 million in 1997. This growth was
primarily the result of increasing net sales of computer and networking thermal
management products, both to Intel and other customers. Net sales in the
industrial electronics markets were lower in 1998 than 1997 primarily due to
customer inventory reductions in the second half of 1998, reflecting less
favorable economic conditions.

     Despite the well publicized personal computer industry inventory correction
experienced in the first half of 1998, net sales for computer and networking
products (excluding the Intel Special Product) showed strong growth in 1998,
increasing 31.6% over 1997 primarily due to market share gains. Industrial
electronics net sales performed well in the first half of 1998, increasing 13.8%
over the first half of 1997. However, the Asian economic slowdown in 1998 caused
a sharp correction of customer inventories in the second half of 1998, leaving
total industrial electronics net sales down 3.8% in 1998 over 1997. Net sales of
the Intel Special Product grew strongly in the first half of 1998 reaching $15.0
million for the second quarter of the year. Following Intel's decision to phase
out the Intel Special Product in July 1998, net sales to Intel declined from
$15.0 million for the second quarter of 1998 to $10.8 million and $8.6 million
for the third and fourth quarters, respectively.

     Fluent's net sales were $38.3 million in 1998, an increase of $5.8 million,
or 17.8%, over $32.5 million in 1997. Strong growth in North America and Europe
was marginally offset by lower growth in the Far East. In general, increases
were seen in all product offerings due primarily to increased sales to new
customers in the market for CFD design software, as well as the success of
application-specific products.

     Excluding sales of the Intel Special Product, international net sales
(which include North American exports) increased to 36.4% of net sales for 1998
compared with 34.7% in 1997. This increase in the level of international net
sales is primarily the result of both additional product manufactured within
North America and shipped to customers' offshore manufacturing and assembly
operations and higher product net sales from our expanded Far East manufacturing
operations.

     Our gross profit for 1998 was $70.6 million, an increase of $10.3 million,
or 17.1%, over $60.3 million in 1997. Our gross margin as a percentage of net
sales decreased from 36.0% in 1997 to 33.8% for 1998. Approximately two-thirds
of this change was


                                       27
<PAGE>   28


derived from a higher proportion of lower gross margin business related to the
Intel Special Product in 1998 than in 1997. The remaining one-third of this
decrease was predominantly due to reduced levels of higher gross margin
industrial electronics sales in the second half of 1998.

     Our selling, general and administrative expenses were $43.8 million, or
20.9% of net sales, for 1998 as compared to $36.7 million, or 21.9% of net
sales, for 1997. The decrease in selling, general and administrative expense as
a percentage of net sales resulted principally from the faster rate of growth in
net sales at Aavid Thermalloy, which has a lower selling, general and
administrative expense as a percentage of net sales, than at Fluent.

     Our research and development expenses were $6.8 million, or 3.2% of net
sales, in 1998 as compared to $6.9 million, or 4.1% of net sales, in 1997. The
decrease in research and development expenses as a percentage of net sales is
primarily due to lower research and development expenditures at Aavid
Thermalloy.

     Our 1998 income from operations of $20.1 million (excluding the
non-recurring charge) was $3.4 million, or 20.4%, higher than $16.7 million in
1997. Our income from operations as a percentage of net sales for 1998 (prior to
the non-recurring charge) was 9.6% as compared with 10.0% for the prior year.
Fluent's income from operations as a percentage of net sales for 1998 dropped to
16.0% from 17.0% in 1997. Aavid Thermalloy's income from operations as a
percentage of net sales for 1998 was 8.0%, compared to 8.4% for 1997.
Substantially all of this decrease was the result of an approximate 1% reduction
in operating margin in the second half of 1998, which resulted from lower sales
volume of the Intel Special Product.

     Our interest charges were $1.3 million in 1998, a $0.9 million, or 38.4%,
decrease over interest charges of $2.2 million for 1997, reflecting lower levels
of indebtedness. Our effective tax rate in 1998 was 35.1%, compared with 36.2%
in 1997.

     Our net income for 1998 prior to non-recurring charges was $11.7 million,
an increase of $3.2 million over our 1997 net income of $8.5 million.

     During the first quarter of 1998, we recorded a non-recurring pre-tax
charge of $1.9 million, which related to the termination of a management
agreement and an obligation to pay a former director a bonus based on 1998
profits in excess of certain thresholds.

     During the third quarter of 1998, we recorded a non-recurring pre-tax
charge of $4.9 million, reflecting the costs associated with the closure of our
Manchester, New Hampshire facility. We incurred charges of $0.7 million related
to this plant closure during 1998. The charge was offset by a $1.0 million
reduction in the previous estimate of obligations to pay a former director a
bonus, paid on profits in excess of certain thresholds, as discussed above.

LIQUIDITY AND CAPITAL RESOURCES

     Historically, we have used internally generated funds and proceeds from
financing activities to meet our working capital and capital expenditure
requirements. As a result of the Thermalloy acquisition and the merger, we have
significantly increased our cash requirements for debt service relating to the
notes and our amended and restated credit facility. We intend to use amounts
available under our amended and restated credit facility, future debt and equity
financings and internally generated funds to finance our working capital
requirements, capital expenditures and potential acquisitions.

     Net cash provided by operating activities for the year ended December 31,
1999 was $15.8 million compared to $28.9 million for the year ended December 31,
1998. We had $47.1 million in working capital as of December 31, 1999 compared
with $30.6 million for the prior year period. At December 31, 1999, accounts
receivable days sales outstanding ("DSO") were 71 days, which compares with 56
days at December 31, 1998. While the number of days sales outstanding increased
from the end of 1998, average DSO over 1999 is approximately 3 days higher than
1998, reflecting the increase in revenues in the Far East which have a higher
DSO, in addition to the fact that due to purchase accounting, the Company is
only reflecting Thermalloy sales from October 21, 1999 through year end, while
the balance sheet reflects the full value of outstanding receivables. At
December 31, 1999, inventory turns were 6 times, which compares with 7.7 times
at December 31, 1998. This reduction in turns is primarily the result of the
elimination of high turnover business related to the Intel Special Product. In
addition, due to purchase accounting, cost of sales related to Thermalloy is
recorded on our books only from October 21 through year end, yet the full value
of Thermalloy inventory is recorded on the balance sheet.

     During the year ended December 31, 1999, we made capital expenditures of
$12.4 million compared with $10.4 million in 1998.

     As of December 31, 1999 Aavid Thermalloy had committed to approximately
$1.7 million of leasehold improvements related to a new leased facility in
Concord, N.H. In addition, Fluent had committed to a $2.3 million addition to
their corporate headquarters in Lebanon, N.H.

                                       28
<PAGE>   29


     In connection with the Merger, pursuant to which we became a wholly-owned
subsidiary of Heat Holdings Corp., we repaid all outstanding debt under our
existing credit facility, which aggregated approximately $88.2 million at
February 2, 2000 and amended and restated this credit facility to, among other
things, add Heat Holdings as a guarantor, permit the issuance of the senior
notes and amend certain of the financial ratios and restrictive covenants to
reflect such issuance. The amended and restated credit facility, which replaced
our $100 million revolving credit and term loan facility, consists of a $53
million term loan facility (the "Term Facility") and a $22 million revolving
credit facility, including a $2 million letter of credit subfacility (the
"Revolving Facility"). The Term Facility, all of which was borrowed on February
2, 2000 to repay amounts outstanding under our existing credit facility, matures
on March 31, 2005, and will be amortized in 18 consecutive quarterly
installments, commencing December 31, 2000, as follows: five quarterly payments
of $2 million each; four quarterly payments of $2.5 million each; four quarterly
payments of $2.75 million each; two quarterly payments of $3.2 million each; two
quarterly payments of $3.9 million; and a final payment of $7.8 million. The
Revolving Facility matures on March 31, 2005. The Credit Facility bears interest
at a rate equal to, at our option, either (1) in the case of Eurodollar loans,
the sum of (x) the interest rate in the London interbank market for loans in an
amount substantially equal to the amount of borrowing and for the period of
borrowing selected by us and (y) a margin of between one and one-half percent
and two and one-quarter percent (depending on our consolidated leverage ratio
(as defined in the credit agreement)) or (2) the sum of (A) the higher of (x)
Canadian Imperial Bank of Commerce's prime or base rate or (y) one-half percent
plus the latest overnight federal funds rate plus (y) a margin of between one
quarter percent and one percent (depending on our consolidated leverage ratio).
The Credit Facility may be prepaid at any time in whole or in part without
penalty, and must be prepaid to the extent of certain equity or asset sales and
excess cash flow.

     The Credit Facility limits our ability to incur debt, to sell or dispose of
assets, to create or incur liens, to make additional acquisitions, to pay
dividends, to purchase or redeem our stock and to merge or consolidate with any
other person. In addition, the Credit Facility requires that we meet certain
financial ratios, and provides the banks with the right to require the payment
of all amounts outstanding under the facility, and to terminate all commitments
thereunder, if we undergo a change in control. The Credit Facility is guaranteed
by Heat Holdings Corp., Heat Holdings II Corp. and all of our subsidiaries and
secured by our assets (including the assets and stock of our domestic
subsidiaries and a portion of the stock of our foreign subsidiaries), and a
pledge of our stock by Heat Holdings.

     On February 2, 2000, as part of the transactions relating to the Merger, we
issued 150,000 units (the "Units"), consisting of $150 million aggregate
principal amount of our 12 3 /4 % Senior Subordinated Notes due 2007 (the
"Notes") and warrants (the "Warrants") to purchase an aggregate of 60 shares of
our Class A Common Stock, par value $0.01 per share, and 60 shares of our Class
H Common Stock, par value $0.01 per share. The Notes are fully and
unconditionally guaranteed on a joint and several basis by each of our domestic
subsidiaries. The senior notes were issued pursuant to an Indenture (the
"Indenture") among us, the subsidiary guarantors and Bankers Trust Company, as
trustee. Approximately $4.6 million of the proceeds from the sale of the Units
was allocated to the fair value of the Warrants and approximately $143.7 million
was allocated to the Notes, net of original issue discount of approximately $1.7
million.

     The Indenture limits our ability to incur additional debt, to pay dividends
or make other distributions, to purchase or redeem our stock or make other
investments, to sell or dispose of assets, to create or incur liens, and to
merge or consolidate with any other person. The Indenture also contains
provisions requiring additional equity investments by Willis Stein & Partners in
the event the Company does not achieve certain leverage to EBITDA ratios, as
defined, in years 2000 and 2001. The Indenture provides that upon a change in
control of Aavid, we must offer to repurchase the Notes at 101% of the face
value thereof, together with accrued and unpaid interest. The Notes are
subordinated in right of payment to amounts outstanding under the Credit
Facility and certain other permitted indebtedness.

     We believe that existing sources of liquidity and funds expected to be
generated from operations will be sufficient to meet our debt service, capital
expenditure and working capital requirements for the foreseeable future. Further
expansion of our business or the completion of any material strategic
acquisitions may require additional funds which, to the extent not provided by
internally generated sources, could require us to seek access to debt and equity
markets.

YEAR 2000

     The year 2000 problem was to have resulted from computer programs and
devices that did not differentiate between the year 1900 and the year 2000
because they were written using two digits rather than four to define the
applicable year. As a result, computer systems that have time-sensitive
calculations potentially would not properly recognize the year 2000. This could
have resulted in system failures or miscalculations causing disruptions of our
operations. The year 2000 problem potentially affected us across our worldwide


                                       29
<PAGE>   30


locations and within substantially all of our business activities. We believe
that as a result of our year 2000 remediation and planning programs, the year
2000 problem has not, as of March 30, 2000, had a material adverse effect on our
operations or financial results. As of December 31, 1999, we estimate that we
had incurred approximately $0.2 million in our year 2000 efforts, including
without limitation, outside consulting fees and computer systems upgrades, but
excluding internal staff costs, all of which has been expensed. It is possible
that we will experience year 2000 related problems in the future, particularly
with our non-business critical systems, which may result in failures or
miscalculations resulting in inaccuracies in computer output or disruptions of
operations. However, we believe that the year 2000 problem will not pose
significant operational problems for our business critical computer systems and
equipment. The financial impact of future remediation activities that may become
necessary, if any, cannot be known precisely at this time, but is not expected
to be material.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Upward or downward changes in market interest rates and their impact on the
reported interest expense of the Company's variable rate borrowings will affect
the our future earnings; however, a ten percent change in 1999 effective
interest rates would have an approximate $0.7 million impact on our earnings for
2000, based on debt composition and rates in effect at December 31, 1999.

ITEM  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Financial Statements and supplementary data required pursuant to this Item
begin on page 43 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Not applicable.


                                       30
<PAGE>   31


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

     The following table sets forth the names of each of the our directors as of
March 31, 1999, their ages, the year in which each became a director and their
principal occupations during the past five years:

<TABLE>
<CAPTION>
                                             YEAR
                                            FIRST
                                            BECAME                                 PRINCIPAL OCCUPATION
           NAME               AGE          DIRECTOR                             DURING THE PAST FIVE YEARS
---------------------------- -----     ----------------                   ----------------------------------------------

<S>                            <C>           <C>            <C>
Daniel H. Blumenthal           36            2000           Mr. Blumenthal became a director upon consummation of the Merger on
                                                            February 2, 2000.  Mr. Blumenthal has been a managing director of Willis
                                                            Stein & Partners since its inception in 1994.  Prior to that time, he
                                                            served as vice president of Continental Illinois Venture Corporation, or
                                                            CIVC, from 1993 to 1994, and as a corporate tax attorney with Latham &
                                                            Watkins, a national law firm, from 1988 to 1993.

Avy H. Stein                   45            2000           Mr. Stein became a director upon consummation of the Merger on February
                                                            2, 2000. Mr. Stein has been a managing director of Willis Stein &
                                                            Partners since its inception in 1994. Prior to that time, he served as a
                                                            managing director of CIVC, a venture capital investment firm, from 1989
                                                            to 1994. Prior to his tenure at CIVC, Mr. Stein served as a special
                                                            consultant for mergers and acquisitions to the chief executive officer
                                                            of NL Industries, Inc.; as the chief executive officer and principal
                                                            shareholder of Regent Corporation; as president of Cook Energy
                                                            Corporation and as an attorney with Kirkland & Ellis, a national law
                                                            firm. Mr. Stein also serves as a director of CTN Media Group, Inc.,
                                                            Racing Champions Corporation and Tremont Corporation.
</TABLE>

Prior to the Merger, our directors were Ronald F. Borelli, Bharatan Patel,
Charles Dickinson, M. William Macey, Jr., Frank Pipp and David Steadman. Mr.
Borelli served as Chairman of the Board.

MEETINGS OF THE BOARD OF DIRECTORS

     Our business affairs are managed under the direction of the Board of
Directors. Members of the Board are kept informed through various reports and
documents sent to them, through operating and financial reports routinely
presented at Board and committee meetings by the Chairman and other officers,
and through other means. In addition, our directors discharge their duties
throughout the year not only by attending Board meetings, but also through
personal meetings and other communications, including considerable telephone
contact, with the Chairman of the Board and others regarding matters of interest
and concern to Aavid.

     During the fiscal year ended December 31, 1999, our Board of Directors held
22 formal meetings, a substantial majority of which related to our acquisition
of Thermalloy and the sale of Aavid. Each director attended at least 75% of the
meetings of the Board of Directors held during 1999 and of all committees of the
Board of Directors on which he served during 1999.

BOARD COMMITTEES

Our Board of Directors has a Compensation and Stock Plans Committee and an Audit
Committee but does not have a nominating committee. The members of each
committee are appointed by the Board of Directors.


