<PAGE>

                                   FORM 10-K/A
                                 AMENDMENT NO. 1

                       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, 2004

                                       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)

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

  ONE EAGLE SQUARE, SUITE 509, CONCORD, NEW HAMPSHIRE              03301
        (Address of principal executive offices)                 (Zip Code)

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: NONE

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

                                Yes [ ] No [X](1)

      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]

    Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

                                 Yes [ ] No [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 15, 2005 was 1,018.87 shares of class A, 1,078.87 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. The Registrant's
Common Stock is no longer publicly traded; however, the Registrant's Senior
Subordinated Notes are publicly traded.

      Documents incorporated by reference: none

------------

(1) Although the Company has not been subject to such filing requirements for
    the past 90 days, it has filed all reports required to be filed by Section
    15(d) of the Securities Exchange Act (the "Act") of 1934 during the
    preceding twelve months. Pursuant to Section 15(d) of the Act, the
    Company's duty to file reports is automatically suspended as a result of
    having fewer than 300 holders of record of each class of its debt
    securities outstanding, as of January 1, 2003, but the Company agreed
    under the terms of certain long-term debt covenants to continue these
    filings.


<PAGE>

                                EXPLANATORY NOTE

      Aavid Thermal Technologies, Inc. (the "Company") is filing this Amendment
No. 1 on Form 10-K/A to amend and restate, in its entirety, its Annual Report on
Form 10-K for the fiscal year ended December 31, 2004, as filed with the
Securities and Exchange Commission on March 28, 2005 (the "Original Filing").
The purpose of this Amendment No. 1 is to amend and restate the Report of
Independent Registered Public Accounting Firm filed under Item 15 (a) (1) and
(2) of Part IV of Form 10-K to state that the audit was performed in accordance
with the Public Company Accounting Oversight Board standards. This Amendment No.
1 also amends and restates Exhibits 31.1 and 31.2 of the Original Filing to make
certain corrections and clarifications to the information presented in the
Original Filing. We identified these changes in the course of preparing our
responses to a comment letter from the Securities and Exchange Commission (the
"SEC") regarding the Original Filing.

      We have not updated other information contained in the Original Filing in
this Amendment. Therefore, you should read this Amendment together with other
reports and documents that we have filed with the SEC subsequent to the date of
the Original Filing. Information in those other reports and documents updates
and supersedes some of the information contained in this Amendment. You should
not deem the filing of this Amendment to be an admission that our Original
Filing, when made, included any known, untrue statement of material fact or
knowingly omitted to state a material fact necessary to make a statement in the
Original Filing not misleading.

<PAGE>
                                     PART I

ITEM 1. BUSINESS

COMPANY INTRODUCTION

     We are a leading global provider of thermal management solutions for
electronic products and the leading developer and marketer of computational
fluid dynamics ("CFD") software. 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, heat
pipes, 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 for complex computer
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.

     Our thermal management products are used in a wide variety 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 3,000 national and international customers,
including original equipment manufacturers (commonly referred to as OEMs),
electronics distributors and contract manufacturers.

     On February 2, 2000 we were acquired in a merger ("Merger") with Heat
Holdings Corp., a corporation newly formed by Willis Stein & Partners II, L.P.
(together with affiliated funds, "Willis Stein") and other investors
(collectively the "Purchaser"). The Merger was accounted for using the purchase
method. In connection with the Merger, we consolidated our business into two
operating segments: Aavid Thermalloy LLC, which includes Applied Thermal
Technologies, Inc.'s thermal design, validation and consulting services; and
Fluent.

INDUSTRY OVERVIEW

     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.


                                       2
<PAGE>
     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.

     -    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. However, CFD software is not a substitute for physical modeling and
testing prior to production or manufacture of the final product. Specific uses
of CFD-based flow analysis include the design of electronic components and
systems, automotive design, combustion systems modeling and process plant
troubleshooting.

     The CFD software market, which has been growing rapidly over the past
decade, continued to grow in 2004. We believe that, through Fluent, we have
approximately 35-40% 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.


                                       3
<PAGE>
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 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 SOFTWARE

     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 31 years of
experience in the area of fluid flows and thermal management and H. Ferit
Boysan, president of our CFD software business, has 24 years of experience in
the area of fluid flows and CFD software.


                                       4
<PAGE>
     BUSINESS STRATEGY

     Our business strategy is to continue to be a 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 THERMAL MANAGEMENT INDUSTRY GROWTH

     We believe that our existing thermal management markets will continue to
experience growth in the long term. 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 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.

     ACCELERATE GROWTH IN 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, licensing of externally developed technology, 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 150 Ph.D.s and 280 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.


                                       5
<PAGE>
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. Our customer base includes major customers which operate in the
computer, networking, contract manufacturing, communications and electronics
distribution market sectors.

     One customer represented approximately 10.2% of our thermal management net
sales during 2003. No customer represented more than 10% of our thermal
management net sales in 2004 or 2002.

     We currently have more than 2,000 licensees of our CFD software. Our
largest customers for CFD software applications operate in the aerospace,
automotive, chemical process, electronics, consumer products and power
generation market sectors.

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.

     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 and hardware prototyping and testing
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:

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


                                        6
<PAGE>
<TABLE>
<CAPTION>
           PRODUCT OR SERVICE                             DESCRIPTION                                APPLICATION
           ------------------                             -----------                                -----------
<S>                                        <C>                                        <C>
Interface Materials and Attachment         Attachment devices are the spring clips,   -    Increases the effectiveness of heat
Accessories                                tapes, adhesives, tabs and similar              sinks
                                           devices which are used to attach the
                                           heat sink to the semiconductor or          -    Promotes a highly efficient thermal
                                           integrated circuit device and/or to the         transfer between the microprocessor
                                           customer's printed circuit board or             or integrated circuit and heat sink
                                           system chassis. Interface materials
                                           include greases, silicon pads and other    -    Reduces the cost of the customer's
                                           materials which have desirable thermal          installation and repair
                                           and electrical properties. We purchase
                                           most of these materials on a private       -    Transfers heat from the component
                                           label basis from a number of suppliers.         being cooled to the heat sink

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

Applied Thermal Technologies' Design       Applied Thermal Technologies' facilities   -    Analyzes customers' thermal
Centers                                    are staffed by technicians with thermal         problems at the device-, board-and
                                           engineering and flow analysis expertise         system-level
                                           and utilize a variety of sophisticated
                                           design, test and validation hardware and   -    Designs, simulates, prototypes, and
                                           software.                                       tests 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,
Airpak, for use by designers and engineers in the HVAC 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.


                                       7
<PAGE>
     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 major CFD software
products:

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

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

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

Airpak               Airpak, like Icepak, is a fully            -    Used to determine the layout of
                     interactive, object-based CFD software          ventilation systems in rooms and
                     tool. Airpak is specifically designed to        buildings in order to provide
                     analyze air flow, contamination and             maximum comfort and air quality.
                     thermal comfort in room and building
                     designs.                                   -    Assesses the risk of airborne
                                                                     contamination

                                                                -    Improves the energy performance of
                                                                     heating and cooling designs.

GAMBIT               GAMBIT supports a single user interface    -    Reduces the time to create a CFD
                     for geometry creation and meshing.              model
                     Different CFD problems require different
                     mesh types, and GAMBIT brings together     -    Allows users to import geometries
                     all of Fluent's options in one                  created under other CAD/CAE
                     environment.                                    packages into the Fluent suite of
                                                                     software products.

                                                                -    Enables users to automatically
                                                                     create unstructured 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>


                                        8
<PAGE>
<TABLE>
<CAPTION>
PRODUCT OR SERVICE                  DESCRIPTION                                 FEATURES
------------------                  -----------                                 --------
<S>                  <C>                                        <C>
MixSim               MixSim is a fully interactive,             -    Reduces the time to create a CFD
                     object-based CFD software tool                  model: The geometry is
                     specifically designed to analyze the            interactively assembled from
                     fluid flow and blending in stirred tank         application-specific objects
                     reactors. Based on, and fully compatible        (impeller library); the mesh and
                     with FLUENT and GAMBIT, it fully                FLUENT solver case setup is created
                     automates and thus simplifies their             fully automatic by the software
                     application to stirred tank reactors for
                     both CFD beginners and expert users.       -    Flexible interface for the addition
                                                                     of new objects (e.g. arbitrary new
                                                                     agitators) by the user, including
                                                                     import of CAD files
                                                                     Application-specific results
                                                                     examination and evaluation

FloWizard            FloWizard is a highly automated flow       -    Basic, steady state fluid flow and
                     simulation tool that is specifically            heat transfer analysis.
                     built for design and process engineers.
                     It allows engineers to rapidly turn        -    Accepts files from all major CAD
                     their CAD (computer aided design) models        software.
                     into fluid flow models without requiring
                     extensive data input.                      -    A Wizard driven interface that
                                                                     requires minimal user training.
</TABLE>

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 325 sales, support and marketing personnel.

TECHNOLOGY

     We believe that technology leadership is essential to our growth strategy
and have focused our approximately 150 Ph.D.s and 280 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.


                                       9
<PAGE>
COMPUTATIONAL FLUID DYNAMIC 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.

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; re-circulating 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; and adhesive and interface systems that have a high degree
of thermal conductivity.

     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 a purchasing
commitment to a key supplier of up to 24 months. In return, this supplier
commits to maintaining local inventory and to reserving run-time on 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.


                                       10
<PAGE>
COMPETITION

     Our thermal management products business competes with a number of major
providers of thermal management products throughout the world. 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 companies, primarily on the
basis of product performance. To the extent that Fluent expands into additional
applications 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 30 days 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.

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

EMPLOYEES

     As of December 31, 2004, we had a total of 2,157 employees including
approximately 500 contract employees in China. Except for the employees in our
manufacturing facility in Mexico, none of our employees are 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.


                                       11
<PAGE>
RISKS RELATING TO OUR BUSINESS

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

     We intend to increase our thermal products and software businesses
overseas, expand the products and services we offer, and possibly make selective
acquisitions as the economy improves. This growth and expansion may place a
significant strain on our production, technical, financial and other management
resources. To manage any 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.

     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;

     -    general economic conditions;

     -    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,
are currently being 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 subordinated notes. We
cannot provide assurance that the overall thermal management market, or the
segments of the market served by us, will continue to grow in the future. See
"Item 7. Management Discussion and Analysis of Financial Condition and Results
of Operations."


                                       12
<PAGE>
     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, and for computer and networking applications, consisting primarily of
microprocessors and related chip sets. 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.

     Future 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, in
developing and designing new products, semiconductor manufacturers and their
customers 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, 2004, 2003 and 2002, we
purchased a significant portion 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 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 decides 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."


                                       13
<PAGE>
     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.

     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 billings 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 billings are lowest during
the second and third quarters of the fiscal year, which ends in December.

     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. 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.


                                       14
<PAGE>
     OUR INTERNATIONAL OPERATIONS EXPOSE US TO ADDITIONAL RISKS.

     We currently have multiple international manufacturing locations to better
service our customers, many of whom have moved their manufacturing operations
and expanded their business overseas. 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.

     A 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 currently
maintain approximately 140,000 square feet of manufacturing space. Because of
language and cultural differences, managing operations in China can be
difficult, and although we have focused significant management resources on this
operation, we cannot provide assurance that this business will be successful. 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 have additional manufacturing
facilities in North America and Europe.

     As of the date of this filing, there has been significant speculation that
the People's Republic of China may elect to adjust the exchange rate of the
Chinese Yuan against the U.S. Dollar. While there have been no official
decisions made, or timetables established, current press reports indicate that
some form of revaluation may occur in 2005. Currently, the Chinese Yuan has a
fixed exchange rate against the U.S. dollar. Should China adjust the exchange
rate of the Yuan, or allow the value of the Yuan to float, it is possible that
this change could negatively impact our operation in China by making it more
expensive for us to do business there. A revaluation of the Yuan could also
result in foreign currency exchange gains or losses within our statement of
operations in 2005 or future periods. It is impossible, based on current facts
or circumstances, to estimate the impact on our business in 2005 or future
periods of a revaluation of the Chinese Yuan.


                                       15
<PAGE>
     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 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 SUBORDINATED
     NOTES.

     We have a substantial amount of debt. The following chart shows certain
important credit statistics:

<TABLE>
<CAPTION>
                                                         AS OF DECEMBER 31, 2004
                                                         (DOLLARS IN THOUSANDS)
                                                         -----------------------
<S>                                                      <C>
Total debt (including current portion)................          $138,467
Stockholders' deficit.................................           (67,639)
Debt to stockholders' equity..........................               N/A
</TABLE>


                                       16
<PAGE>
     Our substantial indebtedness could have important consequences to holders
of our senior subordinated notes. For example, it could:

     -    make it difficult for us to satisfy our obligations with respect to
          the senior subordinated notes and our obligations under our current
          senior credit facility (the "Loan and Security Agreement");

     -    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.

     The terms of the indenture governing our senior subordinated notes do not
fully prohibit us or our subsidiaries from incurring substantial additional debt
in the future. Our Loan and Security Agreement also permits additional
borrowing. All of the borrowings under our Loan and Security Agreement are
senior to the senior subordinated 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 Loan
and Security Agreement, bears interest at variable rates. An increase in the
interest rates on our debt will reduce the funds available to repay the senior
subordinated 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 Discussion and Analysis of Financial
Condition and Results of Operations" for a description of our Loan and Security
Agreement and the senior subordinated 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 subordinated notes and the Loan and Security Agreement, 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 subordinated 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 subordinated notes, on or before maturity. We cannot assure noteholders
that we will be able to refinance any of our debt, including the senior
subordinated notes, on a timely basis or on satisfactory terms if at all. In
addition, the terms of our existing debt, including the senior subordinated
notes and the Loan and Security Agreement, and other future debt may limit our
ability to pursue any of these alternatives.


                                       17
<PAGE>
     OUR LOAN AND SECURITY AGREEMENT AND THE INDENTURE IMPOSE OPERATIONAL AND
     FINANCIAL RESTRICTIONS ON US.

     Our Loan and Security Agreement and the indenture under which our senior
subordinated 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 Loan and Security Agreement 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 Loan and Security Agreement may be affected by
changes in our business condition or results of operations, adverse regulatory
developments or other events beyond our control.

RISKS RELATED TO THE SENIOR SUBORDINATED NOTES

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

     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 subordinated 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 subordinated notes.

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

     The senior subordinated 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 subordinated
notes are contractually subordinated in right of payment to borrowings under our
Loan and Security Agreement.


                                       18
<PAGE>
     As of December 31, 2004, we had $14.7 million of senior debt outstanding
under the Loan and Security Agreement, all of which was 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 subordinated notes will be blocked
in the event of a payment default under the Loan and Security Agreement 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
subordinated notes and any resulting acceleration of the senior subordinated
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 subordinated
notes.

     In a bankruptcy, liquidation or reorganization or similar proceeding
relating to us, holders of the senior subordinated 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
subordinated notes in a bankruptcy or similar proceeding be paid to holders of
senior debt instead, holders of the senior subordinated 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 subordinated notes.

     WE ARE A HOLDING COMPANY AND OUR ONLY SOURCE OF CASH TO PAY INTEREST ON AND
     THE PRINCIPAL OF THE SENIOR SUBORDINATED 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 subordinated 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 subordinated notes were issued, we must offer to buy back the
senior subordinated 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 subordinated notes in that event, or
that we will have sufficient funds to pay our other debts. In addition, our Loan
and Security Agreement prohibits us from repurchasing the senior subordinated
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 subordinated notes upon a
change of control, we will be in default under both the senior subordinated
notes and our Loan and Security Agreement. Any future debt that we incur may
also contain restrictions on repurchases in the event of a change of control or
similar event.


                                       19
<PAGE>
     THE SENIOR SUBORDINATED NOTES AND THE GUARANTEES COULD BE VOIDED OR
     SUBORDINATED TO OUR OTHER DEBT IF THE ISSUANCE OF THE SENIOR SUBORDINATED
     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 subordinated notes and the guarantees of the
senior subordinated 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 subordinated notes and the guarantees 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 subordinated
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 SUBORDINATED
     NOTES.

     The senior subordinated notes are considered to have been issued with
original issue discount. Holders of the senior subordinated 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
subordinated 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.


                                       20
<PAGE>
ITEM 2. PROPERTIES

     Aavid Thermalloy has a total of approximately 480,000 square feet of
manufacturing space with locations in Laconia, New Hampshire; Monterrey, Mexico;
the United Kingdom; Italy; China; and Toronto, Canada. We employ a broad range
of aluminum and copper fabrication and processing capabilities. Manufacturing
operations consist of cutting, stamping, machining, joining, brazing, soldering,
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. 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. We plan to continue to build or acquire
additional manufacturing facilities overseas and/or expand supplier
relationships to better service our customers, many of whom have moved
manufacturing operations and expanded their business overseas. Fluent's total
sales, marketing, development, and support facilities consist of approximately
237,000 square feet.

     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, foreign currency fluctuations 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 where we
own or operate manufacturing facilities could result in the impairment or loss
of our investment in such countries.

We currently operate in the following locations:

<TABLE>
<CAPTION>
U.S. LOCATIONS                                                      PRINCIPAL ACTIVITY
--------------                                                      ------------------
<S>                                        <C>
Concord, NH.............................   Corporate Offices, Aavid Thermalloy Corporate Offices
Chicago, IL.............................   Fluent-Software Development, Sales and Marketing
Dallas, TX..............................   Aavid Thermalloy -Sales and Marketing
Laconia, NH.............................   Aavid Thermalloy-Manufacturing
Lebanon, NH.............................   Fluent-Software Development, Sales and Marketing
Santa Clara, CA.........................   Fluent-- Software Sales and Marketing; Applied Thermal
                                           Technologies-Research and Development and Consulting
Morgantown, WV..........................   Fluent-Research and Development and Consulting
Ann Arbor, MI...........................   Fluent-Software Sales and Marketing
</TABLE>

<TABLE>
<CAPTION>
INTERNATIONAL LOCATIONS                                             PRINCIPAL ACTIVITY
-----------------------                                             ------------------
<S>                                        <C>
Toronto, Canada.........................   Aavid Thermalloy-Manufacturing
Monterrey, Mexico.......................   Aavid Thermalloy-Manufacturing
Darmstadt, Germany......................   Fluent-Software Sales and Marketing
Swindon, U.K............................   Aavid Thermalloy-Manufacturing
Sheffield, U.K..........................   Fluent-Software Development, Sales and Marketing
Bologna, Italy..........................   Aavid Thermalloy-Manufacturing
Le Bretonneaux, France..................   Fluent-Software Sales and Marketing
Guang Dong Prov., PRC...................   Aavid Thermalloy-Manufacturing
Singapore...............................   Aavid Thermalloy-Sales and Marketing
Taipei, Taiwan..........................   Aavid Thermalloy-Sales and Marketing
Pune, India.............................   Fluent-Software Development, Sales and Marketing;
                                           Applied Thermal Technologies-Research and Development and Consulting
Tokyo, Japan............................   Fluent-Software Development, Sales and Marketing
Milan, Italy............................   Fluent-Software Sales and Marketing
Goteborg, Sweden........................   Fluent-Software Sales and Marketing
Brussels, Belgium.......................   Fluent-Software Development, Sales and Marketing
Shanghai, China.........................   Fluent-Software Development, Sales and Marketing
</TABLE>


                                       21
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

     We are involved in various 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

None

                                     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.

     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 Loan and Security
Agreement and senior subordinated notes indenture contain restrictive covenants
which, among other things, impose limitations on the payment of dividends.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1)

     The following tables set forth selected statement of operations and balance
sheet data derived from the consolidated financial statements of the Company and
the Predecessor 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 included elsewhere herein.

     The purchase method of accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting generally results in
increased amortization and depreciation reported in future periods. Accordingly,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since those financial statements report
financial position, results of operations, and cash flows for these two separate
entities.


                                       22
<PAGE>
<TABLE>
<CAPTION>
                                           THE PERIOD
                                           JANUARY 1,     THE PERIOD
                                              2000        FEBRUARY 2,
                                             THROUGH        THROUGH       YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED
                                           FEBRUARY 1,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                             2000(1)        2000(1)        2001(1)        2002(1)        2003(1)        2004(1)
                                          -------------  -------------  -------------  -------------  -------------  -------------
                                          (PREDECESSOR)  (THE COMPANY)  (THE COMPANY)  (THE COMPANY)  (THE COMPANY)  (THE COMPANY)
<S>                                       <C>            <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
(AMOUNTS IN THOUSANDS)
Net sales                                    $22,437       $253,414       $ 170,892      $161,942       $188,167        $227,131
Cost of goods sold                            14,879        166,801         124,000        88,532         97,061         112,232
                                             -------       --------       ---------      --------       --------        --------
   Gross profit                                7,558         86,613          46,892        73,410         91,106         114,899
Selling, general and administrative
   expenses                                    4,952         92,849          92,742        58,835         62,565          68,924
Research and development                         631          8,495          10,775        12,492         15,004          16,658
Intangible asset impairment charge(2)             --             --         115,210            --             --              --
Restructuring charge (credit)(3)                  --             --          16,885           858            (90)             (6)
Loss on sale of division(4)                       --             --           4,322            --             --              --
Acquired in-process research and
   development(5)                                 --         15,000              --            --             --              --
                                             -------       --------       ---------      --------       --------        --------
   Income (loss) from continuing
      operations                               1,975        (29,731)       (193,042)        1,225         13,627          29,323
Interest expense, net                           (816)       (23,136)        (22,217)      (20,141)       (18,137)        (17,940)
Other income (expense), net                       68         (1,012)          1,098           453          2,483           1,077
                                             -------       --------       ---------      --------       --------        --------
   Income (loss) from continuing
      operations before income
      taxes and minority interest              1,227        (53,879)       (214,161)      (18,463)        (2,027)         12,460
Benefit (provision) for income taxes            (533)            (5)         10,959          (817)        (1,627)         (4,807)
                                             -------       --------       ---------      --------       --------        --------
   Income (loss) from continuing
     operations before minority interest         694        (53,884)       (203,202)      (19,280)        (3,654)          7,653
Minority interest                                 --          1,519           3,294            --             --              --
                                             -------       --------       ---------      --------       --------        --------
   Income (loss) from continuing
      operations                                 694        (52,365)       (199,908)      (19,280)        (3,654)          7,653
Income (loss) from discontinued
   operations, net (including gain
   on disposal of $7,082 in 2002)(6)             (69)         1,040           1,445         6,725             --              --
                                             -------       --------       ---------      --------       --------        --------
Net income (loss)(7)                         $   625       $(51,325)      $(198,463)     $(12,555)      $ (3,654)       $  7,653
                                             =======       ========       =========      ========       ========        ========
BALANCE SHEET DATA AT YEAR END:
Working capital                                            $ 37,359       $(152,980)     $ (19,359)     $(18,276)       $(12,751)
Total assets                                                386,288         175,294        139,052       145,693         171,690
Total long term debt, including
   current portion                                          204,002         175,832        139,450       138,810         138,467
Stockholders' (deficit) equity                              100,160         (70,888)       (70,416)      (75,331)        (67,639)
</TABLE>


                                       23
<PAGE>
NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (AMOUNTS IN THOUSANDS)

(1)  This financial data reflects the consolidated financial position of the
     Company as of December 31, 2004, 2003, 2002, 2001 and 2000, and the
     consolidated results of operations of the Company for the years ended
     December 31, 2004, 2003, 2002, 2001, and the period February 2, 2000
     through December 31, 2000 and of the Predecessor for the period from
     January 1, 2000 to February 1, 2000. The Predecessor financial statements
     have been prepared using the historical cost of the Company's assets and
     have not been adjusted to reflect the merger with Heat Holdings Corp. on
     February 2, 2000. The accompanying financial data as of and for the years
     ended December 31, 2004, 2003, 2002, 2001 and as of December 31, 2000 and
     for the period from February 2, 2000 to December 31, 2000 reflect the
     consolidated financial position and results of operations of the Company
     subsequent to the date of the merger and include adjustments required under
     the purchase method of accounting.