                                       31
<PAGE>   32


Compensation and Stock Plans Committee. The Compensation and Stock Plans
Committee reviews and approves overall policy with respect to compensation
matters, including such matters as compensation plans for employees and
employment agreements and compensation for executive officers. The Compensation
and Stock Plans Committee also administers the Company's Stock Plans. The
Compensation and Stock Plans Committee consisted of Messrs. Steadman and
Dickinson during 1999. The Compensation and Stock Plans Committee met 2 times
during 1999.

Audit Committee. The Audit Committee recommends to the Board of Directors the
auditing firm to be selected each year as independent auditors of our financial
statements and to perform services related to the completion of such audit. The
Audit Committee also has responsibility for: (i) reviewing the scope and results
of the audit; (ii) reviewing our financial condition and results of operations
with management; (iii) considering the adequacy of our internal accounting and
control procedures; and (iv) reviewing any non-audit services and special
engagements to be performed by the independent auditors and considering the
effect of such performance on the auditors' independence. Messrs. Steadman and
Pipp served as members of the Audit Committee during 1999. The Audit Committee
met 3 times during 1999.

Acquisitions Committee. In connection with the possible sale of Aavid, the Board
of Directors appointed an Acquisitions Committee to conduct negotiations with
the interested parties. The Acquisitions Committee consisted of Messrs. Borelli,
Macey and Steadman. The committee had numerous informal meetings and discussions
during the sale process.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Securities and Exchange Commission (the "Commission") has comprehensive
rules relating to the reporting of securities transactions by directors,
executive officers and stockholders who beneficially own more than 10% of our
Common Stock (collectively, the "Reporting Persons"). Based solely on a review
of reports filed pursuant to Section 16 of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), received by us from Reporting Persons and
written representations from our executive officers and directors, we believe
that no Reporting Person has failed to file a Section 16 report on a timely
basis during the most recent fiscal year. We have no knowledge of whether Alan
Beane, whom we believe beneficially owned more than 10% of our Common Stock
during 1999, had any transactions required to be reported pursuant to Section
16.

EXECUTIVE OFFICERS

     Our executive officers are as follows:

<TABLE>
<CAPTION>
NAME                                          AGE                             POSITION
----                                          ---                             --------

<S>                                           <C>      <C>
Ronald F. Borelli.........................    63       Chairman of the Board of Directors through February 2, 2000
Bharatan R. Patel.........................    51       President and Chief Executive Officer, Aavid; Chief Executive Officer,
                                                         Fluent; Director through February 2, 2000
Bryan Byrne...............................    52       Vice President and Chief Financial Officer
John W. Mitchell..........................    50       Vice President and General Counsel, Aavid
H. Ferit Boysan...........................    52       President and Chief Operating Officer, Fluent
George P. Dannecker.......................    50       President and Chief Operating Officer, Aavid Thermalloy LLC
Peter Christie............................    55       Vice President and Chief Financial Officer of Fluent
</TABLE>


     RONALD F. BORELLI served as Chairman of the Board from October 15, 1996 to
February 2, 2000. He was our Chief Executive Officer and Chief Executive Officer
of Aavid Thermalloy from October 15, 1996 until December 31, 1999. He served as
one of our directors from October 1993 to February 2, 2000, and served as our
President and President of Aavid Thermalloy from October 15, 1996 to October 15,
1997. From March 1989 until he joined Aavid, Mr. Borelli was the Chief Executive
Officer and a Director of Spectra, Inc., a hot melt ink jet company focusing on
color printers. From 1982 to March 1989 Mr. Borelli was a Senior Vice President
of SCI Systems. Prior to that he spent 20 years at Honeywell in a variety of
engineering and management positions.


                                       32
<PAGE>   33


     BHARATAN R. PATEL, PH.D. became our Chief Executive Officer on January 1,
2000. He served as one of our directors from April 1996 to February 2, 2000, our
President since October 15, 1997 and Chief Executive Officer of Fluent since he
helped form it in 1988 as a subsidiary of Creare, Inc. He served as our Chief
Operating Officer from October 15, 1997 until December 31, 1999. Dr. Patel
worked at Creare, Inc., an engineering consulting firm, from 1976 to 1988,
serving in various capacities including Principal Engineer and Vice President.
From 1971 to 1976, Dr. Patel was employed as a Senior Engineer in the Power
Systems Group of Westinghouse Electric Corporation.

     BRIAN BYRNE joined Aavid Thermal Technologies, Inc. in April, 2000 as its
Chief Financial Officer. Brian comes to Aavid from Jabil Circuits, Inc., where
he served as Operations Manager. Prior to his position at Jabil, Mr. Byrne
served as the Vice President for Altron Incorporated's (subsequently Sanmina
Corporation) Business Development and its Massachusetts' printed circuit
assembly division for 3 years. Prior to that, he spent 20 years at Compangnie
Des Machines Bull in increasingly senior financial and executive positions, most
recently as Division General Manager of Bull Electronics.

     JOHN W. MITCHELL joined us in December 1995 as Vice President and General
Counsel. From 1979 until he joined us, Mr. Mitchell was a corporate and business
attorney at Sulloway & Hollis, a Concord, New Hampshire law firm, where he
served as Aavid Thermalloy' principal outside legal counsel since May 1985.

     H. FERIT BOYSAN, PH.D. became Chief Operating Officer of Fluent in July
1997 and President of Fluent in December 1998. Since 1991, he had been Managing
Director of Fluent's European operations, headquartered in Sheffield, England.
From 1986 to 1991, Dr. Boysan was the Managing Director of Flow Simulations,
Ltd., the European distributor of Fluent products until the formation of Fluent
Europe in 1991. Dr. Boysan was one of the original developers of Fluent's CFD
software.

     GEORGE P. DANNECKER became President and Chief Operating Officer of Aavid
Thermalloy (now Aavid Thermalloy LLC) in October 1997. Prior to that
appointment, he had been Vice President-Marketing and Sales of Aavid Thermalloy
since February 1994. Prior to joining Aavid Thermalloy, Mr. Dannecker was
employed by Concord Communications, Inc., a telecommunications software company,
where he was Vice President-Sales and Service from March 1986 to February 1994.

     PETER CHRISTIE joined Fluent in 1998 as its Vice President and Chief
Financial Officer. From 1984 to 1998, Mr. Christie held several senior
management positions, including President and Chief Financial Officer, at Verax
Corporation, a bioprocessing company. Prior to joining Verax, Mr. Christie was
employed at Creare Inc., an engineering consulting firm, where he held the
position of Chief Financial Officer from 1973 to 1978 and was President and
founder of Creare Products Inc., a medical instruments manufacturer, from 1978
to 1984.

ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

     The following table summarizes all compensation earned by or paid to our
Chief Executive Officer and the four other most highly paid executive officers
whose annual salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers") for services rendered in all capacities to Aavid during the
fiscal years indicated.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                          LONG-TERM
                                                                                                         COMPENSATION
                                                                             COMPENSATION                   AWARDS
                                                                             -----------                    ------
                                                                       ANNUAL                         SECURITY UNDERLYING
NAME AND PRINCIPAL POSITION                        FISCAL YEAR         SALARY            BONUS              OPTIONS
---------------------------                        -----------         ------            -----        -------------------
<S>              <C>                                   <C>          <C>               <C>              <C>
Ronald F. Borelli(1)..........................         1999         $   325,316       $   150,000           50,000
Chairman of the Board and                              1998             299,787                --          100,000
Chief Executive Officer                                1997             254,808           150,000               --
Bharatan R. Patel(2)..........................         1999         $   244,115       $   125,000           24,950
President and                                          1998             225,000                --           10,000
Chief Operating Officer                                1997             200,000            83,744               --
George P. Dannecker(3)........................         1999         $   212,000       $   100,000           15,000
President and Chief Operating Officer of Aavid         1998             200,000                --           24,900
Thermalloy                                             1997             174,237            59,100           17,320
H. Ferit Boysan(4)............................         1999         $   169,365       $   137,300           24,950
</TABLE>


                                       33
<PAGE>   34

<TABLE>
<CAPTION>
<S>                                                    <C>              <C>                <C>          <C>
President and Chief Operating Officer of               1998             165,858            79,065            5,000
Fluent                                                 1997             144,637            62,211               --
John W. Mitchell..............................         1999         $   196,088       $    75,000           10,000
Vice President, General                                1998             185,228                --            3,000
Counsel and Secretary                                  1997             172,774            34,650            2,393
</TABLE>


(1)  Mr. Borelli served as Aavid's President from October 15, 1996 to October
     15, 1997 and as Aavid's Chief Executive Officer from October 15, 1996 to
     December 31, 1999 and as our Chairman of the Board from October 15, 1996 to
     February 2, 2000.

(2)  Mr. Patel became President and Chief Operating Officer of Aavid in October
     1997, and became Chief Executive Officer of Aavid on January 1, 2000.

(3)  Mr. Dannecker became President and Chief Operating Officer of Aavid
     Thermalloy in October 1997.

(4)  Mr. Boysan became President of Fluent in December 1998.

                          OPTION GRANTS IN FISCAL 1999

<TABLE>
<CAPTION>
                                              PERCENTAGE OF
                                              TOTAL OPTIONS                                             POTENTIAL REALIZABLE
                            SECURITIES         GRANTED TO                                                 VALUE AT ASSUMED
                            UNDERLYING        EMPLOYEES IN      EXERCISE PRICE                          ANNUAL RATES OF STOCK
                         OPTIONS GRANTED     FISCAL YEAR(1)        PER SHARE       EXPIRATION          PRICE APPRECIATION FOR
         NAME                                                                         DATE                 OPTION TERM (2)
                                                                                                         5%             10%
-------------------      ---------------     --------------     --------------     ----------        --------       ----------

<S>                          <C>                  <C>              <C>               <C> <C>         <C>            <C>
Ronald F. Borelli            50,000               15.6%            $13.00            4/1/09          $408,782       $1,035,933
George P. Dannecker          15,000                4.7%            $15.88            1/4/09           149,803          379,629
Bhartan R. Patel             24,950                7.8%            $15.88            1/4/09           249,172          631,450
H. Ferit Boysan              24,950                7.8%            $15.88            1/4/09           249,172          631,450
John W. Mitchell             10,000                3.1%            $15.88            1/4/09            99,868          253,086
</TABLE>



(1)  Based upon options to purchase 320,714 shares granted to all employees in
     1999.
(2)  The 5% and 10% assumed annual compound rates of stock price appreciation
     are mandated by the Commission and do not represent the Company's estimate
     or projection of the future Common Stock prices. Actual gains, if any, on
     stock option exercises will depend on the future price of the Common Stock
     and overall stock market conditions. The 5% and 10% rates of appreciation
     over the 10 year option term of the $13.00 stock price on the date of the
     grant would result in a stock price of $21.18 and $33.72, respectively. The
     5% and 10% rates of appreciation over the 10 year option term of the $15.88
     stock price on the date of the grant would result in a stock price of
     $25.87 and $41.19, respectively. There is no representation that the rates
     of appreciation reflected in this table will be achieved.

     All of these options were cashed out in connection with the merger pursuant
to which we became a wholly-owned subsidiary of Heat Holdings Corp.

     The following table sets forth information with respect to (i) stock
options exercised in 1999 by the Named Executive Officers and (ii) unexercised
stock options held by such individuals at December 31, 1999.



                                       34

<PAGE>   35
   AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND 1999 FISCAL YEAR-END OPTION
                                     VALUES

<TABLE>
<CAPTION>
                                                                      NUMBER OF SECURITIES
                                                                           UNDERLYING                             VALUE OF
                                                                     UNEXERCISED OPTIONS AT                 IN-THE-MONEY OPTIONS
                          SHARES ACQUIRED                                FISCAL YEAR-END                    AT FISCAL YEAR-END(1)
                                ON                                         EXERCISABLE/                         EXERCISABLE/
      NAME                   EXERCISE        VALUE REALIZED               UNEXERCISABLE                        UNEXERCISABLE
-------------------       ---------------    --------------          ----------------------                 ---------------------

<S>                       <C>                <C>                     <C>                                   <C>
Ronald F. Borelli               --                --                    356,250 / 100,000                  $4,625,187 / $592,000
Bhartan R. Patel                --                --                     81,238 / 23,712                   $1,111,173 / $165,313
H. Ferit Boysan                 --                --                     14,573 / 21,212                     $143,452 / $163,913
George P. Dannecker             --                --                     56,295 / 28,378                     $760,568 / $145,865
John W. Mitchell                --                --                     41,687 / 9,956                      $603,574 / $ 77,267
</TABLE>



(1)  Calculated on the basis of $24.56 per share, the closing sale price of the
     Common Stock as reported on the NASDAQ National Market on December 31,
     1999, minus the exercise price.

     All of these options were cashed out in connection with the Merger pursuant
     to which we became a wholly-owned subsidiary of Heat Holdings Corp.

EMPLOYMENT AGREEMENTS

     Aavid has entered into an employment agreement with Mr. Mitchell, which
currently expires on December 5, 2001. Aavid Thermalloy has entered into an
employment agreement with Mr. Dannecker, which currently expires on June 30,
2000; and Fluent has entered into an employment agreement with Mr. Patel, which
currently expires on May 1, 2001, and with Mr. Boysan, which currently expires
on August 24, 2000. Each of these employment agreements provides for automatic
renewal for successive two year terms (one year in the case of Mr. Dannecker)
unless either party gives written notice to the other to the contrary at least
180 days prior to its expiration; however, each of Messrs. Mitchell, Dannecker,
Patel and Boysan are entitled to terminate his employment at any time by giving
90 days' notice to Aavid.

     The employment agreements require each employee to devote his full business
time and best efforts, business judgment, skill and knowledge exclusively to the
advancement of the business and interests of Aavid. The employment agreements
currently provide for the payment of a base salary to Messrs. Patel, Boysan,
Mitchell and Dannecker equal to $250,000, $180,000, $195,000, and $212,000,
respectively, subject to increase at the discretion of the board of directors of
their respective employers. Each employment agreement provides that the employee
will continue to receive his base salary, bonuses, benefits and other
compensation for a specified period in the event their respective employers
terminate their employment other than for "cause" or under certain other
circumstances.

     Each of Messrs. Dannecker, Mitchell, Boysan and Patel is entitled to an
annual bonus based on Aavid's performance. Mr. Patel is entitled to a target
annual bonus of $125,000 based upon achievement in each fiscal year. Mr.
Dannecker is entitled to receive a target annual bonus of $100,000 based on
Aavid Thermalloy's actual performance measured against budgeted performance. Mr.
Mitchell is entitled to receive an annual bonus of up to $65,000 based on his
management of our legal expenses. Mr. Boysan is entitled to an annual bonus
based on our actual performance against budgeted performance. We may renegotiate
our obligation to make the payments under those employment agreements in
connection with certain public offering or acquisition transactions.

     The employment agreements contain non-competition covenants, waivable by
us, which survive the termination of each employee's employment with us until
two years from the date the employee's employment terminates (the
"non-competition period"). In addition to other compensation payable to each of
Messrs. Dannecker, Mitchell, Patel and Boysan under their agreements, during the
non-competition period we are required to pay each employee one-half (75% of
base salary in the case of Mr. Boysan and $10,000 per month in the case of Mr.
Patel) of his highest prior base salary per annum.