(2)  In the fourth quarter of 2001 and in accordance with SFAS 121, we recorded
     an impairment charge related to goodwill and intangible assets acquired in
     connection with the Merger.

(3)  Represents the credit in 1999 of $630 related 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. Restructuring
     charges of $16,885 in 2001 were recorded in connection with the cessation
     of manufacturing activities at the Dallas, Texas, Terrell, Texas and
     Loudwater, United Kingdom facilities, reduction of the New Hampshire
     workforce and reduction of China workforce including closure of the fan
     factory and write-off of associated fixed assets. Restructuring charges of
     $858 in 2002 were recorded in the fourth quarter of 2002 in connection with
     the reduction in workforce and cessation of manufacturing activities in
     Singapore and Malaysia. Restructuring credit of $90 in 2003 and $6 in 2004
     consists of excess accruals originally recorded in Singapore that were
     reversed once actual restructuring activities were concluded in 2003 and
     2004.

(4)  Represents loss realized on sale of Franklin, New Hampshire extrusion plant
     that occurred in the fourth quarter of 2001.

(5)  The $15,000 charge in 2000 represents the amount of the purchase price
     allocated to technology acquired by Heat Holdings related to Fluent, Inc.,
     which was not fully commercially developed and had no alternative future
     use at the time of acquisition.

(6)  On July 17, 2002, the Company sold all of the outstanding shares of Aavid
     Thermalloy Holdings, GmbH, which in turn owned approximately 89.5% of the
     outstanding shares of curamik electronics GmbH, pursuant to a Share Sale
     and Purchase Agreement between the Company and Electrovac Fabrikation
     Electrotechnischer Spezialartikel GesmbH dated July 10, 2002 (the "Sale
     Agreement"). The sale of Curamik and its related operating results have
     been excluded from income (losses) from continuing operations and is
     classified as a discontinued operation for all periods presented, in
     accordance with the requirements of Statement of Financial Accounting
     Standards (SFAS) No. 144 "Accounting for Impairment or Disposal of
     Long-Lived Assets".

(7)  Because the Company's common stock is not publicly traded, earnings per
     share information is not presented.


                                       24
<PAGE>
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 AND EXECUTIVE SUMMARY

     We are a leading global provider of thermal management solutions for
electronic products and the leading developer and marketer of CFD software.
Prior to February 2, 2000 we were a publicly traded company, listed on the
NASDAQ National Market under the trading symbol "AATT". Since February 2, 2000,
we have been a privately held company, owned by Heat Holdings Corp., a
corporation formed by Willis Stein and other investors. Our acquisition by
Willis Stein was accounted for under the purchase method of accounting and was
financed through a combination of 12 3/4% senior subordinated notes and senior
bank debt.

     We are organized as two operating units 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. These two business units, while complementary,
are quite different from each other and as a result, Aavid Thermalloy and Fluent
will be discussed separately when analyzing performance and industry trends.

     Aavid Thermalloy is a global manufacturing business. Revenues are generated
through the sale of fabricated and purchased thermal management products and
components. Our thermal management products are used in a wide variety of
computer, 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 primary raw
materials include extruded aluminum and copper and our business can be greatly
affected by changes in the prices of aluminum and copper. We have manufacturing
operations in the U.S., Canada, Mexico, U.K., Italy and China. Additionally, we
have several other sales offices throughout the world. The electronics industry
in which Aavid Thermalloy operates is very cost competitive. We compete in this
market by manufacturing many of our products in low cost regions, such as China
and Mexico. We also compete by offering state of the art engineering and design
services to our customers to assist them in solving difficult and complex
thermal management problems. These design services are carried out or assisted
through our specialized engineering and design consulting offices in New
Hampshire, California and India. We partner very closely with many of our
customers in the design phase of product development in order to assist in
prototype development and to develop relationships that allow us to maintain a
strong position as a primary supplier for new products. The operating
environment for Aavid Thermalloy over the past several years has been very
difficult due to the global economic slowdown experienced by the electronics
industry. We have adjusted to the slowdown through significant cost cutting and
consolidation of manufacturing operations that have occurred over the period of
2000 through 2002. By the end of 2002, we had completed our restructuring
efforts and achieved an appropriate cost structure to support the current market
environment. In 2004, Aavid Thermalloy achieved revenue growth of over 20% when
compared with 2003 while keeping our operating expenses as a percentage of
revenue below 2003 levels, allowing us to significantly improve cash flows.


                                       25
<PAGE>
     Fluent's 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. Fluent's
software is used in a variety of industries including, among others, the
automotive, aerospace, chemical processing, power generation, material
processing, electronics and HVAC industries. Fluent develops and markets their
CFD software products worldwide and currently maintains sales, support and
design centers in North America, Europe and Asia. Fluent markets their product
using two different licensing options. Annual licenses, which make up the
majority of the overall licenses sold, allow the user to use the software and
obtain support and other services for a period of one year. Each year the entire
license must be renewed or the software can no longer be used. Perpetual
licenses allow the customer to use the software for life, however, in order to
continue to receive support, upgrades etc, the customer must purchase an annual
maintenance contract. Revenue from annual licenses (and the bundled maintenance)
is recognized ratably over the term of the license. However, in most cases, the
entire fee for the license and maintenance is billed and collected at the
beginning of the contract period. Software license revenue for perpetual
licenses is recognized immediately upon the signing of the contract and delivery
of the software, while the related maintenance revenue is recognized ratably
over the term of the maintenance agreement. Similar to the annual licenses, the
entire perpetual license and related maintenance contracts are billed and
collected at the beginning of the contract term. Historically, Fluent has
achieved an annual contract renewal rate of greater than 80% and overall annual
revenue growth of better than 19% each of the last two years. The nature of
Fluent's products allow for a very consistent recurring revenue base and
associated cash flows. Fluent is one of the larger companies within the CFD
market space. Fluent has achieved consistent growth by penetrating new
industries and also by achieving greater penetration within companies in
existing industries. In the past, CFD software was a generalized software that
required complex customization to be adapted for use within a particular
industry. As a result, the primary user base was limited to upper level PhD
caliber engineers. In the past few years, Fluent has worked to develop industry
specific tools that come with many pre-loaded templates that simplify the
overall use of the CFD software. This has opened up the use of CFD software to a
much broader range of customer employee skill sets and therefore has allowed
Fluent to sell more seat licenses per customer. This strategy is ultimately
leading to a much greater penetration of customer R&D departments. In 2004,
Fluent achieved revenue growth of over 20% when compared with 2003, while
keeping operating expenses as a percentage of revenues below 2003 levels,
allowing us to improve cash flows.

     Both Fluent and Aavid Thermalloy have significant operations outside the
United States. As a result, financial performance can be affected by changes in
foreign currency exchange rates.

     As of the date of this filing, there has been significant speculation that
the People's Republic of China may elect to adjust the exchange rate of the
Chinese Yuan against the U.S. Dollar. While there have been no official
decisions made, or timetables established, current press reports indicate that
some form of revaluation is likely in 2005. Currently, the Chinese Yuan has a
fixed exchange rate against the U.S. dollar. Should China adjust the exchange
rate of the Yuan, or allow the value of the Yuan to float, it is possible that
this change could negatively impact our operation in China by making it more
expensive for us to do business there. A revaluation of the Yuan could also
result in foreign currency exchange gains or losses within our statement of
operations in 2005 or future periods. It is impossible, based on current facts
or circumstances, to estimate the impact on our business in 2005 or future
periods of a revaluation of the Chinese Yuan.

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.


                                       26
<PAGE>
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                        -----------------------
                                                         2002     2003     2004
                                                        -----    -----    -----
<S>                                                     <C>      <C>      <C>
Net sales............................................   100.0%   100.0%   100.0%
Cost of goods sold...................................    54.7     51.6     49.4
                                                        -----    -----    -----
   Gross profit......................................    45.3     48.4     50.6
Selling, general and administrative expenses.........    36.3     33.2     30.4
Research and development.............................     7.7      8.0      7.3
Restructuring charge.................................     0.5       --       --
                                                        -----    -----    -----
   Income from continuing operations.................     0.8      7.2     12.9
Interest expense, net................................   (12.4)    (9.6)    (7.9)
Other income, net....................................     0.2      1.3      0.5
                                                        -----    -----    -----
Income (loss) from continuing operations
      before income taxes............................   (11.4)    (1.1)     5.5
Provision for income taxes...........................    (0.5)    (0.8)    (2.1)
                                                        -----    -----    -----
   Income (loss) from continuing operations
      before income taxes............................   (11.9)    (1.9)     3.4
Income from discontinued operations, net.............     4.1       --       --
                                                        -----    -----    -----
   Net income (loss).................................    (7.8)%   (1.9)%    3.4%
                                                        =====    =====    =====
</TABLE>

2004 COMPARED WITH 2003

<TABLE>
<CAPTION>
                                                           YEAR ENDED
                                                          DECEMBER 31,
                                                        ---------------
             NET SALES (DOLLARS IN MILLIONS)             2003     2004    CHANGE
             -------------------------------            ------   ------   ------
<S>                                                     <C>      <C>       <C>
Computer, Networking and Industrial Electronics......   $100.5   $121.6    21.0%
Consulting and Design (Applied)......................      1.1      1.1      --
                                                        ------   ------    ----
   Total Aavid Thermalloy............................    101.6    122.7    20.8%
   Total Fluent......................................     86.5    104.3    20.6%
   Total Enductive Solutions.........................      0.1      0.1      --
                                                        ------   ------    ----
   Total Aavid Thermal Technologies..................   $188.2   $227.1    20.7%
                                                        ======   ======    ====
</TABLE>

     Net sales for 2004 were $227.1 million, an increase of $39.0 million, or
20.7%, compared with $188.2 million for 2003. The overall increase in sales was
a combination of increasing revenues at both Aavid Thermalloy and Fluent as well
as the benefit received due to the significant weakening of the U.S. Dollar
versus foreign currencies, including the Euro, British Pound, and Canadian
Dollar, that occurred over the course of 2004. Had 2004 revenues in local
currencies been translated at the average exchange rates in effect during 2003,
revenues would have been $8.7 million dollars lower.

     Aavid Thermalloy's net sales were $122.7 million for 2004, an increase of
$21.1 million, or 20.8%, compared with $101.6 million for 2003. Excluding
foreign exchange rate fluctuations from year to year, the increase was primarily
the result of a moderate improvement in the semiconductor and electronics
industries in 2004, as well as an improvement in the Company's market share
position.

     Fluent's net sales were $104.3 million for 2004, an increase of $17.8
million, or 20.6%, over 2003 sales of $86.5 million. Excluding foreign exchange
rate fluctuations from year to year, the increase was primarily due to an
overall increase in sales across all of Fluent's offerings.

     International net sales (which include North American exports) increased to
56.4% of net sales for the year ended December 31, 2004 as compared with 53.1%
for the year ended December 31, 2003.


                                       27
<PAGE>
     Our gross profit in 2004 was $114.9 million, an increase of $23.8 million,
or 26.1% higher than 2003 gross profit of $91.1 million. Our gross margin in
2004 was 50.6%, which compares with 48.4% in 2003. Aavid Thermalloy saw
continued improvement in gross profit and gross margin in 2004. This is
attributable to improved cost efficiencies in manufacturing and supply chain
operations. Additionally, Fluent's revenue and gross profit remained a large
percentage of the Company's overall revenue and gross profit in 2004. As
Fluent's gross margin tends to be much greater than the gross margin of Aavid
Thermalloy, the high percentage of Fluent revenue to overall Company revenues
also serves to increase the overall gross margin of the Company.

     Our selling, general and administrative expenses, excluding amortization of
intangibles, were $68.1 million, or 30.0% of sales for 2004, as compared with
$59.1 million, or 31.4% of net sales, for 2003. Aavid Thermalloy's 2004 S,G&A
expenses were up $1.4 million from 2003 levels, although such costs decreased as
a percentage of net sales. Fluent's 2004 S,G&A increased $7.5 million from 2003
levels as Fluent continued to enhance its sales and support infrastructure to
support its revenue growth. Lastly, the Company's corporate offices experienced
a $0.2 million increase in administrative costs.

     Intangible asset amortization of $0.9 million was recorded in 2004 compared
with $3.5 million recorded in 2003, a decrease of $2.6 million. This
amortization is primarily related to intangible assets established as part of
the acquisition of Aavid by Heat Holdings Corp. The decrease in amortization is
due primarily to Fluent's developed technology intangible asset becoming fully
amortized in January 2004, while 2003 had a full year of amortization expense
related to this intangible asset.

     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
$16.7 million, or 7.3% of net sales, which compares with $15.0 million, or 8.0%
of net sales, in 2003. The increase in research and development expense was
primarily due to increased expenditures at Fluent in connection with the
development of next generation software.

     Our income from continuing operations in 2004 was $29.3 million, an
increase of $15.7 million over 2003 income from continuing operations of $13.6
million. Aavid Thermalloy, excluding intangible asset amortization and
restructuring costs, had operating income of $5.4 million in 2004 compared with
an operating loss of $0.2 million in 2003. This improvement stemmed primarily
from the Aavid Thermalloy's ability to increase its sales and gross profit in
2004, while holding S,G&A costs in line with 2003 levels. Fluent's operating
income, excluding intangible asset amortization, increased to $25.3 million in
2004, compared with an operating income of $17.7 million in 2003. Fluent
experienced an increase in operating profit primarily due to its ability to hold
S,G&A growth to a lower rate than the growth rate seen in revenue and gross
profit.

     Our foreign exchange gains were $0.9 million in 2004 compared with $2.5
million in 2003. Foreign exchange gains occurred in 2004 due to the continued
weakening of the U.S. Dollar versus the Euro, British Pound, and Canadian Dollar
experienced over the last two years. Aavid Thermalloy and Fluent have
significant long-term inter-company notes due to certain U.S. locations from
certain foreign locations. These inter-company notes are the primary contributor
to the foreign exchange gains recorded in 2004 and 2003. Should the U.S. dollar
strengthen in 2005, it is likely that the Company will realize foreign currency
losses associated with these inter-company notes.

     Our net interest charges were $17.9 million in 2004, compared with $18.1
million in 2003 as interest rates in 2004 remained at levels comparable to 2003,
while overall debt levels remained relatively flat from year to year.


                                       28
<PAGE>
     The Company recorded a tax provision of $4.8 million in 2004 compared to a
tax provision of $1.6 million in 2003. The Company incurred a tax provision in
2003 despite having significant operating losses because of state tax provisions
on applicable state components of U.S. income and foreign tax provisions on
foreign earnings. We recorded a tax provision on foreign earnings which are
expected to be repatriated into the U.S. to service debt. 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. These repatriated
earnings will, therefore, incur both foreign income taxes and U.S. income taxes,
effectively doubling up the tax rate on the foreign earnings. 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.

     The Company's EBITDA, as defined in the Loan and Security Agreement with
the Company's senior lenders, was $44.4 million in 2004 compared with $35.7
million in 2003. EBITDA is a non-GAAP financial measure that the Company
believes is relevant to potential readers of our financial statements as it is
the primary measure of performance and compliance with financial covenants
utilized by our lenders. A reconciliation of net income to EBITDA is as follows:

<TABLE>
<CAPTION>
                                                         FOR THE YEAR ENDED
                                                     ---------------------------
                                                     DECEMBER 31,   DECEMBER 31,
               (DOLLARS IN MILLIONS)                     2004           2003
               ---------------------                 ------------   ------------
<S>                                                  <C>            <C>
Net income (loss).................................      $ 7.7          $(3.7)
Cash interest expense.............................       16.5           16.7
Bond discount amortization........................        0.8            0.7
Deferred financing fee amortization...............        1.0            1.0
Provision for income taxes........................        4.8            1.6
Depreciation......................................        7.3            8.0
Intangible asset amortization.....................        0.8            3.5
Deferred revenue change during period (1) ........        5.5            7.8
Loss on disposal of fixed assets..................        0.0            0.2
Restructuring charges(credits) ...................         --           (0.1)
                                                        -----          -----
EBITDA............................................      $44.4          $35.7
                                                        =====          =====
</TABLE>

(1)  Change in deferred revenue as defined in the Loan and Security Agreement
     represents the net change in deferred revenue found on the Company's
     balance sheet from the beginning of the applicable reporting period to the
     end of the applicable reporting period. An increase in deferred revenue
     during the period will increase EBITDA. A decrease in deferred revenue
     during the period will decrease EBITDA, as defined.

2003 COMPARED WITH 2002

<TABLE>
<CAPTION>
                                                        YEAR ENDED
                                                       DECEMBER 31,
                                                     ---------------
          NET SALES (DOLLARS IN MILLIONS)             2002     2003    CHANGE
          -------------------------------            ------   ------   ------
<S>                                                  <C>      <C>      <C>
Computer, Networking and Industrial Electronics...   $ 88.3   $100.5    13.8%
Consulting and Design (Applied)...................      1.3      1.1   (15.4)%
                                                     ------   ------   -----
   Total Aavid Thermalloy.........................     89.6    101.6    13.4%
   Total Fluent...................................     72.2     86.5    19.7%
   Total Enductive Solutions......................      0.1      0.1      --
                                                     ------   ------   -----
   Total Aavid Thermal Technologies...............   $161.9   $188.2    16.2%
                                                     ======   ======   =====
</TABLE>

     Net sales for 2003 were $188.2 million, an increase of $26.3 million, or
16.2%, compared with $161.9 million for 2002. The overall increase in sales was
a combination of increasing revenues at both Aavid Thermalloy and Fluent as well
as the benefit received due to the significant weakening of the U.S. Dollar
versus foreign currencies, including the Euro, British Pound, and Canadian
Dollar, that occurred over the course of 2003. Had 2003 revenues in local
currencies been translated at the exchange rates in effect during 2002, revenues
would have been $9.4 million dollars lower.

     Aavid Thermalloy's net sales were $101.6 million for 2003, an increase of
$12.0 million, or 13.4%, compared with $89.6 million for 2002. Excluding foreign
exchange rate fluctuations from year to year, the


                                       29
<PAGE>
increase was primarily the result of a moderate improvement in the semiconductor
and electronics industries in 2003, as well as an improvement in the Company's
market share position.

     Fluent's net sales were $86.5 million for 2003, an increase of $14.3
million, or 19.8%, over 2002 sales of $72.2 million. Excluding foreign exchange
rate fluctuations from year to year, the increase was primarily due to an
overall increase in sales across all of Fluent's offerings.

     International net sales (which include North American exports) increased to
53.1% of net sales for the year ended December 31, 2003 as compared with 50.3%
for the year ended December 31, 2002.

     Our gross profit in 2003 was $91.1 million, an increase of $17.7 million,
or 24.1% higher than 2002 gross profit of $73.4 million. Our gross margin in
2003 was 48.4%, which compares with 45.3% in 2002. Aavid Thermalloy saw a
significant improvement in gross profit and gross margin in 2003 primarily due
to the restructuring activities that occurred over the prior two years.
Additionally, Fluent's revenue and gross profit continued to become a larger
percentage of the overall Company's revenue and gross profit in 2003. As
Fluent's gross margin tends to be much greater than the gross margin of Aavid
Thermalloy, the increase of Fluent as a percentage of overall Company revenues
also serves to increase the overall gross margin of the Company.

     Our selling, general and administrative expenses, excluding amortization of
intangibles, were $59.1 million, or 31.4% of sales for 2003, as compared with
$55.4 million, or 34.2% of net sales, for 2002. Aavid Thermalloy's 2003 S,G&A
expenses were down $0.6 million from 2002 levels primarily due to a Company wide
effort to maintain costs consistent with 2002 levels. Fluent's 2003 S,G&A
increased $5.9 million from 2002 levels as Fluent continued to enhance its sales
and support infrastructure to support its revenue growth. Lastly, the Company's
corporate offices experienced a $1.6 million decrease in administrative costs
primarily related to lower legal and accounting costs incurred in 2003. In 2002,
the Company incurred higher than normal legal and accounting costs associated
with debt refinancings, re-audits of prior years due to the dissolution of the
Company's previous audit firm, Arthur Andersen, and foreign corporate
reorganizations.

     Intangible asset amortization of $3.5 million was recorded in 2003 compared
with $3.4 million recorded in 2002. This amortization is primarily related to
intangible assets established as part of the acquisition of Aavid by Heat
Holdings Corp.

     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
$15.0 million, or 8.0% of net sales, which compares with $12.5 million, or 7.7%
of net sales, in 2002. The increase in research and development expense was
primarily due to increased expenditures at Fluent in connection with the
development of next generation software.

     Our income from continuing operations in 2003 was $13.6 million, an
increase of $12.4 million over 2002 income from continuing operations of $1.2
million. Aavid Thermalloy, excluding intangible asset amortization and
restructuring costs, had an operating loss of $0.2 million in 2003 compared with
an operating loss of $6.2 million in 2002. This improvement stemmed primarily
from the Aavid Thermalloy's ability to increase its sales and gross profit in
2003, while holding S,G&A costs in line with 2002 levels. Fluent's operating
income, excluding intangible asset amortization, increased to $17.7 million in
2003, compared with an operating income of $14.1 million in 2002. Fluent
experienced an increase in operating profit primarily due to its ability to hold
S,G&A growth to a lower rate than the growth rate seen in revenue and gross
profit.

     Our foreign exchange gains were $2.5 million in 2003 compared with $0.5
million in 2002. Foreign exchange gains increased primarily due to the
significant weakening of the U.S. Dollar versus the Euro, British Pound, and
Canadian Dollar that occurred over the course of 2003. Aavid Thermalloy and
Fluent have significant long-term inter-company notes due to certain U.S.
locations from certain foreign locations. These inter-company notes are the
primary contributor to the foreign exchange gains recorded in 2003.


                                       30
<PAGE>
     Our net interest charges were $18.1 million in 2003 compared with $20.1
million in 2002. This decrease in interest expense was a combination of lower
interest rates in 2003 and a small reduction in outstanding balances of senior
debt in 2003 compared with 2002.

     The Company recorded a tax provision of $1.6 million in 2003 compared to a
tax provision of $0.8 million in 2002. The Company incurred a tax provision in
2003 despite having significant operating losses because of state tax provisions
on applicable state components of U.S. income and foreign tax provisions on
foreign earnings. We had to record a tax provision on foreign earnings which are
expected to be repatriated into the U.S. to service debt. 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. These repatriated
earnings will, therefore, incur both foreign income taxes and U.S. income taxes,
effectively doubling up the tax rate on the foreign earnings. 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.

     The Company's EBITDA, as defined in the Loan and Security Agreement with
the Company's senior lenders, was $35.7 million in 2003 compared with $22.0
million in 2002. EBITDA is a non-GAAP financial measure that the Company
believes is relevant to potential readers of our financial statements as it is
the primary measure of performance and compliance with financial covenants
utilized by our lenders. A reconciliation of net income to EBITDA is as follows:

<TABLE>
<CAPTION>
                                                         FOR THE YEAR ENDED
                                                     ---------------------------
                                                     DECEMBER 31,   DECEMBER 31,
               (DOLLARS IN MILLIONS)                     2003           2002
               ---------------------                 ------------   ------------
<S>                                                  <C>            <C>
Net loss..........................................      $(3.7)         $(12.6)
Cash interest expense.............................       16.7            18.1
Bond discount amortization........................        0.7             0.6
Deferred financing fee amortization...............        1.0             1.8
Provision for income taxes........................        1.6             1.1
Depreciation......................................        8.0             9.1
Intangible asset amortization.....................        3.5             3.8
Deferred revenue change during period (1) ........        7.8             5.8
Loss on disposal of fixed assets..................        0.2             0.5
Restructuring charges(credits) ...................       (0.1)            0.9
Gain on sale of discontinued operation............         --            (7.1)
                                                        -----          ------
EBITDA............................................      $35.7          $ 22.0
                                                        =====          ======
</TABLE>

(1)  Change in deferred revenue as defined in the Loan and Security Agreement
     represents the net change in deferred revenue found on the Company's
     balance sheet from the beginning of the applicable reporting period to the
     end of the applicable reporting period. An increase in deferred revenue
     during the period will increase EBITDA. A decrease in deferred revenue
     during the period will decrease EBITDA, as defined.