COMPENSATION OF DIRECTORS


                                       35
<PAGE>   36


     Prior to the Merger, each of our non-employee directors received an annual
fee of $10,000 and $500 for each Board of Directors and committee meeting
attended. All directors are reimbursed for all reasonable expenses incurred by
them in acting as a director or as a member of any committee of the Board of
Directors. In addition, directors who are not employees of the Company are
compensated through stock options under the Directors' Plan. We adopted the 1995
Non-Employee Director Stock Option Plan (the "Directors' Plan") to promote our
interests by attracting and retaining highly skilled, experienced and
knowledgeable non-employee directors. An aggregate of 200,000 shares of Common
Stock were reserved for issuance under the Directors' Plan. Options granted
under the Directors' Plan did not qualify as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). The Directors' Plan provided for an automatic grant of an option to
purchase 10,000 shares of Common Stock effective upon initial election or
appointment to the Board of Directors of a non-employee director, and an
automatic grant of an option to purchase an additional 2,500 shares of Common
Stock on each anniversary of the date of his or her election or appointment to
the Board of Directors.

     In addition, the Directors' Plan provided for the automatic grant to each
of Messrs. Borelli and Macey, as well as Messrs. Edward Glassmeyer, Douglas
Newhouse, and William L. Selden, at the time non-employee directors of Aavid,
of: (i) an option to purchase 10,000 shares of Common Stock in February 1996
(the "Initial Options") following the consummation of our initial public
offering at an exercise price of $9.50 per share, the initial public offering
price of the Common Stock; and (ii) on April 21st of each year, commencing April
21, 1996, an automatic grant of an option to purchase an additional 2,500 shares
of Common Stock, provided such individual received Initial Options and was
serving as a non-employee director at the close of business on April 21st of
such year. The options had an exercise price of 100% of the fair market value of
the Common Stock on the date of grant and had a ten-year term. Initial Options
became exercisable in their entirety six months after the date of the grant. All
other options granted under the Directors' Plan became fully exercisable on the
first anniversary of the grant date.

     Each outstanding option was subject to acceleration in the event of a
change of control of Aavid (as defined in the Directors' Plan). The options
could be exercised by payment in cash, check or shares of Common Stock. On April
10, 1997, Mr. Dickinson was granted an option to purchase 10,000 shares of
Common Stock at an exercise price of $11.375 upon his election as a director. On
April 15, 1997 Mr. Steadman was granted an option to purchase 10,000 shares of
Common Stock at an exercise price of $11.25 upon his becoming a non-employee
director. On April 21, 1997, each of Messrs. Glassmeyer, Macey, Newhouse and
Selden was granted an option to purchase an additional 2,500 shares of Common
Stock at an exercise price of $11.25; on April 21, 1998, each of Messrs.
Glassmeyer, Macey and Newhouse was granted an option to purchase an additional
2,500 shares at an exercise price of $32.375; and on April 21, 1999, Mr. Macey
was granted an option to purchase an additional 2,500 shares at an exercise
price of $16.50. On each of April 10, 1998 and 1999, Mr. Dickinson was granted
an option to purchase an additional 2,500 shares of Common Stock at an exercise
price of $30.125 and $16.50, respectively. On each of April 15, 1998 and 1999,
Mr. Steadman was granted an option to purchase an additional 2,500 shares of
Common Stock at an exercise price of $32.25 and $16.50, respectively. On June
14, 1999 Mr. Pipp was granted an option to purchase an additional 2,500 shares
of common stock at an exercise price of $20.89. On June 19, 1998, Mr. Pipp was
granted an option to purchase 10,000 shares of Common Stock at an exercise price
of $30.13 upon his election as a Director. These options were cashed out in the
merger to the extent they remained outstanding at the time.

     Messrs. Macey and Steadman, who together with Mr. Borelli constituted the
committee appointed by the Board to negotiate with the interested buyers of
Aavid, each received $75,000 for their service on the committee, regardless of
whether a transaction was consummated. In addition, Mr. Steadman received a fee
of $50,000 for his work on the Thermalloy transaction, which fee was not
contingent on the consummation of the transaction.


                                       36
<PAGE>   37


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                      BENEFICIAL OWNERSHIP OF COMMON STOCK

     Heat Holdings Corp. currently owns all of the issued and outstanding stock
of Aavid (excluding detachable warrants, sold to noteholders in connection with
the sale of the senior notes, to acquire, in the aggregate, 60 shares of Class A
common stock and 60 shares of Class H common stock, representing 3% of the
common stock of Aavid (on a fully diluted basis)).

     The following table sets forth certain information regarding the beneficial
ownership of the issued and outstanding common stock of Holdings as of March 1,
2000. None of our executive officers or directors own any Holdings securities,
except as set forth below.

                             BENEFICIAL OWNERSHIP(1)

<TABLE>
<CAPTION>
                                                   NUMBER OF
                                                SHARES OF CLASS     NUMBER OF SHARES    TOTAL NUMBER OF
            NAME AND ADDRESS                        A COMMON           OF CLASS B          SHARES OF       TOTAL PERCENTAGE OF
          OF BENEFICIAL OWNER                        STOCK            COMMON STOCK       COMMON STOCK        COMMON STOCK(2)
          -------------------                   ---------------     ----------------    ---------------    -------------------

<S>                                               <C>                  <C>                <C>                   <C>
Willis Stein(3)                                   4,938,500.0          4,938,500.0        9,877,000             67.10%
The Chase Manhattan Bank, as
trustee for First Plaza Group Trust(3)            1,210,416.5          1,210,416.5        2,420,833             16.45%
Nassau Capital(4)                                   484,167.0            484,167.0          968,334              6.58%
Abbott Capital Management(5)                        484,167.0            484,167.0          968,334              6.58%
BancBoston Investments, Inc.(6)                     242,083.5            242,083.5          484,167              3.29%
</TABLE>


(1)  "Beneficial ownership" generally means any person who, directly or
     indirectly, has or shares voting or investment power with respect to a
     security or has the right to acquire such power within 60 days. Unless
     otherwise indicated, we believe that each holder has sole voting and
     investment power with regard to the equity interests listed as beneficially
     owned.

(2)  For each beneficial owner listed in the table above, the percentage of
     outstanding Holdings' Class A common stock, Class B common stock and total
     common stock owned by such holder is the same.

(3)  Consists of 4,641,572.5 shares of each of Class A common stock and Class B
     common stock directly beneficially held by Willis Stein & Partners II, L.P.
     and 296,927.5 shares of each of Class A common stock and Class B common
     stock directly beneficially held by Willis Stein & Partners Dutch, L.P.
     Willis Stein & Partners Management II, L.L.C. is the general partner of
     both partnerships and may be deemed to beneficially own such shares. Avy H.
     Stein and Daniel H. Blumenthal, as managing directors of Willis Stein &
     Partners Management II, L.L.C., may be deemed to beneficially own the
     shares of common stock beneficially owned by the partnerships and their
     general partner. Messrs. Stein and Blumenthal disclaim beneficial ownership
     of any of such shares. Willis Stein's address is 227 West Monroe Street,
     Suite 4300, Chicago, Illinois 60606.

(4)  The Chase Manhattan Bank acts as the trustee for the First Plaza Group
     Trust, a trust under and for the benefit of certain employee benefit plans
     of General Motors Corporation ("GM"), its subsidiaries and unrelated
     employers. These shares may be deemed to be owned beneficially by General
     Motors Investment Management Corporation ("GMIMCo"), a wholly-owned
     subsidiary of GM. GMIMCo's principal business is providing investment
     advice and investment management services with respect to the assets of
     certain employee benefit plans of GM, its subsidiaries and unrelated
     employers, and with respect to the assets of certain direct and indirect
     subsidiaries of GM and associated entities. GMIMCo is serving as the
     trust's investment manager with respect to these shares and in that
     capacity it has the sole power to direct the trustee as to the voting and
     disposition


                                       37
<PAGE>   38


     of these shares. Because of the trustee's limited role, beneficial
     ownership of the shares by the trustee is disclaimed. First Plaza Group
     Trust's address is c/o GMIMCo, 767 Fifth Ave., 16th Floor, New York, NY
     10153.

(5)  Consists of 480,455.0 shares of each of Class A common stock and Class B
     common stock directly beneficially held by Nassau Capital Partners III L.P.
     and 3,712.0 shares of each of Class A common stock and Class B common stock
     directly beneficially held by NAS Partners I L.L.C. Such funds' address is
     22 Chambers Street, Princeton, New Jersey 08542.

(6)  Consists of 378,255.5 shares of each of Class A common stock and Class B
     common stock directly beneficially held by Abbott Capital 1330 Investors
     II, L.P., 75,651.0 shares of each of Class A common stock and Class B
     common stock directly beneficially held by Abbott Capital Private Equity
     Fund III, L.P. and 30,260.5 shares of each of Class A common stock and
     Class B common stock directly beneficially held by BNY Partners Fund,
     L.L.C. The address of such funds is c/o Abbott Capital Management, LLC,
     1330 Avenue of the Americas, Suite 2800, New York, New York 10019.

(7)  BancBoston's address is 175 Federal Street, 10th Floor, Boston,
     Massachusetts 02110.

     Each of the stockholders listed in the table above currently holds an
equivalent percentage interest in the Class A common stock and Class B common
stock of Heat Holdings Corp. II, which holds 95% of the outstanding common
membership interests in Aavid Thermalloy, LLC. At the time the Merger was
completed, all options to purchase shares of Aavid common stock held by members
of management were converted into the right to receive cash equal to the product
of the number of shares subject to each option times the excess, if any, of
$25.50 per share over the exercise price per share for such option.

     Willis Stein has advised us that it typically makes available, to
management and key employees of its portfolio companies, up to 10% of the
fully-diluted common equity of the portfolio company and the opportunity to
co-invest in the portfolio company on the same economic terms as Willis Stein.
No agreements, arrangements or understandings have been reached between Willis
Stein and our management and key employees in this regard.


                                       38
<PAGE>   39


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Our Board of Directors established the Compensation Committee in November
1993 and combined it with the Stock Plans Committee in 1997 to form the
Compensation and Stock Plans Committee. Both Messrs. Steadman and Dickinson
served as members of the Compensation and Stock Plans Committee during fiscal
1999. In 1999, each of Messrs. Steadman and Dickinson received options to
purchase 2,500 shares of Common Stock pursuant to the Directors' Plan. See "Item
11. Executive Compensation - Compensation of Directors."

     Messrs. Macey and Steadman, who together with Mr. Borelli constituted the
committee appointed by the Board to negotiate with the interested buyers of
Aavid, each received $75,000 for their service on the committee, regardless of
whether a transaction was consummated. In addition, Mr. Steadman received a fee
of $50,000 for his work on the Thermalloy transaction, which fee was not
contingent on the consummation of the transaction.

     In October 1993, we entered into an agreement with Materials Innovation,
Inc. ("MII") pursuant to which MII, Mr. Alan Beane, formerly both a director and
the Company's chief executive officer and a more than 10% holder of our Common
Stock until the Merger, and Mr. Glenn Beane, Alan Beane's brother, granted to us
exclusive worldwide rights and licenses under certain patents and technology
owned by them to develop, make, have made, use and sell certain products used to
attach certain heat dissipation products ("Clamp Products") and heat sinks
manufactured by a vacuum die cast process ("Heat Sink Products"). Under the
agreement, we are required to pay MII an annual royalty for the Clamp Products
sold by us equal to the greater of: (i) $0.05 per Clamp Product; or (ii) 15% of
the net selling price for such Clamp Products, with a minimum royalty of $40,000
per annum. In addition, under the agreement we must pay MII an annual royalty
for the Heat Sink Products sold by us equal to the greater of (i) 10% of the net
selling price; and (ii) 25% of the net selling price minus servicing cost.
During the term of the agreement, we are required to reimburse MII for its
direct costs incurred in sourcing and testing clamps required and requested by
us. The agreement provides that prior to October 14, 2003, MII, Alan Beane and
Glenn Beane may not directly or indirectly, in any capacity whatsoever: (i) sell
any heat dissipation product of the type produced by us (other than products
whose principal purpose is not heat dissipation and products for one specified
customer); (ii) license, sell, transfer, provide or make available to any
business which is competitive with us any products, technology or other
intellectual property which may be useful in the manufacture or sale of our heat
dissipation products, except that MII is permitted to sell raw materials to
entities which are not our direct competitors; or (iii) provide any kind of
services to any business which is competitive with us with respect to its heat
dissipation products. In addition, we may not prior to October 14, 2003, in any
capacity whatsoever, engage in the manufacture, distribution, sale or licensing
of particle level heterogeneous materials and other materials created from
powders and particles, except adhesives and compliant inter-face materials, or
pursuant to a license from MII. We must give MII primary consideration as a
supplier of such materials created from powders and particles if MII can supply
such materials on terms which are competitive with those otherwise available in
the market. The agreement grants us a right of first refusal in the event of a
transfer of MII's interest in the technology covered by the agreement. In
addition, the agreement provides that MII may not, and may not permit Glenn
Beane or any affiliate to, transfer all or any part of its interest in the
patents or technology covering the Clamp Products or Heat Sink Products, unless,
prior to the transfer, the transferee has executed an agreement acknowledging
that it takes such interest subject to the provisions of the agreement between
MII and Aavid. The agreement terminates upon the last to expire of the licensed
patents covering the Clamp Products and the Heat Sink Products, although we may
terminate the agreement at any time effective immediately upon written notice to
MII. In 1999, royalty payments and expense reimbursement by us to MII were not
material and there were no sales of MII products and development services to us.
We believe that Mr. Alan Beane is the chairman and an owner of approximately
41.5% of MII.

     On March 4, 1998, MII and Messrs. Alan Beane and Glenn Beane filed a
petition for declaratory judgment against Aavid Thermalloy in Grafton County
(New Hampshire) Superior Court. The petitioners have asked the court to declare
as terminated an agreement between Petitioners and Aavid dated October 14, 1993.
Petitioners claim that Aavid Thermalloy has failed to pay royalties associated
with the vacuum die cast patent. The petition does not seek monetary damages
from Aavid.

On January 29, 1999, the Grafton County Superior Court granted our motion to
dismiss the Petitioner's declaratory judgment petition. The petitioners appealed
that dismissal but then subsequently withdrew that appeal. Materials Innovation
then commenced arbitration of the same issue; however, the arbitration and a
related declaratory judgment action brought by us to have the Materials
Innovation vacuum die cast patent declared invalid was stayed by agreement
pending completion or termination of the merger. Although we believe that the
termination of the agreement with Materials Innovation would not have a
materially adverse effect on our business, there can be no assurance it will not
have such a materially adverse effect in the future.


                                       39
<PAGE>   40


     Under the terms of Mr. Beane's former employment agreement with Aavid, Mr.
Beane was permitted to pursue scientific research, patent inventions and
business ventures with MII so long as such activities did not interfere with Mr.
Beane's obligations to Aavid. We have no rights to any intellectual property
resulting from such permitted activities. Our relationship with MII is regulated
by the terms of an agreement between MII, its principals and Aavid, which
prohibits MII from competing with us in the markets for heat sinks and other
products whose principal purpose is to dissipate heat from electronic devices.
MII is pursuing the development of certain products and advanced materials
which, if successfully developed, would have application to our business.
However, MII is not obligated to license such technology to Aavid, and there can
be no assurance that Aavid will benefit from the relationship with MII or will
be able to license any intellectual property from MII, if desirable, on
acceptable terms or at all. There can be no assurance that a conflict of
interest will not develop between Aavid and MII.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K

(a)  Financial Statements and Financial Schedules

     (1)  and (2) See "Index to Consolidated Financial Statements" beginning on
          page 42. Schedule II - Valuation and Qualifying Accounts and the
          Financial Data Schedule are filed herewith. All other schedules for
          which provision is made in the applicable accounting regulations of
          the Securities and Exchange Commission are not required under the
          related instructions or are inapplicable and, therefore, have been
          omitted.