NEW ACCOUNTING PRONOUNCEMENTS

     In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46")
to clarify the conditions under which assets, liabilities and activities of
another entity should be consolidated into the financial statements of a
company. FIN 46 requires the consolidation of a variable interest entity by a
company that bears the majority of the risk of loss from the variable interest
entity's activities, is entitled to receive a majority of the variable interest
entity's residual returns, or both. The provisions of FIN 46, required to be
adopted in fiscal 2005, are not expected to have a material impact on the
Company's financial position or results of operations.

     In November 2004, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 151, "Inventory Costs, an amendment of ARB No. 43,
Chapter 4." The amendments made by SFAS No. 151 clarify that abnormal amounts of
idle facility expense, freight, handling costs, and wasted materials (spoilage)
should be recognized as current-period charges and require the allocation of
fixed production overheads to inventory based on the normal capacity of the
production facilities. The guidance is effective for inventory costs incurred
during


                                       31
<PAGE>
fiscal years beginning after November 23, 2004. It is not believed that the
adoption of SFAS No. 151 will have a material impact on the consolidated
financial position, results of operations or cash flows of the Company.

CRITICAL ACCOUNTING POLICIES

     We prepare the consolidated financial statements of Aavid Thermal
Technologies, Inc. in conformity with accounting principles generally accepted
in the United States of America. As such, we are required to make certain
estimates, judgments and assumptions that we believe are reasonable based on the
information available. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented. The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our financial reporting results include the
following:

REVENUE RECOGNITION AND SALES RETURNS AND ALLOWANCES

Thermal Products

     Revenue is recognized when products are shipped. We offer certain
distributors limited rights of return and stock rotation rights. Due to these
return rights, we continuously monitor and track product returns and we record a
provision for the estimated future amount of such future returns, based on
historical experience and any notification we receive of pending returns. While
such returns have historically been within our expectations and provisions
established, we cannot guarantee that we will continue to experience the same
return rates that we have in the past. Any significant decrease in product
demand experienced by our distributor customers and the resulting credit returns
could have a material adverse impact on our operating results for the period or
periods in which such returns materialize.

Software

The Company recognizes revenue on its software license and maintenance
arrangements in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition", as amended by SOP 98-9, and related pronouncements. The
pronouncements provide specific industry guidance and stipulate that revenue
recognized from software arrangements is to be allocated to each element of the
arrangement based on relative fair values of the elements, such as software
products, upgrades, enhancements, post-contract customer support ("PCS"),
installation and training.

The Company licenses its software products under both perpetual and annual
license arrangements.

For perpetual license arrangements, software license revenue is recognized upon
the execution of the license arrangement 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 PCS
arrangement.

For annual license arrangements, with unbundled PCS, since vendor specific
objective evidence ("VSOE") of value for the PCS does not exist, the Company
recognizes revenue for both the software license and the PCS ratably over the
12-month term of the license.

Training and consulting revenues are recognized upon completion of services or,
in certain instances, on the proportional performance method. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.

ACCOUNTS RECEIVABLE

We perform ongoing credit evaluations of our customers and adjust credit limits
based on payment history and the customer's current credit worthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit


                                       32
<PAGE>
losses based on our historical experience and any specific customer collection
issues we have identified. While such credit losses have historically been
within our expectations and the provisions established, we cannot guarantee that
we will continue to experience the same credit loss rates we have in the past.
In the event that economic or other conditions cause a change in liquidity or
financial condition in multiple customers, there could be a material adverse
effect on our collection of receivables and future results of operations.

INVENTORIES

     We value our inventory, which consists of materials, labor and overhead, at
the lower of the actual cost to purchase and/or manufacture the inventory or the
current estimated market value of the inventory. We regularly review inventory
quantities on hand and record a provision for excess and obsolete inventory
based primarily on our estimated forecast of product demand and production
demand for the next twelve months. As experienced in prior years, demand for our
products can fluctuate significantly. A significant increase in demand for our
products could result in a short-term increase in the cost of inventory
purchases and production costs while a significant decrease in demand could
result in an increase in the amount of excess inventory quantities on hand. In
addition, our industry is characterized by rapid technological change, frequent
new product development and rapid product obsolescence that could result in an
increase in the amount of obsolete inventory quantities on hand. Additionally,
our estimates of future product demand may prove to be inaccurate, in which case
we may have understated or overstated the provision required for excess or
obsolete inventory. In the future, if our inventory is determined to be
overvalued, we would be required to recognize such costs in our cost of goods
sold at the time of determination. Likewise, if our inventory is determined to
be undervalued, we may have over-reported our cost of sales in previous periods
and would be required to recognize such additional operating income at the time
of sale. Therefore, although we make every effort to ensure the accuracy of our
forecasts of future product demand, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
value of our inventory and reported operating results.

VALUATION OF GOODWILL AND OTHER INTANGIBLE ASSETS

     We review goodwill and other intangible assets for impairment annually and
whenever events or changes in circumstances indicate the carrying value of an
asset may not be recoverable in accordance with the Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
The provisions of SFAS No. 142 require that a two-step impairment test be
performed on goodwill. In the first step, we compare the fair value of each
reporting unit to its carrying value. Our reporting units are consistent with
the reportable segments identified in Note M of the Consolidated Financial
Statements. We determine the fair value of our reporting units using a
combination of the income approach and the market approach. Under the income
approach, we calculate the fair value of a reporting unit based on the present
value of estimated future cash flows. Under the market approach, we estimate the
fair value based on market multiples of revenues or earnings for comparable
companies. If the fair value of the reporting unit exceeds the carrying value of
the net assets assigned to that unit, goodwill is not impaired and we are not
required to perform further testing. If the carrying value of the net assets
assigned to the reporting unit exceeds the fair value of the reporting unit,
then we must perform the second step in order to determine the implied fair
value of the reporting unit's goodwill and compare it to the carrying value of
the reporting unit's goodwill. If the carrying value of a reporting unit's
goodwill exceeds its implied fair value, then we must record an impairment loss
equal to the difference. SFAS No. 142 also requires that the fair value of the
purchased intangible assets with indefinite lives be estimated and compared to
the carrying value. We estimate the fair value of these intangible assets using
the income approach. We recognize an impairment loss when the estimated fair
value of the intangible asset is less than the carrying value.

     The income approach, which we use to estimate the fair value of our
reporting units and purchased intangible assets, is dependent on a number of
factors including estimates of future market growth and trends, forecasted
revenue and costs, expected periods the assets will be utilized, appropriate
discount rates and other variables. We base our fair value estimates on
assumptions we believe to be reasonable, but which are unpredictable and
inherently uncertain. Actual future results may differ from those estimates. In
addition, we make certain judgments about the selection of comparable companies
used in the market approach in valuing our reporting units, as well as certain
assumptions to allocate shared assets and liabilities to calculate the carrying
values for each of our reporting units.


                                       33
<PAGE>
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
significant cash requirements for debt service relating to the notes and our
senior credit facility. We intend to use amounts available under our senior
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,
2004 was $24.9 million compared to $11.0 million provided by operating
activities for the year ended December 31, 2003. We had $12.8 million in
negative working capital as of December 31, 2004 compared with $18.3 million in
negative working capital at December 31, 2003. Deferred revenue recorded as a
currently liability on the balance sheet was $43.1 million at December 31, 2004,
compared to $37.7 million at December 31, 2003. At December 31, 2004, accounts
receivable days sales outstanding ("DSO") were 68.7 days, compared with 64.4
days at December 31, 2003. During the fourth quarter of 2004, inventory turns
were 8.1, compared to 9.7 during the fourth quarter of 2003.

     During the year ended December 31, 2004, we made capital expenditures of
$5.4 million compared with $4.0 million in 2003. In addition, $1.7 million and
$0.6 million of assets were acquired under capital leases in 2004 and 2003,
respectively.

     On January 29, 2002, the Company's owners contributed $12.0 million of
additional equity as part of a forbearance agreement entered into with its
lenders at the time. The forbearance agreement allowed the Company to pay its
semi-annual interest payment that was due February 1, 2002 on its 12 3/4% Senior
Subordinated Notes. The forbearance agreement also required the Company to
accelerate a principal payment of $1.985 million on the term loan that was
originally due on March 31, 2002. This payment of $1.985 million was made at the
time of the signing of the forbearance agreement.

     On August 1, 2002, the Company refinanced its Amended and Restated Credit
Facility with two of the four banks that were party to the Amended and Restated
Credit Facility. The new credit facility (the "Loan and Security Agreement") is
a $27.5 million asset based facility. The facility consists of a term loan
component secured by certain United States real estate and machinery and
equipment, and requires quarterly principal payments of $0.4 million commencing
November 1, 2002. The Loan and Security Agreement also consists of a revolving
line of credit component secured by inventory in the United States and accounts
receivable in the United States and the United Kingdom. Availability under the
line of credit component is determined by a borrowing base of 85% of eligible
accounts receivable and 50% of eligible inventory, as defined in the Loan and
Security Agreement. Debt outstanding under the Loan and Security Agreement bears
interest at a rate equal to, at the Company's option, either (1) in the case of
LIBOR rate loans, the sum of the offered rate for deposits in United States
dollars for a period equal to such interest period as it appears on Telerate
page 3750 as of 11:00am London time and a margin of between 2.5% and 2.85%, or
(2) the sum of LaSalle Business Credit's prime rate plus a margin of between
..25% and .50%. At December 31, 2004, the interest rates on the Loan and Security
Agreement ranged from 4.92% to 5.75%. Total availability under the line of
credit at December 31, 2004 was $19.6 million, of which $6.5 million was
outstanding.

     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 "Senior
Subordinated 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 Senior Subordinated
Notes are fully and unconditionally guaranteed on a joint and several basis by
each of our domestic subsidiaries. The senior subordinated 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 Senior
Subordinated Notes, net of original issue discount of approximately $1.7
million. In May, 2001 certain of the Company's stockholders purchased $26.2
million principal amount of Senior Subordinated Notes and contributed them to
the Company for cancellation in


                                       34
<PAGE>
satisfaction of their obligations resulting from the Company's failure to
achieve their required leverage ratio as of December 31, 2000.

     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 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 our senior credit
facility and certain other permitted indebtedness.

     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 the Company has agreed to purchase certain minimum quantities
which approximates $0.1 million at December 31, 2004; however, there are no
required dates within which these quantities may be purchased, as such, this
purchase commitment is not included in the table below. Additionally, the
Company has entered into various long-term debt, capital lease and operating
lease arrangements. The future payments required by these arrangements are as
follows:

<TABLE>
<CAPTION>
                                              PAYMENTS DUE BY PERIOD ($ IN THOUSANDS)
                                        --------------------------------------------------
                                                   LESS THAN
CONTRACTUAL OBLIGATIONS                   TOTAL      1 YEAR     1-3 YRS   4-5 YRS   5+ YRS
-----------------------                 --------   ---------   --------   -------   ------
<S>                                     <C>        <C>         <C>        <C>       <C>
Long-term debt and capital leases ...   $138,467    $ 8,948    $129,366    $   52   $  101
Operating leases ....................     18,774      4,590       6,732     4,128    3,324
                                        --------    -------    --------    ------   ------
   Total contractual obligations ....   $157,241    $13,538    $136,098    $4,180   $3,425
                                        ========    =======    ========    ======   ======
</TABLE>

     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. There can be no assurance that such funds would be
available to the Company at favorable terms or at all.

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
our future earnings; however, a ten percent change in 2004 effective interest
rates would have an approximate $0.1 million impact on our earnings for 2005,
based on debt composition and rates in effect at December 31, 2004.

     The Company is exposed to certain foreign currency risks in connection with
its foreign operations. The Company does not currently engage in foreign
currency hedging activities.


                                       35
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Financial Statements and supplementary data required pursuant to this Item
begin on page 47 of this Report.

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

     Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

     (1)  Evaluation of disclosure controls and procedures. Based on their
          evaluation of our disclosure controls and procedures (as defined in
          Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
          1934) as of December 31, 2004, our chief executive officer and chief
          financial officer have concluded that our disclosure controls and
          procedures were effective in ensuring that information required to be
          disclosed by us in this report is made known to the chief executive
          officer and chief financial officer by others within Aavid during the
          period in which the report was being prepared.

     (2)  Changes in internal controls. There were no significant changes in our
          internal controls or in other factors that could significantly affect
          these controls subsequent to the date of their most recent evaluation.

ITEM 9B. OTHER INFORMATION

     None.

                                    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 15, 2005, 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>
Bharatan R. Patel       56     1996     Mr. Patel has been the Chief Executive
                                        Officer of the Company since January 1,
                                        2000. He served as President and Chief
                                        Operating Officer of the Company from
                                        October 1997 to December 1999 and the
                                        President until 1998 and Chief Executive
                                        Officer of Fluent, Inc., a subsidiary of
                                        the Company ("Fluent"), since 1988, when
                                        Fluent was formed as a subsidiary of
                                        Creare Inc. ("Creare"), an engineering
                                        consulting firm; various capacities at
                                        Creare since 1976, including principal
                                        engineer and vice president, and
                                        established the Fluent division upon its
                                        formation in 1983; senior engineer from
                                        1971 to 1976 in the Power Systems Group
                                        of Westinghouse Electric Corporation.

Daniel H. Blumenthal    41     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, a private
                                        equity investment firm, from 1993 to
                                        1994. From 1988 to 1993
</TABLE>


                                       36
<PAGE>
<TABLE>
<CAPTION>
                               YEAR
                              FIRST
                              BECAME              PRINCIPAL OCCUPATION
       NAME            AGE   DIRECTOR          DURING THE PAST FIVE YEARS
       ----            ---   --------          --------------------------
<S>                    <C>   <C>        <C>
                                        he was a corporate tax attorney with
                                        Latham & Watkins, a national law firm.
                                        Mr. Blumenthal currently serves as a
                                        director of several companies, including
                                        Ziff Davis Holdings, Inc. and other
                                        Willis Stein portfolio companies.

John  R. Willis         55     2001     Mr. Willis became a director in October,
                                        2001. Mr. Willis has been a managing
                                        director of Willis Stein & Partners
                                        since its inception in 1994. Prior to
                                        that time, he served as the president
                                        and a director of CIVC, a private equity
                                        investment firm from 1989 to 1994. In
                                        1988, he founded Continental Mezzanine
                                        Investment Group, and was its Manager
                                        through 1990. From 1974 until 1988, Mr.
                                        Willis held various management positions
                                        at Continental Bank. He currently serves
                                        as a director of several companies,
                                        including Roundy's Inc., Ziff Davis
                                        Holdings, Inc. and other Willis Stein
                                        portfolio companies.

Christopher G. Boehm    32     2003     Mr. Boehm became a director in October,
                                        2003. Prior to joining Willis Stein &
                                        Partners in 1996, Mr. Boehm was in the
                                        investment banking division at Salomon
                                        Brothers Inc, where he was involved with
                                        a variety of mergers and acquisitions
                                        and corporate finance transactions. Mr.
                                        Boehm received an M.B.A. from Harvard
                                        University's Graduate School of Business
                                        Administration in June 2000 and holds a
                                        B.S. in Finance and Accountancy from
                                        Miami University.

Charles A. Dickinson    81     1997     Mr. Dickinson has twice served as
                                        chairman of the board of Solectron
                                        Corporation, from 1986 to 1990 and from
                                        1993 to 1996, where he has been a
                                        director since 1984; from 1991 until
                                        February 1996, he was responsible for
                                        establishing Solectron Europe. Mr.
                                        Dickinson has held various management
                                        positions in manufacturing and
                                        technology companies. From 1986 until
                                        1990 he served as chief executive
                                        officer and chairman of Vermont
                                        Microsystems; prior thereto he was chief
                                        executive officer and president of
                                        Dataproducts Corporation, having been
                                        promoted from vice president of
                                        operations, a position he had held since
                                        1978.

David R. A. Steadman    66     1994     Mr. Steadman served as Chairman of the
                                        Board from February 1995 until October
                                        1996; Director of Tech/Ops Sevcon, Inc.,
                                        a manufacturing company; Chairman of
                                        Visibility, Inc., a software company,
                                        from November 1996 until July, 2000;
                                        Chairman of Brookwood Companies
                                        Incorporated, a textile converter, dyer
                                        and finisher, since March 1989; chairman
                                        of Technology Service Group, Inc., a
                                        manufacturer of coin-operated
                                        telephones, from November 1994 to
                                        December 1997; president of Atlantic
                                        Management Associates, Inc., a
                                        management services and investment
                                        group, since November 1988; chairman and
                                        chief executive officer of Integra-A
                                        Hotel and Restaurant Company from July
                                        1990 to March 1994; chairman and chief
                                        executive officer of GCA Corporation
                                        from 1987 to July 1990; various
                                        positions within the Raytheon Company
                                        from 1975 to 1978 and 1980 to 1987; and
                                        Mr. Steadman served as chairman of a
                                        group of subsidiaries of EMI Ltd. in the
                                        United Kingdom, Australia and the United
                                        States from 1978 to 1980.
</TABLE>


                                       37
<PAGE>
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 Chief Executive Officer and others regarding matters of
interest and concern to Aavid.

     During the fiscal year ended December 31, 2004, our Board of Directors held
5 formal meetings. Each director attended at least 75% of the meetings of the
Board of Directors held during 2004.

BOARD COMMITTEES

     Our Board of Directors formed an audit committee in 2002 comprised of
Daniel Blumenthal and David Steadman. No member of the Company's audit committee
is a financial expert as such term is defined by the Securities and Exchange
Commission. We have not designated a member of the Company's audit committee as
a financial expert as such term is defined by the Securities and Exchange
Commission. The Company does not consider it necessary to designate a financial
expert at this time because a sufficient number of the members of its Board have
backgrounds and experience in sophisticated financial and accounting matters.

EXECUTIVE OFFICERS

     Our executive officers are as follows:

<TABLE>
<CAPTION>
      NAME             AGE                          POSITION
      ----             ---                          --------
<S>                    <C>   <C>
Bharatan R. Patel...    56   Chairman of the Board, President and Chief Executive
                             Officer, Aavid Thermal Technologies, Inc. and Aavid
                             Thermalloy; Chief Executive Officer, Fluent; Director
Bryan A. Byrne......    57   Vice President and Chief Financial Officer
John W. Mitchell....    56   Vice President and General Counsel, Aavid
H. Ferit Boysan.....    57   President and Chief Operating Officer, Fluent
Peter L. Christie...    59   Vice President and Chief Financial Officer of Fluent
</TABLE>

     BHARATAN R. PATEL, PH.D. became our and Aavid Thermalloy's Chief Executive
Officer on January 1, 2000. He served as one of our directors since April 1996,
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 A. BYRNE joined Aavid Thermal Technologies, Inc. in April, 2000 as
its Chief Financial Officer. Mr. Byrne 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 Business Development for Altron Incorporated's
(subsequently Sanmina Corporation) 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 our principal outside legal counsel since May 1985.


                                       38
<PAGE>
     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.

     PETER L. 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.

CODE OF ETHICS

     The Company adopted a Code of Ethics for CEO and Senior Financial Officers
and a Code of Ethics that applies to all of its directors, officers and
employees in February 2005. The Company has made the Codes available on its
website at http://www.aatt.com.

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>
                                                                COMPENSATION
                                                     ---------------------------------
                                                                    ANNUAL
            NAME AND PRINCIPAL POSITION              FISCAL YEAR    SALARY      BONUS
            ---------------------------              -----------   --------   --------
<S>                                                  <C>           <C>        <C>
Bharatan R. Patel.................................       2004      $438,584   $312,092
Chief Executive Officer                                  2003      $425,000   $239,700
                                                         2002      $391,827   $256,781

Brian A. Byrne....................................       2004      $256,747   $110,315
Vice President and Chief Financial Officer               2003      $250,000   $ 84,000
                                                         2002      $232,308   $112,725

H. Ferit Boysan...................................       2004      $217,134   $170,125
President and Chief Operating Officer of Fluent          2003      $216,428   $158,309
                                                         2002      $201,280   $171,085

John W. Mitchell..................................       2004      $259,900   $122,266
Vice President, General Counsel and Secretary            2003      $250,000   $ 93,060
                                                         2002      $232,308   $116,833

Peter L. Christie.................................       2004      $159,024   $126,921
Chief Financial Officer of Fluent                        2003      $153,434   $117,781
                                                         2002      $146,546   $127,780
</TABLE>


                                       39
<PAGE>
EMPLOYMENT AGREEMENTS

     Aavid has entered into an employment agreements with Messrs. Patel, Byrne
and Mitchell, which currently expire on July 1, 2007 and Fluent has entered into
employment agreements with Mr. Boysan and Mr. Christie, which currently expire
on July 1, 2007.

     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,
Christie, Mitchell and Byrne, subject to increase at the discretion of the board
of directors of their respective employers. The board of directors did increase
base compensation of Messrs. Patel, Mitchell and Byrne as set forth in the
Summary Compensation Table above. Each employment agreement provides that the
employee will continue to receive his base salary, 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. Byrne, Mitchell, and Patel is entitled to an annual bonus
of 30%, 33.33% and 50% of base salary, respectively, based on Aavid's
performance. 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.

COMPENSATION OF DIRECTORS

     Each of Messrs. Steadman and Dickinson receives an annual fee of $15,000
and an additional $1,000 for each Board of Directors meeting attended. In
addition, each of Mr. Steadman and Mr. Dickinson purchased 0.05% of the
non-voting common equity of Aavid Thermalloy LLC.

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 common
and preferred stock of Aavid. Aavid also has issued detachable warrants, sold to
noteholders in connection with the sale of the senior subordinated notes, to
acquire, in the aggregate, 60 shares of Aavid's Class A common stock,
representing 3% of the common stock of Aavid (on a fully diluted basis) and 60
shares of Aavid's Class H common stock (representing rights to less than 1% of
the equity securities of Aavid Thermalloy, LLC). Holdings currently owns a
portion of such warrants.


                                       40
<PAGE>
     The following table sets forth certain information regarding the beneficial
ownership of the issued and outstanding stock of Holdings as of March 1, 2005.

                             BENEFICIAL OWNERSHIP(1)

<TABLE>
<CAPTION>
                                                                                    SERIES A
                                                            CLASS A                 PREFERRED
                                                          COMMON AND                   AND
                                                            CLASS B                 SERIES B
                NAME OF SECURITY HOLDER                  COMMON STOCK   PERCENT     PREFERRED    PERCENT
                -----------------------                  ------------   -------   ------------   -------
<S>                                                      <C>            <C>       <C>            <C>
Willis Stein & Partners Management II, L.L.C.(3) .....   4,358,846.57    66.73%           0.00     0.00%
Willis Stein & Partners Management III, L.L.C. (4) ...           0.00     0.00%   1,039,748.31    73.01%
The Chase Manhattan Bank, as
   Trustee For First Plaza Group Trust (5) ...........   1,068,344.75    16.35%     232,909.15    16.35%
Abbott Capital (6) ...................................     427,337.90     6.54%      93,163.66     6.54%
Nassau Capital (7) ...................................     427,337.90     6.54%      50,266.51     3.53%
BancBoston Investments, Inc. (8) .....................     213,668.95     3.27%           0.00     0.00%
Bharatan R. Patel ....................................      21,366.89     0.33%       4,658.18     0.33%
H. Ferit Boysan ......................................       6,410.07     0.10%       1,397.45     0.10%
John W. Mitchell .....................................       6,410.07     0.10%       1,397.45     0.10%
Michael Engelman .....................................       1,282.01     0.02%         279.49     0.02%
Peter L. Christie ....................................       1,068.34     0.02%         232.91     0.02%
Swaminathan Subbiah ..................................         427.34     0.01%          93.16     0.01%
                                                         ------------   ------    ------------   ------
Total ................................................   6,532,500.79   100.00%   1,424,146.27   100.00%
                                                         ============   ======    ============   ======
</TABLE>