     (3)  The following exhibits are filed or incorporated by reference as part
          of this Annual Report are management contracts, compensatory plans or
          arrangements: Exhibits 10.9, 10.10, 10.11, 10.18, 10.21 and 10.22

<TABLE>
<CAPTION>
    NO.      DESCRIPTION
    ---      -----------

<S>          <C>
    2.1      Stock Purchase Agreement by and among Bowthorpe plc, Bowthorpe B.V., Bowthorpe International Inc., Bowthorpe GmbH
             (collectively, "Bowthorpe") and Aavid Thermal Technologies, Inc., dated as of August 23, 1999(1)

    2.2      Agreement of Plan and Merger, dated as of August 23, 1999, by and among Heat Holdings Corp., Heat Merger Corp. and
             Aavid Thermal Technologies, Inc.(1)

    3.1      Certificate of Incorporation (2)

    3.2      By-laws(2)

    4.1      Indenture dated as of February 2, 2000, among Aavid Thermal Technologies, Inc., the subsidiary guarantors and Bankers
             Trust Company, as trustee.(3)

    4.2      Warrant Agreement, dated as of February 2, 2000, by and between Aavid Thermal Technologies, Inc. and Bankers Trust
             Company, as Warrant Agent.(3)

   10.1      Registration Rights Agreement, dated as of August 24, 1995, between Bharatan R. Patel and Fluent, Inc. ("Fluent")(4)

   10.2      Amended and Restated Management Agreement, dated as of September 30, 1995 between the Company and Sterling Ventures
             Limited, as amended(4)

   10.3      1994 Stock Option Plan(4)

   10.4      Form of Stock Option Agreement under the 1994 Stock Option Plan(4)

   10.5      1995 Employee Stock Purchase Plan(4)

   10.6      1995 Non-Employee Director Stock Option Plan(4)

   10.7      Stock Option Agreements, dated October 14, 1993, between the Company and Alan F. Beane, relating to options to purchase
             shares of the Company's Series A Preferred Stock and Common Stock(4)

   10.8      Employment Agreement, dated as of October 14, 1993, between Alan F. Beane and the Company(4)

   10.9      Employment Agreement, dated as of January 1, 1995, between George P. Dannecker and Aavid Engineering(4)
</TABLE>


                                       40
<PAGE>   41

<TABLE>
<CAPTION>
<S>          <C>
   10.10     Employment Agreement, dated as of May 1, 1999, between Bharatan R. Patel and Fluent(5)

   10.11     Employment Agreement, dated as of August 24, 1995, between Dr. Ferit Hassan Boysan and Fluent Europe Limited(4)

   10.12     Agreement dated as of October, 1993, between Aavid Engineering and Materials Innovation, Inc.(4)

   10.13     Warrant Purchase Agreement, dated as of October 14, 1993, between the Company and Rice Mezzanine Lenders, LP(4)

   10.14     Loan and Security Agreement, dated as of October 14, 1993, between Aavid Engineering and LaSalle Business Credit, Inc.;
             First Amendment, dated May 25, 1994; Second Amendment, dated September 1, 1994; Third Amendment, dated December 13,
             1994; and Fourth Amendment, dated July, 1995(4)

   10.15     Guaranty, dated October 14, 1993, of the Company for the benefit of LaSalle Business Credit, Inc.(4)

   10.16     Patent Collateral Security Agreement, dated October 14, 1993, by and between Aavid Engineering and LaSalle Business
             Credit, Inc.(4)

   10.17     Patent Assignment of Security, dated October 14, 1993, by and between Aavid Engineering and LaSalle Business Credit,
             Inc.(4)

   10.15     Lease, dated as of October 10, 1995, between Aavid Engineering and Industrial Enterprises; and Addendum to Lease(4)

   10.16     Business Loan Agreement, dated March 2, 1995, between Fluent Europe Limited and Lloyds Bank PLC(4)

   10.17     Form of indemnification agreement for the Company's officers and directors(4)

   10.18     Employment Agreement, dated as of December 1, 1995, among John Mitchell, Aavid Engineering and the Company.(4)

   10.19     Employment Agreement, dated as of June 20, 1997, between the Company and Stephen Eldred(5)

   10.20     Amendment No. 1 to Employment Agreement, dated as of April 15, 1999, between the Company and Stephen Eldred.(5)

   10.21     First Amendment to Employment Agreement, dated as of January 1, 1998, between the Company and Ronald F. Borelli.(5)

   10.22     Amendment No. 1 to Employment Agreement, dated as of March 24, 1999, between the Company and John Mitchell(5)

   10.23     Credit Agreement, dated as of October 21, 1999, among Aavid Thermal Technologies, Inc., as Borrower, the several
             lenders from time to time party hereto, CIBC World Markets Corp., as Lead Arranger and Bookrunner, and Canadian
             Imperial Bank of Commerce, as Issuer and Administrative Agent.(6)

   10.24     Amended and Restated Credit Agreement, dated as of February 2, 2000, among Aavid Thermal Technologies, Inc., Heat
             Holdings Corp., Heat Holdings II Corp., the several lenders from time to time parties hereto, CIBC World Markets Corp.,
             as lead arranger and bookrunner, BankBoston, N.A., as documentation agent, and Canadian Imperial Bank of Commerce, as
             issuer and administrative agent. (3)

   10.25     Registration Rights Agreement dated as of February 2, 2000, among Aavid Thermal Technologies, Inc., the subsidiary
             guarantors, CIBC World Markets Corp. and Fleet Boston Robertson Stephens Inc., as initial purchasers.(3)

   10.26     Common Stock Registration Rights Agreement dated as of February 2, 2000, among Aavid Thermal Technologies, Inc., Heat
             Holdings Corp. and CIBC World Markets Corp. and Fleet Boston Robertson Stephens Inc., as initial purchasers.(3)

   21.0      Subsidiaries of Registrant(2)

   23.0      Consent of Arthur Andersen LLP (filed herewith)

</TABLE>

(1)  Incorporated by reference to Exhibits to the Company's Current Report on
     Form 8-K dated August 23, 1999.
(2)  Incorporated by reference to Exhibits to the Company's Registration
     Statement on Form S-4 (No. 333-33126).
(3)  Incorporated by reference to Exhibits to the Company's Current Report on
     Form 8-K dated February 2, 2000.
(4)  Incorporated by reference to Exhibits to the Company's Registration
     Statement on Form S-1 (No. 33-99232).
(5)  Incorporated by reference to Exhibits to the Company's Quarterly Report on
     Form 10-Q for the quarter ended June 30, 1999.
(6)  Incorporated by reference to Exhibits to the Company's Current Report on
     Form 8-K dated October 21, 1999.


                                       41
<PAGE>   42


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       AAVID THERMAL TECHNOLOGIES, INC.

                                       By: /s/ Bharatan R. Patel
                                           -----------------------------
                                           Bharatan R. Patel President and Chief
                                           Executive Officer April 13, 2000

Dated April 13, 2000

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE                                   TITLE                                                    DATE
---------                                   -----                                                    ----

<S>                                         <C>                                                      <C>
/s/ Bharatan Patel                          President and CEO                                        April 13, 2000
---------------------------                 (Principal Executive Officer)
Bharatan Patel

/s/ Brian Byrne                             Chief Financial Officer                                  April 13, 2000
---------------------------                 (Principal Financial and Accounting Officer)
Brian Byrne


/s/ Avy H. Stein.                           Director                                                 April 13, 2000
---------------------------
Avy H. Stein

/s/ Daniel H. Blumenthal                    Director                                                 April 13, 2000
---------------------------
Daniel H. Blumenthal.
</TABLE>


                                       42
<PAGE>   43


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                                              PAGE
                                                                                                                              ----
<S>                                                                                                                            <C>
Report of Independent Public Accountants................................................................................       44

Consolidated Balance Sheets as of December 31, 1999 and 1998............................................................       45

Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997..................................       46

Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998, and 1997.......................................................................................       47

Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997..............................       48

Notes to Consolidated Financial Statements..............................................................................       49

Schedule II -- Valuation & Qualifying Accounts..........................................................................       67
</TABLE>


                                       43
<PAGE>   44


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO AAVID THERMAL TECHNOLOGIES, INC.:

We have audited the accompanying consolidated balance sheets of Aavid Thermal
Technologies, Inc. and subsidiaries (a Delaware Corporation) as of December 31,
1999 and 1998, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aavid Thermal Technologies,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subject to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

/S/ ARTHUR ANDERSEN LLP
BOSTON, MASSACHUSETTS
April 10, 2000


                                       44
<PAGE>   45


                        AAVID THERMAL TECHNOLOGIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
ASSETS                                                                      DECEMBER 31, 1999   DECEMBER 31, 1998
------                                                                      -----------------   -----------------

<S>                                                                             <C>                 <C>
Cash and cash equivalents ............................................          $  18,273           $  20,027
Notes receivable .....................................................                 --               1,459
Accounts receivable-trade, less allowance for doubtful accounts ......             53,583              31,158
Inventories ..........................................................             30,059              15,283
Refundable taxes .....................................................                333                 370
Deferred income taxes ................................................              1,963               3,748
Prepaid and other current assets .....................................              4,099               2,897
                                                                                ---------           ---------
Total current assets .................................................            108,310              74,942
Deferred income taxes.................................................                 --               3,106
Property, plant and equipment, net ...................................             60,955              42,497
Other assets, net ....................................................             59,687               6,321
                                                                                ---------           ---------

Total assets .........................................................          $ 228,952           $ 126,866
                                                                                =========           =========

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
-------------------------------------------------------
Current portion of debt obligations ..................................          $   2,337           $   3,442
Accounts payable-trade ...............................................             21,805              17,377
Income taxes payable .................................................              4,637               2,721
Restructuring charges ................................................              2,333               4,169
Deferred revenue .....................................................              7,765               5,461
Accrued expenses and other current liabilities .......................             22,383              11,137
                                                                                ---------           ---------
Total current liabilities ............................................             61,260              44,307
Deferred income taxes ................................................                707                  --
Debt obligations, net of current portion .............................             86,608              11,208
                                                                                ---------           ---------
Total liabilities ....................................................            148,575              55,515

Commitments and contingencies (Note L)

Minority interest in consolidated subsidiary .........................                809                  --

Stockholders' equity:
Common stock, $0.01 par value; authorized 25,000,000 shares; 9,608,868
and 9,251,391 shares issued and outstanding at  December 31, 1999 and
1998, respectively ...................................................                 96                  93
Additional paid-in capital ...........................................             58,660              56,740
Cumulative translation adjustment ....................................             (1,294)               (902)
Retained earnings ....................................................             22,106              15,420
                                                                                ---------           ---------
Total stockholders' equity ...........................................             79,568              71,351
                                                                                ---------           ---------

Total liabilities, minority interest and stockholders' equity ........          $ 228,952           $ 126,866
                                                                                =========           =========
</TABLE>


   The accompanying notes are an integral part of these consolidated financial
                                   statements.


                                       45
<PAGE>   46


                        AAVID THERMAL TECHNOLOGIES, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                                                           ------------------------
                                                               1999                  1998                  1997
                                                               ----                  ----                  ----

<S>                                                         <C>                   <C>                   <C>
Net sales ........................................          $   214,243           $   209,078           $   167,745
Cost of goods sold ...............................              138,558               138,431               107,401
                                                            -----------           -----------           -----------
Gross profit .....................................               75,685                70,647                60,344
Selling, general and administrative expenses .....               51,970                43,783                36,709
Research and development .........................                7,528                 6,756                 6,939
Restructuring and buyout of compensation agreement
   charges (credits) .............................                 (630)                5,740                    --
                                                            -----------           -----------           -----------

Income from operations ...........................               16,817                14,368                16,696
Interest expense, net ............................               (1,629)               (1,342)               (2,178)
Other income (expense), net ......................                  218                  (520)               (1,201)
                                                            -----------           -----------           -----------
Income before income taxes and minority interest .               15,406                12,506                13,317
Provision for income tax expense .................               (8,852)               (4,385)               (4,824)
                                                            -----------           -----------           -----------
Income before minority interest ..................                6,554                 8,121                 8,493
Minority interest in loss of consolidated
subsidiaries .....................................                  132                    --                    --
                                                            -----------           -----------           -----------
Net income .......................................          $     6,686           $     8,121           $     8,493
                                                            ===========           ===========           ===========

Net income per share, basic ......................          $      0.71           $      0.94           $      1.22
                                                            ===========           ===========           ===========

Weighted average common shares ...................            9,432,221             8,668,368             6,945,339
                                                            ===========           ===========           ===========

Net income per share, diluted ....................          $      0.68           $      0.86           $      0.98
                                                            ===========           ===========           ===========

Weighted average common shares and equivalents ...            9,848,967             9,484,826             8,638,611
                                                            ===========           ===========           ===========
</TABLE>


   The accompanying notes are an integral part of these consolidated financial
                                   statements.


                                       46
<PAGE>   47


                        AAVID THERMAL TECHNOLOGIES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                    COMMON STOCK       ADDITIONAL                  CUMULATIVE  RETAINED
                                                -------------------      PAID-IN   COMPREHENSIVE  TRANSLATION  EARNINGS
                                                SHARES       AMOUNT      CAPITAL      INCOME       ADJUSTMENT  (DEFICIT)     TOTAL
                                                ------       ------    ----------  -------------  -----------  ---------     -----

<S>                                            <C>            <C>    <C>           <C>             <C>          <C>        <C>
Balance, December 31, 1996 .................   6,517,131      $ 65   $  30,254                     $   228      $(1,194)   $ 29,353
Comprehensive income:
  Net income ...............................          --        --          --     $   8,493            --        8,493       8,493
  Cumulative translation adjustment ........          --        --          --          (981)         (981)          --        (981)
                                                                                   ---------
Comprehensive income .......................          --        --                 $   7,512
                                                                                   =========
Proceeds from exercise of options ..........     626,930         6       1,615                          --           --       1,621
Proceeds from the issuance of common stock..     339,476         4       7,074                          --           --       7,078
Issuance of shares related to acquisition
of joint venture ...........................      75,000         1       1,124                          --           --       1,125
Income tax benefit from stock options ......          --        --       3,726                          --           --       3,726
                                               ---------      ----    ---------                    -------      -------    --------
Balance, December 31, 1997 .................   7,558,537      $ 76   $  43,793                     $  (753)     $ 7,299    $ 50,415
Comprehensive income:
  Net income ...............................          --        --          --     $   8,121            --        8,121       8,121
  Cumulative translation adjustment ........          --        --          --          (149)         (149)          --        (149)
                                                                                   ---------
Comprehensive income .......................          --        --                 $   7,972
                                                                                   =========
Proceeds from exercise of options ..........   1,192,117        12       3,469                          --           --       3,481
Proceeds from exercise of warrants .........     466,455         5          (5)                         --           --          --
Proceeds from the issuance of common stock .      34,282        --         622                          --           --         622
Income tax benefit from stock options ......          --        --       8,861                          --           --       8,861
                                               ---------      ----    ---------                    -------      -------    --------
Balance, December 31, 1998 .................   9,251,391      $ 93   $  56,740                     $  (902)     $15,420    $ 71,351
Comprehensive income:
  Net income ...............................          --        --          --     $   6,686            --        6,686       6,686
  Cumulative translation adjustment ........          --        --          --          (392)         (392)          --        (392)
                                                                                   ---------
Comprehensive income .......................          --        --                 $   6,294
                                                                                   =========
Proceeds from exercise of options ..........     311,916         3       1,162                          --           --       1,165
Proceeds from the issuance of common stock .      45,561        --         634                          --           --         634
Income tax benefit from stock options ......          --        --         124                          --           --         124
                                               ---------      ----    ---------                    -------      -------    --------
Balance, December 31, 1999 .................   9,608,868      $ 96   $  58,660                     $(1,294)     $22,106    $ 79,568
                                               =========      ====    =========                    =======      =======    ========
</TABLE>


   The accompanying notes are an integral part of these consolidated financial
                                   statements.