<TABLE>
<CAPTION>
                                                          SERIES C                  FULLY
                                                          PREFERRED              DILUTED, AS
                                                             AND                  CONVERTED
                                                          SERIES D              (EACH COMMON
                NAME OF SECURITY HOLDER                   PREFERRED   PERCENT     CLASS)(2)    PERCENT
                -----------------------                  ----------   -------   ------------   -------
<S>                                                      <C>          <C>       <C>            <C>
Willis Stein & Partners Management II, L.L.C.(3) .....         0.00     0.00%   4,358,846.57    46.83%
Willis Stein & Partners Management III, L.L.C. (4) ...   476,357.44    92.89%   2,313,579.30    24.86%
The Chase Manhattan Bank, as
   Trustee For First Plaza Group Trust (5) ...........         0.00     0.00%   1,286,016.85    13.82%
Abbott Capital (6) ...................................    33,546.29     6.54%     608,903.35     6.54%
Nassau Capital (7) ...................................         0.00     0.00%     474,315.95     5.10%
BancBoston Investments, Inc. (8) .....................         0.00     0.00%     213,668.95     2.30%
Bharatan R. Patel ....................................     1,677.31     0.33%      30,445.17     0.33%
H. Ferit Boysan ......................................       503.19     0.10%       9,133.55     0.10%
John W. Mitchell .....................................       503.19     0.10%       9,133.55     0.10%
Michael Engelman .....................................       100.64     0.02%       1,826.71     0.02%
Peter L. Christie ....................................        83.87     0.02%       1,522.26     0.02%
Swaminathan Subbiah ..................................        33.55     0.01%         608.90     0.01%
                                                         ----------   ------    ------------   ------
Total ................................................   512,805.48   100.00%   9,308,001.11   100.00%
                                                         ==========   ======    ============   ======
</TABLE>

(1)  "Beneficial ownership" 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)  Each share of Series A preferred stock is convertible into approximately
     .9346 shares of Class A common stock and each share of Series B preferred
     stock is convertible into approximately .9346 shares of Class B common
     stock. Each share of Series C preferred stock is convertible into
     approximately 2.817 shares of Class A common stock, and each share of
     Series D preferred stock is convertible into approximately 2.817 shares of
     Class B common stock.


                                       41
<PAGE>
(3)  Consists of 4,096,770.66 shares of each of Class A common stock and Class B
     common stock directly beneficially held by Willis Stein & Partners II, L.P.
     and 262,075.91 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 the
     general partner of both partnerships and may be deemed to beneficially own
     such shares. John R. Willis and Daniel H. Blumenthal are managing directors
     and Christopher G. Boehm is a principal of Willis Stein & Partners
     Management II, L.L.C. As a result of such relationships, Messrs. Willis,
     Blumenthal and Boehm may be deemed to beneficially own the shares of stock
     beneficially owned by the partnerships and their general partners, but each
     of Messrs. Willis, Blumenthal and Boehm disclaim beneficial ownership of
     any of such shares. The address of Willis Stein & Partners Management II,
     L.L.C. and each partnership is One North Wacker Drive, Suite 4800, Chicago,
     IL 60606.

(4)  Consists of (a) 972,735.80 shares of each of Series A preferred stock and
     Series B preferred stock and 445,655.86 shares of each of Series C
     preferred stock and Series D preferred stock directly beneficially held by
     Willis Stein & Partners III, L.P., (b) 29,288.68 shares of each of Series A
     preferred stock and Series B preferred stock and 13,418.52 shares of each
     of Series C preferred stock and Series D preferred stock directly
     beneficially held by Willis Stein & Partners Dutch III-A, L.P., (c)
     29,288.68 shares of each of Series A preferred stock and Series B preferred
     stock and 13,418.52 shares of each of Series C preferred stock and Series D
     preferred stock directly beneficially held by Willis Stein & Partners Dutch
     III-B, L.P. and (d) 8,435.15 shares of each of Series A preferred stock and
     Series B preferred stock and 3,864.54 shares of each of Series C preferred
     stock and Series D preferred stock directly beneficially held by Willis
     Stein & Partners III-C, L.P. Willis Stein & Partners Management III, L.L.C.
     is the general partner of the general partner of each partnership and may
     be deemed to beneficially own such shares. John R. Willis and Daniel H.
     Blumenthal are managing directors and Christopher G. Boehm is a principal
     of Willis Stein & Partners Management III, L.L.C. As a result of such
     relationships, Messrs. Willis, Blumenthal and Boehm may be deemed to
     beneficially own the shares of stock beneficially owned by the partnerships
     and their general partners, but each of Messrs. Willis, Blumenthal and
     Boehm disclaim beneficial ownership of any of such shares. The address of
     Willis Stein & Partners Management III, L.L.C. and each partnership is One
     North Wacker Drive, Suite 4800, Chicago, IL 60606.

(5)  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 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.

(6)  Consists of (a) 333,857.73 shares of each of Class A common stock and Class
     B common stock directly beneficially held by Abbott Capital 1330 Investors
     II, L.P., (b) 66,771.55 shares of each of Class A common stock and Class B
     common stock, 93,163.66 shares of each of Series A preferred stock and
     Series B preferred stock, and 31,804.53 shares of each of Series C
     preferred stock and Series D preferred stock directly beneficially held by
     Abbott Capital Private Equity Fund III, L.P. and (c) 26,708.62 shares of
     each of Class A common stock and Class B common stock and 1,741.76 shares
     of each of Series C preferred stock and Series D preferred stock directly
     beneficially held by BNY Partners Fund, L.L.C. The address of such funds is
     c/o Abbott Capital Management, LLC, 1211 Avenue of the Americas, Suite
     4300, New York, New York 10036.


                                       42
<PAGE>
(7)  Consists of (a) 424,061.76 shares of each of Class A common stock and Class
     B common stock, and 49,881.15 shares of each of Series A preferred stock
     and Series B preferred stock directly beneficially held by Nassau Capital
     Partners III, L.P., and (b) 3,276.14 shares of each of Class A common stock
     and Class B common stock and 385.36 shares of each of Series A preferred
     stock and Series B preferred stock directly beneficially held by NAS
     Partners I L.L.C. Such funds' address is 22 Chambers Street, Princeton, New
     Jersey 08542.

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

     Each of the stockholders listed in the table above currently holds Class A
and Class B common stock and Series A, Series B, Series C and Series D preferred
stock of Heat Holdings II Corp. in a percentage equal to such stockholder's
ownership of the corresponding class and series of Holdings shares. Heat
Holdings II Corp. holds or has the rights to acquire approximately 98% of the
outstanding common and convertible preferred membership interests in Aavid
Thermalloy, LLC.

     Our executive officers and certain of our employees currently own
approximately 1.5% of the non-voting common equity of Aavid Thermalloy, LLC and
approximately 9.5% of the non-voting common equity of Fluent Holdings, Inc.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

NONE

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

INDEPENDENT AUDITOR FEE INFORMATION

     Fees for professional services provided by our independent auditors in each
of the last two fiscal years, in each of the following categories (in millions)
are:

<TABLE>
<CAPTION>
                 2003   2004
                 ----   ----
<S>              <C>    <C>
Audit fees ...   $0.5   $0.7
Tax fees .....    0.5    0.3
                 ----   ----
Total fees ...   $1.0   $1.0
                 ====   ====
</TABLE>

     Fees for audit services include fees associated with the annual audit, the
reviews of the Company's quarterly reports on Form 10-Q, and statutory audits
required internationally. Tax fees included tax compliance, tax advice, and tax
planning including expatriate tax services. Our independent auditor did not
perform any audit-related services or other services for us in 2003 or 2004.

     The Company's audit committee charter requires the audit committee to
pre-approve all audit and non-audit services provided by our independent
auditors. Formal approval was given for 2004 audit fees. The audit committee
also approved non-audit and non-tax fees totaling $78 for 2004 and $348 for
2005. None of the fees paid in 2003 to the Company's principal accountants were
pre-approved by the audit committee.


                                       43
<PAGE>
                                     PART IV

ITEM 15. 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 47. 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. Exhibits pertaining to
                   management contracts, compensatory plans or arrangements are
                   as follows: Exhibits 5.15, 5.25, 5.35, 5.45 and 5.55.

<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 and Plan of 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)

5.15   Amendment to Executive Employment Agreement dated as of
       February 6, 2004 among Aavid Thermal Technologies, Inc. and
       Bharatan R. Patel.(6)

5.25   Amendment to Executive Employment Agreement dated as of
       February 6, 2004 among Aavid Thermal Technologies, Inc. and
       John W. Mitchell.(6)

5.35   Amendment to Executive Employment Agreement dated as of
       February 6, 2004 among Aavid Thermal Technologies, Inc. and
       Brian A. Byrne.(6)

5.45   Amendment to Executive Employment Agreement dated as of May 1,
       2004 among Aavid Thermal Technologies, Inc., Fluent, Inc. and
       H.Ferit Boysan.

5.55   Amendment to Executive Employment Agreement dated as of May 1,
       2004 among Fluent, Inc. and Peter L. Christie.
</TABLE>


                                       44
<PAGE>
<TABLE>
<CAPTION>
NO.     DESCRIPTION
---     -----------
<S>     <C>
 10.5   Form of indemnification agreement for the Company's officers
        and directors(4)

10.10   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)

10.27   Loan and Security Agreement dated as of July 31, 2002(5)

 21.0   Subsidiaries of Registrant(2)

 31.1   CEO Certification pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002

 31.2   CFO Certification pursuant to Section 302 of the
        Sarbanes-Oxley Act of 2002

 32.1   CEO Certification pursuant to Section 906 of the
        Sarbanes-Oxley Act of 2002

 32.2   CFO Certification pursuant to Section 906 of the
        Sarbanes-Oxley Act of 2002
</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 29, 2002.

(6)  Incorporated by reference to Exhibits to the Company's Quarterly Report on
     Form 10-Q for the Quarter ended March 31, 2004.


                                       45
<PAGE>
                                   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
                                             October 28, 2005

    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 R. Patel             Director, President and CEO                October 28, 2005
------------------------------    (Principal Executive Officer)
Bharatan R. Patel

/s/ Brian A. Byrne                Chief Financial Officer                    October 28, 2005
------------------------------    (Principal Financial and Accounting
Brian A. Byrne                    Officer)

/s/ John R. Willis                Director                                   October 28, 2005
------------------------------
John R. Willis

/s/ Daniel H. Blumenthal          Director                                   October 28, 2005
------------------------------
Daniel H. Blumenthal

/s/ Christopher G. Boehm          Director                                   October 28, 2005
------------------------------
Christopher G. Boehm
</TABLE>

                                       46
<PAGE>
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AAVID THERMAL TECHNOLOGIES, INC.