                                       47
<PAGE>   48


                        AAVID THERMAL TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                             YEARS ENDED DECEMBER 31,
                                                                                             ------------------------
                                                                                     1999              1998              1997
                                                                                     ----              ----              ----
<S>                                                                               <C>               <C>               <C>
Cash flows provided by (used for) operating activities:
Net income                                                                        $   6,686         $   8,121         $   8,493
Adjustments to reconcile net income to net cash provided
 by (used for) operating activities:
   Depreciation and amortization                                                     10,072             9,880             7,640
   Loss on sale of property, plant and equipment                                        284                17                35
   Deferred income taxes                                                              4,081            (2,172)             (167)
   Minority interest in (loss)                                                         (132)               --                --

Changes in assets and liabilities, net of effects from acquisitions:
   Accounts receivable-trade                                                         (3,596)            1,949           (11,685)
   Inventories                                                                         (996)           (1,468)           (4,288)
   Refundable taxes                                                                      72             1,766            (1,138)
   Prepaid and other current assets                                                    (450)           (4,861)             (588)
   Other assets                                                                      (4,386)              153              (540)
   Accounts payable-trade                                                            (4,325)            1,201             5,559
   Income taxes payable                                                               1,128               331             1,493
   Deferred revenue                                                                   2,304               574               652
   Accrued expenses and other current liabilities                                     5,065            13,452             5,169
                                                                                  ---------         ---------         ---------
         Total adjustments                                                            9,121            20,822             2,142
                                                                                  ---------         ---------         ---------

         Net cash provided by operating activities                                   15,807            28,943            10,635

Cash flows used in investing activities:
   Payments for acquisitions, net of cash acquired                                  (82,759)               --            (1,316)
   Proceeds from sale of property, plant and equipment                                  158                20               417
   Purchases of property, plant and equipment                                       (12,364)          (10,407)          (15,992)
   Note receivable                                                                    1,459                86                --
                                                                                  ---------         ---------         ---------

         Net cash used in investing activities                                      (93,506)          (10,301)          (16,891)

Cash flows provided by (used in) financing activities:
   Issuance of common stock, net of expenses                                          1,799             4,103             8,699
   Advances under line of credit                                                      8,182           128,366           124,073
   Repayments of line of credit                                                         (21)         (133,898)         (124,061)
   Advances under debt obligations                                                   79,201               581            17,876
   Principal payments on debt obligations                                           (13,275)           (4,335)          (17,258)
                                                                                  ---------         ---------         ---------

         Net cash provided by (used in) financing activities                         75,886            (5,183)            9,329

Foreign exchange effect on cash and cash equivalents                                     59              (351)             (247)
                                                                                  ---------         ---------         ---------

Net increase (decrease) in cash and cash equivalents                                 (1,754)           13,108             2,826
Cash and cash equivalents, beginning of period                                       20,027             6,919             4,093
                                                                                  ---------         ---------         ---------

Cash and cash equivalents, end of  period                                         $  18,273         $  20,027         $   6,919
                                                                                  =========         =========         =========

Supplemental disclosure of cash flow information:
Interest paid                                                                     $   2,592         $   1,685         $   2,316
Income taxes paid                                                                     2,818             1,917               739

Supplemental disclosure of non-cash investing activities:
Reconciliation of assets acquired and liabilities assumed in acquisitions:
   Fair value of assets acquired                                                  $ 107,026         $      --         $   3,163
   Cash paid for assets                                                             (84,593)               --            (1,316)
   Issuance of common stock                                                              --                --            (1,125)
                                                                                  ---------         ---------         ---------
         Liabilities assumed                                                      $  22,433         $      --         $     722
                                                                                  =========         =========         =========

Capital lease obligations incurred for purchases of new equipment:                $     733         $      --         $      --
</TABLE>


   The accompanying notes are an integral part of these consolidated financial
                                   statements.


                                       48
<PAGE>   49


                        AAVID THERMAL TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands, except share and per share data)

A. OPERATIONS

     Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is the leading
global provider of thermal management solutions for electronic products and the
leading developer and marketer of CFD software. Each of these businesses has an
established reputation for high product quality, service excellence and
engineering innovation in its market. We design, manufacture and distribute on a
worldwide basis thermal management products that dissipate unwanted heat, which
can degrade system performance and reliability, from microprocessors and
industrial electronics products. Our products, which include heat sinks,
interface materials and attachment accessories, fans, heat spreaders and liquid
cooling and phase change devices that we configure to meet customer-specific
needs, serve the critical function of conducting, convecting and radiating away
unwanted heat. CFD software is used in complex computer-generated modeling of
fluid flows, heat and mass transfer and chemical reactions. Our CFD software is
used in a variety of industries, including the automotive, aerospace, chemical
processing, power generation, material processing, electronics and HVAC
industries.

     Overall, the Company services a highly diversified base of more than 3,500
national and international customers including OEMs, distributors, and contract
manufacturers through a highly integrated network of software, development,
manufacturing, sales and distribution locations throughout North America,
Europe, and the Far East.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

     The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All material intercompany
transactions have been eliminated.

RECLASSIFICATIONS

     Certain reclassifications have been made to 1998 and 1997 financial
statements to conform to the 1999 presentation.

CONCENTRATION OF CREDIT RISK

     Financial instruments that potentially subject the Company to significant
concentration of credit risk consists principally of trade accounts receivable.
The risk is limited due to the relatively large number of customers comprising
the Company's customer base and their dispersion across many industries within
the United States, Europe, and Asia. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral from its customers. The Company maintains an allowance for
uncollectible accounts receivable based upon expected collectibility of all
accounts receivable. The Company's write-offs of accounts receivable have not
been significant during the periods presented. At December 31, 1999 and 1998,
accounts receivable for one customer represented 0.4% and 12.1%, respectively,
of the total accounts receivable balance. The Company's sales have been
primarily denominated in U.S. dollars, and the effects of foreign exchange
fluctuations are not considered to be material.


                                       49
<PAGE>   50


INCOME TAXES

     The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under this
method, the amount of deferred tax liabilities or assets is calculated by
applying the provisions of enacted tax laws to determine the amount of taxes
payable or refundable currently or in future years. SFAS No. 109 requires a
valuation allowance against deferred tax assets if, based upon the available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realizable.

RESEARCH AND DEVELOPMENT

     Research and development costs are charged to operations as incurred. SFAS
No. 86, "Accounting for the Costs of Computer Software To Be Sold, Leased, or
Otherwise Marketed," requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have not been material. Accordingly, all research and software
development costs have been expensed.

CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS

     For purposes of the consolidated statements of cash flows, cash and cash
equivalents consist of highly liquid investments with original maturities of
three months or less.

     The estimated fair value of the Company's financial instruments including
accounts receivable, accounts payable and cash equivalents equals carrying
value. The fair value of the Company's long-term debt instruments is also
estimated at carrying value due to their variable interest rates and relatively
short maturities.

INVENTORIES

     For the year ending December 31, 1999 and 1998, inventories were valued at
the lower of cost or market (first-in, first-out), and consist of materials,
labor and overhead.

PROPERTY, PLANT AND EQUIPMENT

     Property, plant, and equipment are stated at cost. The Company depreciates
property, plant and equipment over their estimated remaining useful lives
(buildings -- 30 to 40 years; machinery and equipment, -- 1 to 10 years; and
vehicles -- 4 to 5 years) using both the straight-line and accelerated methods
of depreciation.

     Repairs and maintenance are charged against income when incurred; renewals
and betterments are capitalized. When property, plant, and equipment are retired
or sold, their cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in other income.

INTANGIBLES

     Costs incurred in connection with the issuance of the Company's debt
obligations have been deferred and are being amortized over the term of the
respective debt obligations.

     Other intangibles, which consist principally of goodwill, prepaid rent and
deferred financing fees are being amortized on a straight-line basis over 5 to
20 years.

IMPAIRMENT OF LONG-LIVED ASSETS

     In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting For the Impairment of Long-Lived Assets and For Long-Lived
Assets To Be Disposed Of." This statement addresses the accounting for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of.


                                       50
<PAGE>   51


     This statement requires that long-lived assets, including intangibles, be
reviewed for impairment whenever events or changes in circumstances, such as a
change in market value, indicate that the asset carrying amounts may not be
recoverable. In performing the review for recoverability, if future undiscounted
cash flows (without interest charges) from the use and ultimate dispositions of
the assets are less than its carrying value, an impairment loss is recognized.
Impairment losses are to be measured based on the fair value of the asset. To
date, the Company has not experienced any such impairments.

REVENUE RECOGNITION

THERMAL PRODUCTS

     Revenue is recognized when products are shipped. The Company records an
estimate at that time for returns and warranty costs to be incurred.

SOFTWARE

     The Company recognizes software revenue in accordance with Statement of
Position (SOP) 97-2, "Software Revenue Recognition" and SOP 98-9, "Modification
of SOP 97-2; Software Revenue Recognition, With Respect to Certain
Transactions." These statements provide specific industry guidance and stipulate
that revenue recognized from software arrangements is to be allocated to each
element of the arrangement based on the relative fair values of the elements,
such as software products, upgrades, enhancements, post-contract customer
support, installation or training. Under SOP 97-2, the determination of fair
value is based on objective evidence that is specific to the vendor. If such
evidence of fair value for each element of the arrangement does not exist, all
revenue from the arrangement is deferred until such time that evidence of fair
value does exist or until all elements of the arrangement are delivered. Revenue
allocated to software products, specified upgrades and enhancements is generally
recognized upon delivery of the related products, upgrades and enhancements.
Revenue allocated to post-contract customer support is generally recognized
ratably over the term of the support, and revenue allocated to service elements
is generally recognized as the services are performed. SOP 97-2 was adopted by
the Company effective January 1, 1998 and has not had a material effect on
revenue recognition.

     The Company licenses its software products under both annual and perpetual
license arrangements. Software license revenue is recognized upon the execution
of the license arrangements and shipment of the product, provided that no
significant vendor post-contract support obligations remain outstanding, and
collection of the resulting receivable is deemed probable. The Company
recognizes revenue from post-contract support, which consists of telephone
support and the right to software upgrades, ratably over the period of the
post-contract arrangement.

NET INCOME PER SHARE

     In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") and became effective for
both interim and annual periods ending after December 15, 1997. All prior period
EPS data has been restated to conform with the provisions of SFAS No. 128. Basic
earnings per share excludes dilution and is computed by dividing net earnings by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share is computed based upon the weighted average number of common
shares outstanding and dilutive common stock equivalents. For purposes of this
calculation, outstanding stock options and warrants are considered common stock
equivalents (using the treasury stock method). The following table is a
reconciliation of the numerators and denominators used to calculate earnings per
share in the Consolidated Statements of Operations:


                                       51
<PAGE>   52


<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED DECEMBER 31,
                     ---------------------------------------------------------------------------------------------------------------
                                     1999                                    1998                                 1997
                     -----------------------------------   -----------------------------------   -----------------------------------
                                                   PER                                   PER                                   PER
                       INCOME         SHARES      SHARE      INCOME        SHARES       SHARE      INCOME        SHARES       SHARE
                     (NUMERATOR)   (DENOMINATOR)  AMOUNT   (NUMERATOR)  (DENOMINATOR)   AMOUNT   (NUMERATOR)  (DENOMINATOR)   AMOUNT

<S>                    <C>           <C>           <C>       <C>          <C>           <C>        <C>          <C>           <C>
Net Income             $6,686                                $8,121                                $8,493

BASIC EPS:
Net Income             $6,686        9,432,221     $.71      $8,121       8,668,368     $0.94      $8,493       6,945,339     $1.22

EFFECT OF DILUTIVE
SECURITIES:
Options and Warrants                   416,746                              816,458                             1,693,272
                                     ---------                            ---------                             ---------

DILUTED EPS:
Net Income             $6,686        9,848,967   $   .68    $8,121        9,484,826     $0.86      $8,493       8,638,611     $0.98
                       ======        =========   =======    ======        =========     =====      ======       =========     =====
</TABLE>

     Options and warrants to purchase 332,117, 343,268 and 61,500 shares of
common stock were outstanding at December 31, 1999, 1998 and 1997, respectively,
but were not included in the computation of diluted earnings per share because
the exercise prices exceeded the average market price of common shares and these
were antidilutive to the EPS calculation.

USE OF ACCOUNTING ESTIMATES

     The preparation of the consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and the reported amounts of revenues and expenses during the
reporting period, and to disclose contingent assets and liabilities at the date
of the financial statements. Actual results could differ from those estimates.

TRANSLATION OF FOREIGN CURRENCY

     The financial statements of the Company's foreign subsidiaries are
translated in accordance with SFAS 52, "Foreign Currency Translation". The
financial statements of the Company's subsidiaries are translated from their
functional currency into U.S. dollars utilizing the current rate method.

     Accordingly, assets and liabilities are translated at exchange rates in
effect at the end of the year, and revenues and expenses are translated at the
weighted average exchange rate during the year. All cumulative translation gains
and losses from the translation into U.S. dollars are included as a separate
component of stockholder's equity in the consolidated balance sheets.
Transaction gains and losses are included in the consolidated income statements
and have not been material.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June, 1998 the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the value of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133, as
amended by SFAS 137, is required to be adopted by the Company in 2001. Although
management is currently reviewing the impact of the statement, it believes this
statement will not have a significant impact on the Company. The Company did not
enter into foreign currency forward exchange contracts or any other derivatives
during 1999, 1998, or 1997.

     In December, 1999 the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) no. 101, Revenue Recognition in Financial Statements.
SAB 101 provides interpretative guidance on the recognition, presentation and
disclosure of revenue. SAB 101 must be applied to financial statements no later
than the second quarter of calendar 2000. The Company does not believe that the
application of SAB 101 will have a material effect on the Company's financial
position or results of operations.

C.  ACQUISITION OF BUSINESSES

     On October 21, 1999, the Company purchased all of the stock of the
Thermalloy Division of Bowthorpe plc (Thermalloy) and 85.4% of the stock of
Curamik Electronics Gmbh (Curamik) (the Thermalloy acquisition) for a cash
purchase price of $84,593, including transaction costs of $2,804.

                                       52
<PAGE>   53


Thermalloy designs, manufactures and sells a wide variety of standard and
proprietary heat sinks and associated products, similar to those produced by our
thermal management business, within the computer and networking and industrial
electronics (including telecommunications) industries. Curamik is a German
corporation that manufactures direct bonded copper ceramic substrates that are
used in the power semiconductor and other industrial electronics industries.
Aavid used $12,619 of its cash on hand and $84,593 of borrowings under its new
credit facility to complete the Thermalloy acquisition, repay $12,619 of
outstanding debt, and pay transaction costs. The new credit facility is further
described in footnote I., "Debt Obligations".

     The Thermalloy acquisition has been accounted for under the purchase method
of accounting. The results of operations for Thermalloy and Curamik since
October 21, 1999 have been presented in the accompanying consolidated statement
of income for the year ended December 31, 1999. Goodwill acquired will be
amortized over 20 years on a straight-line basis starting on October 21, 1999.
Management does not believe the final purchase price allocation will produce
materially different results than those reflected herein. The fair value of
assets acquired and liabilities assumed at October 21, 1999 was as follows:

<TABLE>
<CAPTION>
<S>                                                    <C>
Cash                                                   $   1,834
Inventory                                                 13,780
Accounts receivable                                       18,829
Other current assets                                       3,512
Fixed assets                                              18,168
Goodwill                                                  45,014
Other non-current assets                                   5,889
Trade payables                                            (8,754)
Accrued expenses and taxes payable                        (6,399)
Deferred tax liabilities                                  (4,011)
Thermalloy restructuring accruals                         (2,130)
Other non-current liabilities                               (198)
Minority Interest                                           (941)
                                                       ----------
                                                       $  84,593
</TABLE>

     Approximately $2,130 has been recorded as restructuring charges in
connection with the acquisition. The restructuring plans include initiatives to
integrate the operations of the Company and Thermalloy and reduce overhead. The
primary components of these plans relate to (a.) the closure of duplicative
operations in Hong Kong and the United Kingdom, (b.) the elimination of
duplicative selling, general and administration functions on a global basis and
(c.) the termination of certain contractual obligations. The Company expects
these activities to result in a workforce reduction of approximately 165
individuals. Management is in the process of finalizing its restructuring plans
related to Thermalloy, and, accordingly, the amounts recorded are based on
management's current estimates of those costs. The Company will finalize these
plans during 2000 and the majority of the restructuring activities is expected
to be completed by the end of 2000. There were no amounts charged against the
Thermalloy restructuring accrual in the fourth quarter of 1999.

     The following table presents selected unaudited pro forma financial
information for Aavid, Thermalloy and Curamik, assuming the companies had
combined on January 1, 1998:


                                       53
<PAGE>   54


                UNAUDITED PROFORMA CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                              ------------
                                                          1999           1998
                                                          ----           ----

<S>                                                    <C>            <C>
Pro forma net sales                                    $  296,659     $  311,410

Pro forma net income                                   $    4,625     $    5,189

Pro forma net income per share, basic                  $     0.49     $     0.60

Weighted average common shares                          9,432,221      8,668,368
                                                       ==========     ==========

Pro forma net income per share, diluted                $     0.47     $     0.55

Weighted average common shares and equivalents          9,848,967      9,484,826
                                                       ==========     ==========
</TABLE>


     The pro forma results are not necessarily indicative of either actual
results of operations that would have occurred had the acquisition been made on
January 1, 1998 or future results. The resolution of any uncertainties and
contingencies that exist at the acquisition date will result in an adjustment to
goodwill in 2000 but is not expected to be material.

D. ACCOUNTS RECEIVABLE

     The components of accounts receivable at December 31, 1999 and 1998 are as
follows:

<TABLE>
<CAPTION>
                                                 DECEMBER 31,
                                                 ------------
                                           1999               1998
                                           ----               ----

<S>                                      <C>                <C>
Accounts receivable                      $ 55,765           $ 32,079
Allowance for doubtful accounts            (2,182)              (921)
                                         --------           --------
Net accounts receivable                  $ 53,583           $ 31,158
                                         ========           ========
</TABLE>

E. INVENTORIES

     The components of inventories at December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                               ------------
                                          1999             1998
                                          ----             ----

<S>                                     <C>              <C>
Raw materials                           $15,983          $ 9,987
Work-in-process                           5,245            2,364
Finished goods                            8,831            2,932
                                        -------          -------
                                        $30,059          $15,283
                                        =======          =======
</TABLE>

F. PROPERTY, PLANT, AND EQUIPMENT

     Property, plant, and equipment, recorded at cost, by major classification
as of December 31, 1999 and 1998 consist of the following:

<TABLE>
<CAPTION>
                                                 DECEMBER 31,
                                                 ------------
                                           1999                1998
                                           ----                ----

<S>                                     <C>                 <C>
Land                                    $   1,774           $   1,771
Building and improvements                  17,342              16,633
Machinery and equipment                    44,035              29,784
Furniture and fixtures                     16,950              12,454
Vehicles                                      983                 563
Machinery-in-progress                       5,598               1,397
                                        ---------           ---------
                                           86,682              62,602
Less accumulated depreciation             (25,727)            (20,105)
                                        ---------           ---------
                                        $  60,955           $  42,497
                                        =========           =========
</TABLE>

     Substantially all property, plant, and equipment serve as collateral under
the Company's borrowing arrangements.


                                       54
<PAGE>   55


G. OTHER ASSETS

     Other long-term assets as of December 31, 1999 and 1998 consist principally
of the following intangible assets:

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                     ------------
                                                1999               1998
                                                ----               ----

<S>                                          <C>                <C>
Goodwill                                     $ 52,349           $  6,283
Patents                                           724                724
Other intangibles                               8,984              1,607
Deferred financing costs                        1,717                 53
Other - equity in affiliates                       --                257
                                             --------           --------
                                               63,774              8,924
Less:  accumulated amortization                (4,087)            (2,603)
                                             --------           --------
                                             $ 59,687           $  6,321
                                             ========           ========
</TABLE>

H. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

     Included in accrued expenses at December 31, 1999 and 1998 are the
following:

<TABLE>
<CAPTION>
                                              DECEMBER 31,
                                              ------------
                                          1999             1998
                                          ----             ----

<S>                                     <C>              <C>
Employee related                        $ 9,395          $ 5,911
Merger related                            3,464               --
Other accrued expenses                    9,524            5,226
                                        -------          -------
                                        $22,383          $11,137
                                        =======          =======
</TABLE>

I. DEBT OBLIGATIONS

     Debt obligations as of December 31, 1999 and 1998 consist of the following:

<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                                  ------------
                                                                                             1999              1998
                                                                                             ----              ----

<S>                                                                                         <C>              <C>
  Term Facility payable in 19 consecutive quarterly installments, commencing
  March 31, 2000, ranging from $2,000 to $8,000 each. At December 31, 1999,
  the interest rate on the Term Facility was 8.47% ...............................          $80,000          $    --

  Revolving Facility which matures on September 30, 2004. At December 31,
  1999, the interest rate on the Revolving Credit Facility was 8.48% .............            8,182               --

  Notes payable in monthly installments of $11 to $18, including interest at rates
  between prime minus 0.50% to the prime rate, which equaled 7.25% and 7.75%
  at December 31, 1998, due June 2002; collateralized by a first mortgage on real
  property, repaid in 1999 .......................................................               --            2,757

  Notes payable in monthly installments of $21 to $91 plus interest at 8.5%, due
  February through November of 1999, repaid in 1999 ..............................               --              825

  Consolidated term loan due November 2003, payable in monthly installments of
  $186, including interest at either the prime rate or the LIBOR rate plus 2.0%,
  subject to an election made by the Company; as of December 31, 1998 the
  Company elected the prime rate which equaled 7.75%, repaid in 1999 .............               --            8,374

  Notes payable in monthly installments of $4 to $12, including interest at rates
  between 5.60% and the prime rate plus 1.50%, which equaled 9.25% at
  December 31, 1998, due June 30, 2008; collateralized by mortgages on certain
  real property, repaid in 1999 ..................................................               --            2,570

  Capitalized lease obligations ..................................................              763              124
                                                                                            -------          -------
                                                                                             88,945           14,650

  Less current portion ...........................................................            2,337            3,442
                                                                                            -------          -------

  Debt Obligations, net of current portion .......................................          $86,608          $11,208
                                                                                            =======          =======
</TABLE>

     On October 21, 1999, in connection with the Thermalloy acquisition, the
Company entered into a $100,000 revolving credit and term loan facility with
Canadian Imperial Bank of Commerce, as Administrative Agent, and certain other
lenders (the Credit


                                       55
<PAGE>   56


Facility). The Credit Facility consists of an $80,000 term loan facility (the
Term Facility) and a $20,000 revolving credit facility, including a $2,000
letter of credit sub-facility (the Revolving Facility). The Term Facility, all
of which was borrowed on October 21, 1999 to pay the purchase price for
Thermalloy, pay transaction costs and provide working capital to Thermalloy,
matures on September 30, 2004, and will be amortized in 19 consecutive quarterly
installments, commencing March 31, 2000, as follows: four quarterly payments of
$2,000 each; four quarterly payments of $3,000 each; four quarterly payments of
$4,000 each; four quarterly payments of $5,000 each; and three quarterly
payments of $8,000 each. The Revolving Facility matures on September 30, 2004.
The Credit Facility bears interest at a rate equal to, at the Company's option,
either (1) in the case of Eurodollar loans, the sum of (x) the interest rate in
the London interbank market for loans in an amount substantially equal to the
amount of borrowing and for the period of borrowing selected by Aavid and (y) a
margin of between one and one-half percent and two percent (depending on the
Company's consolidated leverage ratio (as defined in the credit agreement)) or
(2) the sum of (A) the higher of (x) Canadian Imperial Bank of Commerce's prime
or base rate of (y) one-half percent plus the latest overnight federal funds
rate plus (z) a margin of between one quarter percent and three quarters percent
(depending on the Company's consolidated leverage ratio). At December 31, 1999,
the interest rate on the Term Facility was 8.47% and the interest rate on the
Revolving Credit Facility was 8.48%. The Credit Facility may be prepaid at any
time in whole or in part without penalty, and must be prepaid to the extent of
certain equity or asset sales.

     The Credit Facility limits the Company's ability to incur additional debt,
to sell or dispose of assets, to create or incur liens, to make additional
acquisitions, to pay dividends, to purchase or redeem its stock and to merge or
consolidate with any other person other than the previously announced merger
with an entity formed by Willis Stein & Partners. In addition, the Credit
Facility requires that the Company meet certain financial ratios, and provides
the banks with the right to require the payment of all amounts outstanding under
the facility, and to terminate all commitments thereunder, if there is a change
in control of Aavid other than as contemplated by the merger agreement with
entities formed by Willis Stein & Partners. The Company was in compliance with
all covenants at December 31, 1999. The Credit Facility is guaranteed by all of
the Company's domestic subsidiaries and secured by the Company's assets
(including the assets and stock of its domestic subsidiaries and a portion of
the stock of its foreign subsidiaries).

     The Company incurred approximately $1,719 in bank and legal fees in
connection with the obtainment of the Credit Facility. These costs have been
capitalized as deferred financing costs and are being amortized over the life of
the debt (five years), beginning October 21, 1999.

     The Company was also contingently liable at December 31, 1999 and 1998 for
$45 and $200, respectively, related to outstanding letters of credit.


                                       56
<PAGE>   57


     Debt maturities payable for the five years and thereafter subsequent to
December 31, 1999 are as follows:

<TABLE>
<CAPTION>
<S>                                <C>
2000                               $   2,337
2001                                  12,307
2002                                  16,119
2003                                  20,000
2004                                  38,182
Thereafter                                --
                                   ---------

          Total                    $  88,945
                                   =========
</TABLE>

     As discussed in Note P., the $80,000 term loan and the $20,000 revolver
facility were refinanced subsequent to December 31, 1999.

J. EQUITY

PREFERRED STOCK

     The Company has authorized the issuance of 4,000,000 shares of $0.01 par
value Preferred Stock, none of which is outstanding as of December 31, 1999 and
1998. The Preferred Stock shall have designations, preferences, powers, and
rights as may be authorized by the Board of Directors.

SALE OF COMMON STOCK

     On November 14, 1997, the Company sold an aggregate of 297,872 shares of
Common Stock and a warrant to purchase 50,000 shares of Common Stock for
$7,000,000 to a corporate investor. The warrant has an exercise price of $23.50
per share and expires on November 14, 2000 and remained outstanding at December
31, 1999. The Company granted this investor certain demand and "piggyback"
registration rights with respect to the purchased shares (including the shares
underlying the warrant), although the investor had agreed not to exercise these
rights for a period of one year. The Company used the proceeds for general
corporate purposes, including working capital. As further discussed in Note P.,
in connection with the Merger, all common stock and this warrant were cashed out
on February 2, 2000 for $25.50 a share.

STOCK OPTIONS

     During 1993, an officer of the Company was granted non-qualified stock
options to acquire 249,205 shares of Common Stock at an exercise price of $0.19
per share, and 1,268,795 shares of Common Stock at an exercise price of $2.20
per share. These options vested and became exercisable as to 25% of the
applicable shares immediately, with the remainder ratably in October 1994, 1995,
and 1996, respectively. During 1999, 1998 and 1997, respectively, 268,000,
1,025,000 and 225,000 options were exercised. There were no outstanding options
held by this officer at December 31, 1999. In addition, since 1993, the Company
has issued 556,875 non-qualified stock options to Directors of the Company and
certain executives outside of the plans discussed below, at exercise prices
ranging from $0.19 to $16.50. As of December 31, 1999, 453,375 of these options
were outstanding and 411,188 were exercisable. The exercise price of all these
options equaled or exceeded the fair market value on the date of grant, as
determined by the Board of Directors for issuances prior to its initial public
offering or market prices thereafter.


                                       57
<PAGE>   58


STOCK OPTIONS (CONTINUED)

     During 1994, the Company's Board of Directors adopted and approved a stock
option plan for officers and key employees (1994 Stock Option Plan). The 1994
Stock Option Plan provides for the grant to officers and key employees of the
Company of stock options intended to qualify as incentive stock options under
the applicable provisions of the Internal Revenue Code, as well as non-qualified
options. The Company has reserved 894,326 shares of its Common Stock for
issuance under this plan. As of December 31, 1999, 821,629 options were
outstanding, of which 446,148 were exercisable.

     The 1994 Stock Option Plan provides that the exercise price of all options
shall be at least equal to the fair market value of the Company's shares, as of
the date on which the grant is made. The term of options issued under the plan
cannot exceed ten years. Options are generally exercisable in installments
beginning on the date of grant. With respect to incentive stock options granted
to a participant owning more than 10% of the Company's shares, the exercise
price thereof is at least 110% of the fair market value of the Company's stock.

     During 1995, the Company's Board of Directors adopted and approved a stock
option plan for non-employee directors (Directors' Plan). The Company has
reserved 200,000 shares of its Common Stock for issuance under this plan. The
Directors' Plan provides for the automatic grant to non-employee directors of
options to purchase shares of Common Stock reserved for issuance under the
Directors' Plan. Options granted under the Directors' Plan do not qualify as
incentive stock options under the applicable provisions of the Internal Revenue
Code. The options have an exercise price of 100% of the fair market value of the
Common Stock on the date of grant and have a ten-year term. Initial options
become fully exercisable six (6) months after the date of grant. All other
options granted under the Directors' Plan become fully exercisable from and
after the first anniversary of the grant date. As of December 31, 1999, 116,250
options were outstanding, of which 58,750 were exercisable.

     During 1995, the Company's Board of Directors adopted and approved an
employee stock purchase plan (Purchase Plan). Under the Purchase Plan, the
Company will grant rights to purchase shares of Common Stock to eligible
employees on a date or series of dates designated by the Board of Directors. The
Company has reserved 250,000 shares of its Common Stock for issuance under this
plan. The price per share with respect to each grant of rights under the
Purchase Plan is the lesser of:

     (i)  85% of the fair market value on the offering date on which such rights
          were granted, or

     (ii) 85% of the fair market value on the date such right is exercised.

     The Purchase Plan is intended to qualify as an employee stock purchase plan
under the applicable provisions of the Internal Revenue Code. During 1999, 1998
and 1997, the Company sold 45,561, 34,282, and 41,604 shares under this plan,
respectively.

     A summary of all stock option activity follows:

<TABLE>
<CAPTION>
                                           NUMBER OF      WEIGHTED AVERAGE
                                            SHARES         EXERCISE PRICE
                                          ----------      ----------------
<S>                                       <C>              <C>
Outstanding at December 31, 1996           2,701,589           $    4.04
Granted during 1997                          289,779               15.22
Exercised during 1997                       (626,930)               2.59
Canceled during 1997                         (51,656)               7.51
                                          ----------           ---------
Outstanding at December 31, 1997           2,312,782           $    5.76
Granted during 1998                          358,133               24.07
Exercised during 1998                     (1,191,659)               2.92
Canceled during 1998                         (49,085)              21.64
                                          ----------           ---------
Outstanding at December 31, 1998           1,430,171           $   12.16
Granted during 1999                          320,714               15.73
Exercised during 1999                       (311,916)               3.73
Canceled during 1999                         (47,715)              21.41
                                          ----------           ---------
Outstanding at December 31, 1999           1,391,254               14.56
                                          ==========           =========
</TABLE>

     At December 31, 1999, 1998 and 1997 options for 916,086, 932,602 and
1,814,021 shares were exercisable, respectively, with weighted average exercise
prices of $13.20, $8.53 and $4.11, respectively.

     During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which defines a fair value based
method of accounting for employee stock options, or similar equity instruments,
and


                                       58
<PAGE>   59


encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans; however, it also allows an entity to continue
to measure compensation costs for those plans using the intrinsic method of
accounting prescribed by APB Opinion 25. Entities electing to remain with the
accounting in APB Opinion 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined in
SFAS No. 123 has been applied.

     The Company has elected to account for its stock-based compensation plan
under APB Opinion 25; however, the Company has computed, for pro forma
disclosure purposes, the value of all options granted during 1999, 1998, and
1997 using the Black-Scholes option-pricing model as prescribed by SFAS No. 123,
using the following weighted-average assumptions for grants in 1999, 1998, and
1997:

<TABLE>
<CAPTION>
                                        1999             1998            1997
                                        ----             ----            ----

<S>                                   <C>              <C>             <C>
Risk-free interest rate                   5.2%            5.35%           6.55%
Expected dividend yield                    --               --              --
Expected life                         4 years          4 years         4 years
Expected volatility                        65%              75%             50%
</TABLE>

     The weighted average fair value of options granted in 1999, 1998 and 1997
were $8.43, $14.29, and $7.61, respectively.

     The total value of options granted during 1995 through 1999 would be
amortized on a pro forma basis over the vesting period of the options. Options
generally vest equally over two to four years. Because the SFAS No. 123 method
of accounting has not been applied to options granted prior to January 1, 1995,
the resulting pro forma compensation costs may not be representative of that to
be expected in future years. If the Company had accounted for these plans,
including the Employee Stock Purchase Plan, in accordance with SFAS No. 123, the
Company's net income and net income per share would have decreased or increased,
as reflected in the following pro forma amounts:

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                        ------------------------------------------------
                                            1999               1998               1997
                                            ----               ----               ----

<S>                                     <C>                <C>                <C>
Net income -
   As reported                          $    6,686         $    8,121         $    8,493
   Pro forma                                 2,816              4,322              6,761
Net income per share, diluted -
   As reported                          $     0.68         $     0.86         $     0.98
   Pro forma                                  0.29               0.46               0.78
</TABLE>

     Set forth is a summary of options outstanding and exercisable as of
December 31, 1999:

<TABLE>
<CAPTION>
                                             OPTIONS OUTSTANDING                              OPTIONS EXERCISABLE
                             ------------------------------------------------------       ----------------------------
                                                     WEIGHTED
                                                     AVERAGE               WEIGHTED                           WEIGHTED
                              NUMBER OF             REMAINING              AVERAGE         NUMBER OF          AVERAGE
        RANGE OF             OUTSTANDING         CONTRACTUAL LIFE          EXERCISE       EXERCISABLE         EXERCISE
    EXERCISE PRICES            OPTIONS               (YEARS)                PRICE           OPTIONS            PRICE
    ---------------          -----------         ----------------          --------       -----------         --------

<S>                          <C>                    <C>                 <C>               <C>              <C>
    $ 2.20 - $ 9.00            148,695                5.98                $    7.27         106,508          $    6.58
             $ 9.50            437,322                6.74                $    9.50         431,702          $    9.50
    $ 9.88 - $15.88            369,150                8.66                $   14.20         117,144          $   13.34
    $16.25 - $24.00            343,212                8.00                $   20.56         202,982          $   19.80
    $28.13 - $32.63             92,875                8.32                $   29.35          57,750          $   29.52
    ---------------          ---------                ----                ---------         -------          ---------
      2.20 - $32.63          1,391,254                7.58                $   14.56         916,086          $   13.20
    ===============          =========                ====                =========         =======          =========
</TABLE>


As further discussed in Note P., all stock options outstanding at February 2,
2000 became immediately vested and were cashed out at $25.50 per share in
connection with the Merger with Willis Stein & Partners.


                                       59
<PAGE>   60


K. INCOME TAXES

     Income before income taxes and minority interest for domestic and foreign
operations are as follows:

<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                       ------------------------------------------
                                           1999            1998            1997
                                           ----            ----            ----

<S>                                    <C>             <C>             <C>
Domestic                               $    4,425      $    4,998      $    7,321
Foreign                                    10,981           7,508           5,996
                                       ----------      ----------      ----------
                                       $   15,406      $   12,506      $   13,317
                                       ==========      ==========      ==========
</TABLE>

     The income tax provision included in the consolidated statements of
operations, consists of the following:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                        ------------------------------------------
                                          1999             1998              1997
                                          ----             ----              ----
<S>                                     <C>              <C>               <C>
Federal provision (benefit):
   Current                              $ 1,095          $ 3,289           $ 2,723
   Deferred                               3,265           (1,785)             (291)
                                        -------          -------           -------
                                          4,360            1,504             2,432
State provision:
   Current                                  252              707               260
   Deferred                                 816             (387)              124
                                        -------          -------           -------
                                          1,068              320               384
Foreign provision:
   Current                                3,424            2,561             2,008
                                        -------          -------           -------

Total provision                         $ 8,852          $ 4,385           $ 4,824
                                        =======          =======           =======
</TABLE>

     The Company is in a net operating loss carryforward position for US tax
purposes due to the tax benefit associated with stock options which totaled
$124, $8,861 and $3,726 for 1999, 1998 and 1997, respectively, and was credited
directly to stockholders' equity. The Company has approximately $17,500 of U.S.
federal net operating loss carryforwards available to reduce future taxable
income, if any. These net operating loss carryforwards expire through 2020, and
are subject to the review and possible adjustment by the Internal Revenue
Service. Section 382 of the Internal Revenue Code also contains provisions that
could place annual limitations on the utilization of these net operating loss
carryforwards in the event of a change in ownership, as defined. A
reconciliation of the income tax expense at the statutory federal income tax
rate to the Company's actual income tax expense (benefit) is as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                  -------------------------------------------
                                                    1999              1998              1997
                                                    ----              ----              ----

<S>                                               <C>               <C>               <C>
Expected federal tax                              $ 5,392           $ 4,376           $ 4,528
State income taxes, net                               694               208               387
Benefit of tax credits                               (100)             (100)             (150)
Non-deductible goodwill                               253               270                48
Foreign related                                      (420)             (284)              (96)
Provision on unremitted foreign earnings            3,400                --                --
Increase in valuation allowance                        --                --                56
Other                                                (367)              (85)               51
                                                  -------           -------           -------

         Total income tax expense                 $ 8,852           $ 4,385           $ 4,824
                                                  =======           =======           =======
</TABLE>

     Deferred tax assets and liabilities are measured as the difference between
the financial statement and the tax bases of assets and liabilities at the
applicable enacted tax rates. In 1999, the Company provided for U.S. income
taxes on $8,400 of undistributed earnings from its foreign subsidiaries as it is
the Company's intention to only repatriate those earnings from its foreign
operations in future years.


                                       60
<PAGE>   61


     The components of the net deferred asset consist of the following:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                         ---------------------------
                                                            1999               1998
                                                            ----               ----

<S>                                                      <C>                <C>
Short-term deferred tax assets (liabilities):
   Tax credits                                           $  1,373           $  1,449
   Inventory reserves and capitalization                    1,287                346
   Accounts receivable reserves                               765                530
   Vacation and benefit reserves                              881                349
   Unremitted foreign earnings                             (4,057)                --
   Restructuring reserves                                      84              1,513
   Other liabilities and reserves                           2,554                485
                                                         --------           --------
                                                            2,887              4,672
Valuation allowance                                          (924)              (924)
                                                         --------           --------
Total short-term deferred tax assets                        1,963              3,748

Long-term deferred tax (liabilities) assets:
   Depreciation                                            (2,233)            (1,964)
   Favorable lease                                         (2,264)                --
   Net operating loss carryforwards                         5,950              5,324
   Acquired intangibles                                      (198)              (254)
   Other                                                   (1,962)                --
                                                         --------           --------
Total long-term deferred tax (liabilities) assets            (707)             3,106
                                                         --------           --------
Net deferred tax asset                                   $  1,256           $  6,854
                                                         ========           ========
</TABLE>


L. COMMITMENTS AND CONTINGENCIES

LEASES

     The Company leases various equipment and facilities under the terms of
non-cancelable operating leases. Future lease commitments are as follows:

<TABLE>
<CAPTION>
           YEARS ENDING DECEMBER 31,
           -------------------------

<S>                                   <C>
2000                                  $       5,295
2001                                          2,870
2002                                          2,095
2003                                          1,537
2004                                          1,275
Thereafter                                    6,655
                                      -------------
                                      $      19,727
                                      =============
</TABLE>

     Lease expense was approximately $5,634, $3,141 and $2,556 for the years
ended December 31, 1999, 1998 and 1997, respectively.

LITIGATION

     Following the public announcement of the merger with Heat Merger Corp.,
lawsuits were filed against us, Willis Stein, our directors and one former
director in the Court of Chancery of the State of Delaware by certain of our
stockholders. The complaints allege, among other things, that our directors have
breached their fiduciary duties and seek to enjoin, preliminarily and
permanently, the merger and also seek compensatory damages. The stockholder
plaintiffs, on behalf of our public stockholders, also seek class action
certification for their lawsuits. We believe the actions to be without merit and
intend to contest the actions vigorously.

     On March 4, 1998, Materials Innovation, Inc. of Lebanon, New Hampshire and
two of its principals, Alan Beane and Glenn Beane, filed a petition for
declaratory judgment against Aavid Thermalloy in Grafton County (New Hampshire)
Superior Court. The petitioners have asked the court to declare as terminated an
agreement between Petitioners and Aavid dated October 14, 1993. Petitioner Alan
Beane was formerly our Chief Executive Officer and one of our directors, who, we
believe, beneficially owned more than 10% of our common stock at December 31,
1999.


                                       61
<PAGE>   62


     The agreement grants to Aavid Thermalloy licenses for two patents, one
involving a clamp for attaching heatsinks to semiconductors, and the other
involving a process to make heatsinks by vacuum die casting. The agreement also
provides Aavid Thermalloy with rights to potential technology of Materials
Innovation relating to its thermal products business, and prohibits Petitioners
from competing against Aavid Thermalloy for the ten-year term of the Agreement.
Petitioners claim that Aavid Thermalloy has failed to pay royalties associated
with the vacuum die cast patent. The petition does not seek monetary damages
from Aavid.

     On January 29, 1999, the Grafton County Superior Court granted our motion
to dismiss the Petitioner's declaratory judgment petition. The petitioners
appealed that dismissal but then subsequently withdrew that appeal. Materials
Innovation then commenced arbitration of the same issue; however, the
arbitration and a related declaratory judgment action brought by us to have the
Materials Innovation vacuum die cast patent declared invalid was stayed by
agreement pending completion or termination of the merger, described in Note P,
below. Although we believe that the termination of the agreement with Materials
Innovation would not have a materially adverse effect on our business, there can
be no assurance it will not have such a materially adverse effect in the future.

     We are involved in various other legal proceedings that are incidental to
the conduct of our business, none of which we believe could reasonably be
expected to have a materially adverse effect on our financial condition.

PURCHASE COMMITMENT

     The Company has an obligation to purchase from one of its key suppliers a
minimum quantity of aluminum coil stock. The Company believes that purchasing
aluminum coil stock from this supplier is necessary to achieve consistently low
tolerances, design, delivery flexibility, and price stability. Under the terms
of this agreement, which expires on February 28, 2001, the Company has agreed to
purchase certain minimum quantities which approximates $1,026.

M. 401(k) PROFIT SHARING PLAN

     The Company has profit sharing plans, which permit participants to make
contributions by salary reduction pursuant to Section 401(k) of the Internal
Revenue Code. Employee eligibility is based on a minimum age and employment
requirement. Annual employer contributions are determined by the Board of
Directors, but cannot exceed the amount allowable for federal income tax
purposes. The Company's contribution was approximately $535, $280 and $202 for
the years ended December 31, 1999, 1998 and 1997, respectively.

N. SEGMENT REPORTING

     Aavid provides thermal management solutions for microprocessors and
integrated circuits ("ICs") for digital and power applications. The Company
consists of three distinct reportable segments: thermal management products,
computational fluid dynamics ("CFD") software, and thermal design services.
Aavid's thermal management products consist of products and services that solve
problems associated with the dissipation of unwanted heat in electronic and
electrical components and systems. The Company develops and offers CFD software
for computer modeling and fluid flow analysis of products and processes that
reduce time and expense associated with physical models and the facilities to
test them. The Company also provides thermal design services to customers who
choose to outsource their thermal design needs.

     The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.

     The Company accounts for inter-segment sales and transfers as if the sales
or transfers were to third parties, that is, at current market prices.

     Aavid's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment requires different marketing and sales strategies. Most of the
businesses were acquired as a unit and the management at the time of acquisition
has generally been retained.


                                       62
<PAGE>   63


     The following summarizes the operations of each reportable segment for the
years ending December 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                                      RESTRUCTURING
                               REVENUES FROM                        DEPRECIATION      AND BUYOUT OF
                                 EXTERNAL          INTEREST             AND           COMPENSATION
                                 CUSTOMERS       EXPENSE, NET       AMORTIZATION      ARRANGEMENTS
                               -------------     ------------       ------------      -------------
<S>                              <C>               <C>                <C>               <C>
1999

  Thermal Products               $163,597          $  1,661           $  7,950          $   (630)
  CFD Software                     49,236               (31)             1,743                --
  Thermal Design Services           1,410                (1)               356                --
  Corporate Office                     --                --                 23                --
                                 --------          --------           --------          --------
  Total......................     214,243             1,629             10,072              (630)

1998
  Thermal Products                169,597             1,087              8,337             5,740
  CFD Software                     38,326               255              1,331                --
  Thermal Design Services           1,155                --                 15                --
  Corporate Office                     --                --                197                --
                                 --------          --------           --------          --------
  Total......................     209,078             1,342              9,880             5,740

1997
  Thermal Products                134,719             1,729              6,366                --
  CFD Software                     32,472               435              1,133                --
  Thermal Design Services             554                14                  9                --
  Corporate Office                     --                --                132                --
                                 --------          --------           --------          --------
  Total......................    $167,745          $  2,178           $  7,640          $     --
                                 ========          ========           ========          ========
</TABLE>


<TABLE>
<CAPTION>
                                                        SEGMENT
                                                     INCOME BEFORE
                                                       TAXES AND       ASSETS (NET OF
                                   INCOME TAX          MINORITY         INTERCOMPANY        CAPITAL
                                     EXPENSE           INTEREST           BALANCES)       EXPENDITURES
                                   ----------        -------------     --------------     ------------
<S>                                 <C>                <C>                <C>               <C>
1999
   Thermal Products                 $  4,748           $  7,885           $193,893          $  9,860
   CFD Software.................       4,224              7,821             30,734             2,122
   Thermal Design Services               (71)              (178)               933               364
   Corporate Office                      (49)              (122)             3,392                18
                                    --------           --------           --------          --------
   Total........................       8,852             15,406            228,952            12,364

1998
   Thermal Products                    2,070              6,512             94,774             9,012
   CFD Software.................       2,311              6,036             25,497             1,153
   Thermal Design Services                 4                (22)               570                26
   Corporate Office                       --                (20)             6,025               216
                                    --------           --------           --------          --------
   Total........................       4,385             12,506            126,866            10,407

1997
   Thermal Products                    3,253              9,731             85,436            12,889
   CFD Software.................       1,569              4,238             22,384             2,817
   Thermal Design Services                 2               (262)               582                60
   Corporate Office                       --               (390)             2,394               226
                                    --------           --------           --------          --------
   Total........................    $  4,824           $ 13,317           $110,796          $ 15,992
                                    ========           ========           ========          ========
</TABLE>

     The following table provides geographic information about the Company's
operations. Revenues are attributable to an operation based on the location the
product was shipped from. Long-lived assets are attributable to a location based
on physical location.

<TABLE>
<CAPTION>
                                                                YEAR ENDING DECEMBER 31,
                                     -----------------------------------------------------------------------------------
                                               1999                         1998                        1997
                                     -------------------------    -------------------------     ------------------------
                                                    LONG-LIVED                   LONG-LIVED                   LONG-LIVED
                                      REVENUES        ASSETS       REVENUES        ASSETS       REVENUES        ASSETS

<S>                                  <C>            <C>           <C>            <C>           <C>            <C>
       United States                 $ 146,547      $  71,436     $ 169,765      $  43,431     $ 137,988      $  44,185
       Taiwan                           17,422          1,748        18,789          1,271        19,407          1,272
       China                            29,899          2,114        13,467          1,431            --             --
       United Kingdom                   21,509         17,682        18,185          2,612        21,929          2,951
       Other International              40,940         27,662        20,623             73        12,430          2,576
       Intercompany eliminations       (42,074)            --       (31,751)            --       (24,009)            --
                                     ---------      ---------     ---------      ---------     ---------      ---------
       Consolidated Revenue          $ 214,243      $ 120,642     $ 209,078      $  48,818     $ 167,745      $  50,984
                                     =========      =========     =========      =========     =========      =========
</TABLE>


                                       63
<PAGE>   64


     Revenues from one customer of Aavid's thermal products division represents
approximately $7,220, $47,000 and $24,700 of the Company's consolidated revenues
for the years ending December 31, 1999, 1998 and 1997, respectively. Due to a
change in product mix at this customer during 1998, revenues from this customer
are expected to be less than 5% of total revenues in future years.

O. MANCHESTER RESTRUCTURING AND BUYOUT OF COMPENSATION ARRANGEMENTS

     During the first quarter of 1998, the Company recorded a non-recurring
pre-tax charge of $1,858, which related to financial obligations arising from
the Company's restructuring in 1993 and comprised two elements. First, the
Company terminated an arrangement with certain venture investors, under which it
was obligated to pay fixed management fees until at least the year 2000. Second,
the Company provided for an obligation to pay a former director a bonus based on
profits in excess of certain thresholds.

     During the third quarter of 1998, the Company recorded a non-recurring
pre-tax charge of $4,882 reflecting the costs associated with the closure of the
Company's Manchester, New Hampshire, facility. This facility was dedicated to
manufacturing a specific large volume product for a single customer. Following a
change in product design by the customer, demand significantly decreased during
the fourth quarter of 1998 to $8,600, from a level of $15,000 in the second
quarter of 1998. The Manchester restructuring was concluded at the end of 1999.

     The costs associated with the closure of the Manchester facility include
the write-down and disposal of surplus equipment, totaling $2,823, settlement of
certain purchase commitments of $1,127, provisions for leased property expenses
of $382, and employee separation costs of $550. While the number of employees
has been significantly reduced through natural attrition, the plan included the
termination of 120 employees comprised of 90 direct and 30 indirect employees.
The charge is offset by a $1,000 reduction in the previous estimate of
obligations to pay a former director a bonus, paid on profits in excess of
certain thresholds.

     The following amounts have been provided to and charged against the
Manchester restructuring reserves as of December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                           RESERVE BALANCE      CHARGES TO EXPENSE    CHARGES AGAINST THE      RESERVE BALANCE,
         DESCRIPTION                       JANUARY 1, 1999          OR (INCOME)             RESERVES          DECEMBER 31, 1999

<S>                                            <C>                   <C>                    <C>                    <C>
Surplus equipment                              $ 2,823               $  (504)               $(2,319)               $    --

Purchase commitments                               691                   (12)                  (679)                    --

Lease terminations and leasehold
  improvements reserve                             328                   181                   (306)                   203

Employee separation                                327                  (295)                   (32)                    --
                                               -------               -------                -------                -------

Total                                          $ 4,169               $  (630)               $(3,336)               $   203
                                               =======               =======                =======                =======
</TABLE>


<TABLE>
<CAPTION>
                                           RESERVE BALANCE      CHARGES TO EXPENSE    CHARGES AGAINST THE      RESERVE BALANCE,
         DESCRIPTION                       JANUARY 1, 1998          OR (INCOME)             RESERVES          DECEMBER 31, 1998

<S>                                            <C>                   <C>                    <C>                    <C>
Surplus equipment                              $    --               $ 2,823                $    --                $ 2,823

Purchase commitments                                --                 1,127                   (436)                   691

Lease terminations and leasehold
  improvements reserve                              --                   382                    (54)                   328

Employee separation                                 --                   550                   (223)                   327
                                               -------               -------                -------                -------

Total                                          $    --               $ 4,882                $  (713)               $ 4,169
                                               =======               =======                =======                =======
</TABLE>

     In the fourth quarter of 1999, the Company completed its restructuring of
the Manchester facility. As a result, excess reserves totaling $630 were
reversed into income. The balance of the reserve represents expected loss on
subletting the facility which occurred in October, 1999.

P. SUBSEQUENT EVENTS

     On August 23, 1999, we entered into an Agreement and Plan of Merger ("the
Merger Agreement") with Heat Holdings Corp., a corporation newly formed by
Willis Stein & Partners II, L.P. ("the Purchaser"), and Heat Merger Corp., a
wholly owned subsidiary of the Purchaser ("the Merger Sub"), providing for the
merger of the Merger Sub with and into Aavid ("the Merger"), with Aavid being
the surviving corporation. The Merger was approved by the Company's stockholders
on January 29, 2000 and consummated on February 2, 2000. Pursuant to the merger,
Aavid stockholders received $25.50 in cash for each outstanding share of common
stock, and outstanding stock options and warrants were cashed out. The Merger
will be accounted for using the Purchase Method.

     In connection with the Merger, the Company repaid all of the outstanding
term loan and revolving line of credit under its existing credit facility, which
aggregated approximately $88,200 at December 31, 1999, and entered into an
amended and restated credit facility ("the Amended and Restated Credit
Facility"). The Amended and Restated Credit Facility provides for a $22,000
revolving credit facility ("the Revolving Facility") (of which $1,700 was drawn
at the closing of the Merger) and a $53,000 term loan


                                       64
<PAGE>   65


facility ("the Term Facility") (which was fully drawn at the closing of the
Merger). Subject to compliance with the terms of the Amended and Restated Credit
Facility, borrowings under the Revolving Facility are available for working
capital purposes, capital expenditures and future acquisitions. The Revolving
Facility will terminate, and all amounts outstanding thereunder will be payable,
on March 31, 2005. Principal on the Term Facility is required to be repaid in
quarterly installments commencing December 31, 2000 and ending March 31, 2005 as
follows: five installments of $2,000; four installments of $2,500; four
installments of $2,750; two installments of $3,200; two installments of $3,900;
and a final installment of $7,800. In addition, commencing with our fiscal year
ending December 31, 2001, we are required to apply 50% of our excess cash flow
to permanently reduce the Term Facility. The Amended and Restated Credit
Facility bears interest at a rate equal to, at the Company's option, either (1)
in the case of Eurodollar loans, the sum of (x) the interest rate in the London
interbank market for loans in an amount substantially equal to the amount of
borrowing and for the period of borrowing selected by Aavid and (y) a margin of
between 1.50% and 2.25% (depending on the Company's consolidated leverage ratio
(as defined in the Amended and Restated Credit Facility)) or (2) the sum of (A)
the higher of (x) Canadian Imperial Bank of Commerce's prime or base rate or (y)
one-half percent plus the latest overnight federal funds rate plus (y) a margin
of between .25% and 1.00% (depending on the Company's consolidated leverage
ratio).

     The Amended and Restated Credit Facility may be prepaid at any time in
whole or in part without penalty, and must be prepaid to the extent of certain
equity or asset sales. The Amended and Restated Credit Facility limits the
Company's ability to incur additional debt, to sell or dispose of assets, to
create or incur liens, to make additional acquisitions, to pay dividends, to
purchase or redeem its stock and to merge or consolidate with any other person.
In addition, the Amended and Restated Credit Facility requires that the Company
meet certain financial ratios, and provides the lenders with the right to
require the payment of all amounts outstanding under the facility, and to
terminate all commitments thereunder, if there is a change in control of Aavid.
The Amended and Restated Credit Facility is guaranteed by each of Holdings Corp.
and Heat Holdings II Corp., and all of the Company's domestic subsidiaries and
secured by the Company's assets (including the assets and stock of its domestic
subsidiaries and a portion of the stock of its foreign subsidiaries).

Units

     On February 2, 2000, as part of the transactions relating to the Merger,
the Company issued 150,000 units (the "Units"), consisting of $150,000 aggregate
principal amount of its 12 3 /4 % Senior Subordinated Notes due 2007 (the
"Notes") and warrants (the "Warrants") to purchase an aggregate of 60 shares of
the Company's Class A Common Stock, par value $0.01 per share, and 60 shares of
the Company's Class H Common Stock, par value $0.01 per share. The Notes are
fully and unconditionally guaranteed on a joint and several basis by each of the
Company's domestic subsidiaries (the "Subsidiary Guarantors"). The Notes were
issued pursuant to an Indenture (the "Indenture") among the Company, the
Subsidiary Guarantors and Bankers Trust Company, as trustee. Approximately
$4,600 of the proceeds from the sale of the Units was allocated to the fair
value of the Warrants and approximately $143,700 was allocated to the Notes, net
of original issue discount of approximately $1,700.

     The Indenture limits the Company's ability to incur additional debt, to pay
dividends or make other distributions, to purchase or redeem its stock or make
other investments, to sell or dispose of assets, to create or incur liens, and
to merge or consolidate with any other person. The Indenture also contains
provisions requiring additional equity investments by Willis Stein & Partners in
the event the Company does not achieve certain leverage to EBITDA ratios, as
defined, in years 2000 and 2001. The Indenture provides that upon a change in
control of Aavid, we must offer to repurchase the Notes at 101% of the face
value thereof, together with accrued and unpaid interest. The Notes are
subordinated in right of payment to amounts outstanding under the Credit
Facility and certain other permitted indebtedness.


                                       65
<PAGE>   66


Q. QUARTERLY DATA (UNAUDITED)

Following is a summary of the quarterly results of operations for the years
ended December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                                  FISCAL QUARTER
                                                      ----------------------------------------------------------------------
     $ IN THOUSANDS EXCEPT PER SHARE AMOUNTS             FIRST           SECOND         THIRD        FOURTH        TOTAL
     ---------------------------------------          ----------------------------------------------------------------------

<S>                                                      <C>             <C>           <C>           <C>         <C>
     1999
     Net sales                                           $49,841         $47,787       $47,611       $69,004     $214,243
     Gross profit                                         18,481          18,640        17,349        21,215       75,685
     Net income                                            3,168           3,133         3,186        (2,801)       6,686
     Basic earnings per share                               0.34            0.34          0.33         (0.29)        0.71
     Diluted earnings per share                             0.33            0.32          0.32         (0.29)        0.68

     1998
     Net sales                                           $55,558         $54,287       $48,837       $50,396     $209,078
     Gross profit                                         18,388          18,418        15,654        18,187       70,647
     Net income                                            1,916           3,197            68         2,940        8,121
     Basic earnings per share                               0.25            0.38          0.01          0.32         0.94
     Diluted earnings per share                             0.21            0.34          0.01          0.31         0.86
</TABLE>


                                       66
<PAGE>   67


                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

ALLOWANCE FOR DOUBTFUL ACCOUNTS:

<TABLE>
<CAPTION>
                                       BALANCE AT          THERMALLOY         PROVISIONS        WRITE-OFFS        BALANCE AT
                                    BEGINNING OF YEAR       RESERVES                                             END OF YEAR
                                                            ACQUIRED

<S>                                   <C>                  <C>                <C>                <C>              <C>
       1999                           $    921             $    755           $    692           $ (186)          $  2,182
       1998                           $    838             $      -           $    533           $ (450)          $    921
       1997                           $    354             $      -           $    628           $ (144)          $    838
</TABLE>


MANCHESTER RESTRUCTURING RESERVES:

<TABLE>
<CAPTION>
                                        RESERVE BALANCE,        CHARGES TO EXPENSE      CHARGES AGAINST THE       RESERVE BALANCE,
               DESCRIPTION               JANUARY 1, 1999           OR (INCOME)               RESERVES            DECEMBER 31, 1999

<S>                                        <C>                      <C>                     <C>                      <C>
      Surplus equipment                    $   2,823                $    (504)              $  (2,319)               $      --

      Purchase commitments                       691                      (12)                   (679)                      --

      Lease terminations and
        leasehold improvements
        reserve                                  328                      181                    (306)                     203

      Employee separation                        327                     (295)                    (32)                      --
                                           ---------                ---------               ----------               ---------

      Total                                $   4,169                $    (630)              $  (3,336)               $     203
                                           =========                =========               ==========               =========
</TABLE>


<TABLE>
<CAPTION>
                                           RESERVE BALANCE      CHARGES TO EXPENSE    CHARGES AGAINST THE      RESERVE BALANCE,
         DESCRIPTION                       JANUARY 1, 1998          OR (INCOME)             RESERVES          DECEMBER 31, 1998

<S>                                            <C>                   <C>                    <C>                    <C>
Surplus equipment                              $    --               $ 2,823                $    --                $ 2,823

Purchase commitments                                --                 1,127                   (436)                   691

Lease terminations and leasehold
  improvements reserve                              --                   382                    (54)                   328

Employee separation                                 --                   550                   (223)                   327
                                               -------               -------                -------                -------

Total                                          $    --               $ 4,882                $  (713)               $ 4,169
                                               =======               =======                =======                =======
</TABLE>


THERMALLOY RESTRUCTURING RESERVES:

<TABLE>
<CAPTION>
                                        RESERVE BALANCE,                                    PAYMENTS OF           RESERVE BALANCE,
               DESCRIPTION               JANUARY 1, 1999       CHARGES TO GOODWILL      RESTRUCTURING COSTS      DECEMBER 31, 1999

<S>                                        <C>                      <C>                     <C>                      <C>
      Employee separation                  $      --                $   1,460               $      --                $   1,460

      Lease terminations                          --                      670                      --                      670
                                           ---------                ---------               ---------                ---------

      Total                                $      --                $   2,130               $      --                $   2,130
                                           =========                =========               =========                =========
</TABLE>


                                       67