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Report of Independent Registered Public Accounting Firm..................    48
Consolidated Balance Sheets as of December 31, 2004 and 2003.............    49
Consolidated Statements of Operations for the years ended December 31,
   2004, 2003 and 2002...................................................    50
Consolidated Statements of Changes in Stockholders' Deficit for the
   years ended December 31, 2004, 2003 and 2002..........................    51
Consolidated Statements of Cash Flows for the years ended December 31,
   2004, 2003 and 2002...................................................    54
Notes to Consolidated Financial Statements...............................    55
Schedule II - Valuation and Qualifying Accounts..........................    78
</TABLE>


                                       47
<PAGE>
             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and Board of Directors
Aavid Thermal Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Aavid Thermal
Technologies, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, changes in stockholders' deficit,
and cash flows for each of the three years in the period ended December 31,
2004. Our audits also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
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 consolidated financial position of Aavid Thermal
Technologies, Inc. and subsidiaries at December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

                                              /s/ Ernst & Young LLP

MANCHESTER, NEW HAMPSHIRE
February 18, 2005

                                       48
<PAGE>
                        AAVID THERMAL TECHNOLOGIES, INC.
                           CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,   DECEMBER 31,
                                                                                          2004           2003
                                                                                      ------------   ------------
<S>                                                                                   <C>            <C>
ASSETS
Cash and cash equivalents .........................................................    $  28,312      $  15,231
Accounts receivable-trade, less allowance for doubtful accounts ...................       48,234         40,008
Inventories .......................................................................       12,745          9,583
Refundable taxes ..................................................................          380            160
Deferred income taxes .............................................................        1,062          1,172
Prepaid and other current assets ..................................................        5,375          6,033
                                                                                       ---------      ---------
   Total current assets ...........................................................       96,108         72,187
Property, plant and equipment, net ................................................       28,296         27,102
Goodwill ..........................................................................       40,026         39,433
Developed technology ..............................................................        2,242          1,518
Deferred financing fees ...........................................................        2,451          3,480
Deferred income taxes .............................................................          434            404
Other assets, net .................................................................        2,133          1,569
                                                                                       ---------      ---------
   Total assets ...................................................................    $ 171,690      $ 145,693
                                                                                       =========      =========
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' DEFICIT
Accounts payable-trade ............................................................    $  19,657      $  12,943
Current portion of long term debt obligations .....................................        8,948          9,043
Income taxes payable ..............................................................        6,411          3,789
Restructuring charges .............................................................          163            215
Deferred revenue ..................................................................       43,136         37,657
Accrued expenses and other current liabilities ....................................       30,544         26,816
                                                                                       ---------      ---------
   Total current liabilities ......................................................      108,859         90,463
Long-term debt obligations, net of current portion ................................      129,519        129,767
Deferred income taxes .............................................................          366            209
                                                                                       ---------      ---------
   Total liabilities ..............................................................      238,744        220,439
Commitments and contingencies (Note K)
Minority interest in consolidated subsidiaries ....................................          585            585
Stockholders' deficit
Series A Preferred Stock, $.0001 par value; authorized 100 shares; 67.71 shares
   issued and outstanding (Liquidation value of $7,140 at December 31, 2004) ......           --             --
Series B Preferred Stock, $.0001 par value; authorized 100 shares; 67.71 shares
   issued and outstanding (Liquidation value of $7,140 at December 31, 2004) ......           --             --
Class A Common Stock, $.0001 par value; authorized 1,400 shares; 1,018.87
   shares issued and outstanding ..................................................           --             --
Class B Common Stock, $.0001 par value; authorized 1,400 shares; 1,078.87
   shares issued and outstanding ..................................................           --             --
Class H Common Stock, $.0001 par value; authorized 200 shares; 40 shares issued
   and outstanding ................................................................           --             --
Warrants to purchase 49.52 shares of Class A common stock and 49.52 shares of
   Class H common stock ...........................................................        3,764          3,764
Additional paid-in capital ........................................................      188,007        188,007
Cumulative translation adjustment .................................................       (1,066)        (1,105)
Accumulated deficit ...............................................................     (258,344)      (265,997)
                                                                                       ---------      ---------
   Total stockholders' deficit ....................................................      (67,639)       (75,331)
                                                                                       ---------      ---------
   Total liabilities, minority interest and stockholders' deficit .................    $ 171,690      $ 145,693
                                                                                       =========      =========
</TABLE>

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


                                       49
<PAGE>

                        AAVID THERMAL TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                         YEAR ENDED          YEAR ENDED          YEAR ENDED
                                                     DECEMBER 31, 2004   DECEMBER 31, 2003   DECEMBER 31, 2002
                                                     -----------------   -----------------   -----------------
<S>                                                  <C>                 <C>                 <C>
Net sales ........................................       $227,131            $188,167            $161,942
Cost of goods sold ...............................        112,232              97,061              88,532
                                                         --------            --------            --------
Gross profit .....................................        114,899              91,106              73,410
Selling, general and administrative expenses .....         68,074              59,096              55,427
Amortization of intangible assets ................            850               3,469               3,408
Research and development .........................         16,658              15,004              12,492
Restructuring charges(credits) ...................             (6)                (90)                858
                                                         --------            --------            --------
Income from continuing operations ................         29,323              13,627               1,225
Interest expense, net ............................        (17,940)            (18,137)            (20,141)
Foreign currency exchange gain, net ..............            902               2,460                 465
Other income (expense), net ......................            175                  23                 (12)
                                                         --------            --------            --------
Income (loss) from continuing operations
   before income taxes ...........................         12,460              (2,027)            (18,463)
Provision for income taxes .......................         (4,807)             (1,627)               (817)
                                                         --------            --------            --------
Income (loss) from continuing operations .........          7,653              (3,654)            (19,280)
Income from discontinued operations (including
   gain on disposal of $7,082 in 2002) ...........             --                  --               6,725
                                                         --------            --------            --------
Net income (loss) ................................       $  7,653            $ (3,654)           $(12,555)
                                                         ========            ========            ========
</TABLE>

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


                                       50
<PAGE>
                        AAVID THERMAL TECHNOLOGIES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                               SERIES A          SERIES B          CLASS A
                                           PREFERRED STOCK   PREFERRED STOCK     COMMON STOCK
                                           ---------------   ---------------   ---------------
                                           SHARES   AMOUNT   SHARES   AMOUNT   SHARES   AMOUNT
                                           ------   ------   ------   ------   ------   ------
<S>                                        <C>      <C>      <C>      <C>      <C>      <C>
Balance, December 31, 2001 .............                                        1,019     $--
                                                                                =====     ===
Capital contribution ...................      68      $--       68      $--        --     $--
Comprehensive loss:
   Net loss ............................      --       --       --       --        --      --
   Cumulative translation adjustment ...      --       --       --       --        --      --
Comprehensive loss .....................      --       --       --       --        --      --
                                             ---      ---      ---      ---     -----     ---
Balance, December 31, 2002 .............      68      $--       68      $--     1,019     $--
                                             ===      ===      ===      ===     =====     ===
Comprehensive loss:
   Net loss ............................      --      $--       --      $--        --     $--
   Cumulative translation adjustment ...      --       --       --       --        --      --
Comprehensive loss .....................      --       --       --       --        --      --
                                             ---      ---      ---      ---     -----     ---
Balance, December 31, 2003 .............      68      $--       68      $--     1,019     $--
                                             ===      ===      ===      ===     =====     ===
Comprehensive income:
   Net income ..........................      --      $--       --      $--        --     $--
   Cumulative translation adjustment ...      --       --       --       --        --      --
Comprehensive income ...................      --       --       --       --        --      --
                                             ---      ---      ---      ---     -----     ---
Balance, December 31, 2004 .............      68      $--       68      $--     1,019     $--
                                             ===      ===      ===      ===     =====     ===
</TABLE>

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


                                       51
<PAGE>
                        AAVID THERMAL TECHNOLOGIES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
                                   (CONTINUED)
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                              CLASS B           CLASS H
                                            COMMON STOCK      COMMON STOCK               ADDITIONAL
                                          ---------------   ---------------                PAID-IN
                                          SHARES   AMOUNT   SHARES   AMOUNT   WARRANTS     CAPITAL
                                          ------   ------   ------   ------   --------   ----------
<S>                                       <C>      <C>      <C>      <C>      <C>        <C>
Balance, December 31, 2001.............    1,079     $--       40      $--     $3,764     $176,007
                                           =====     ===      ===      ===     ======     ========
Capital contribution...................       --     $--       --      $--     $   --     $ 12,000
Comprehensive loss:
   Net loss............................       --      --       --       --         --           --
   Cumulative translation adjustment...       --      --       --       --         --           --
Comprehensive loss.....................       --      --       --       --         --           --
                                           -----     ---      ---      ---     ------     --------
Balance, December 31, 2002.............    1,079     $--       40      $--     $3,764     $188,007
                                           =====     ===      ===      ===     ======     ========
Comprehensive loss:
   Net loss............................       --     $--       --      $--     $   --     $     --
   Cumulative translation adjustment...       --      --       --       --         --           --
Comprehensive loss.....................       --      --       --       --         --           --
                                           -----     ---      ---      ---     ------     --------
Balance, December 31, 2003.............    1,079     $--       40      $--     $3,764     $188,007
                                           =====     ===      ===      ===     ======     ========
Comprehensive income:
   Net income..........................       --     $--       --      $--     $   --     $     --
   Cumulative translation adjustment...       --      --       --       --         --           --
Comprehensive income...................       --      --       --       --         --           --
                                           -----     ---      ---      ---     ------     --------
Balance, December 31, 2004.............    1,079     $--       40      $--     $3,764     $188,007
                                           =====     ===      ===      ===     ======     ========
</TABLE>

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


                                       52
<PAGE>
                        AAVID THERMAL TECHNOLOGIES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
                                   (CONTINUED)
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                            CUMULATIVE
                                           COMPREHENSIVE   TRANSLATION   ACCUMULATED
                                           INCOME (LOSS)    ADJUSTMENT     DEFICIT       TOTAL
                                           -------------   -----------   -----------   --------
<S>                                        <C>             <C>           <C>           <C>
Balance, December 31, 2001 .............                     $  (871)     $(249,788)   $(70,888)
                                                             =======      =========    ========
Capital contribution ...................                     $    --      $      --    $ 12,000
Comprehensive loss:
   Net loss ............................      $(12,555)           --        (12,555)    (12,555)
   Cumulative translation adjustment ...         1,027         1,027             --       1,027
                                              --------
Comprehensive loss .....................      $(11,528)           --             --          --
                                              ========       -------      ---------    --------
Balance, December 31, 2002 .............                     $   156      $(262,343)   $(70,416)
                                                             =======      =========    ========
Comprehensive loss:
   Net loss ............................      $ (3,654)      $    --      $  (3,654)   $ (3,654)
   Cumulative translation adjustment ...        (1,261)       (1,261)            --      (1,261)
                                              --------
Comprehensive loss .....................      $ (4,915)           --             --          --
                                              ========       -------      ---------    --------
Balance, December 31, 2003 .............                     $(1,105)     $(265,997)   $(75,331)
                                                             =======      =========    ========
Comprehensive income:
   Net income ..........................      $  7,653       $    --      $   7,653    $  7,653
   Cumulative translation adjustment ...            39            39             --          39
                                              --------
Comprehensive income ...................      $  7,692            --             --          --
                                              ========       -------      ---------    --------
Balance, December 31, 2004 .............                     $(1,066)     $(258,344)   $(67,639)
                                                             =======      =========    ========
</TABLE>

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


                                       53
<PAGE>
                        AAVID THERMAL TECHNOLOGIES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                            YEAR ENDED      YEAR ENDED     YEAR ENDED
                                                                           DECEMBER 31,    DECEMBER 31,   DECEMBER 31,
                                                                               2004            2003           2002
                                                                           -------------   ------------   ------------
<S>                                                                        <C>             <C>            <C>
Cash flows provided by (used in) operating activities:
   Income (loss) from continuing operations ............................      $ 7,653        $(3,654)       $(19,280)
   Income  from discontinued operations ................................           --             --           6,725
                                                                              -------        -------        --------
      Net income (loss) ................................................        7,653         (3,654)        (12,555)
Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
   Depreciation ........................................................        7,256          7,996           8,513
   Amortization and accretion ..........................................        2,680          5,103           5,809
   Bad debt provision ..................................................        1,008            289            (296)
   Loss on sale of property, plant and equipment .......................            5            225             478
   Deferred income tax provision (benefit) .............................          237           (114)         (1,253)
   Restructuring charges (credits) .....................................           (6)           (90)            858
   Gain on sale of division/subsidiary .................................           --             --          (7,082)
Changes in assets and liabilities:
   Accounts receivable-trade ...........................................       (7,523)        (4,701)           (439)
   Inventories .........................................................       (2,743)        (2,283)          4,026
   Refundable taxes ....................................................         (220)            33             (75)
   Prepaid and other current assets ....................................        1,076           (491)         (1,144)
   Notes receivable ....................................................           --             82             398
   Net assets of discontinued operations ...............................           --             --             592
   Other long-term assets ..............................................         (324)            16          (1,035)
   Accounts payable-trade ..............................................        6,270          1,002          (2,924)
   Income taxes payable ................................................        2,457            (99)            162
   Deferred revenue ....................................................        4,210          5,327           3,937
   Accrued expenses and other current liabilities ......................        2,892          2,406          (1,485)
                                                                              -------        -------        --------
      Total adjustments ................................................       17,275         14,701           9,040
                                                                              -------        -------        --------
      Net cash provided by (used in) operating activities ..............       24,928         11,047          (3,515)
Cash flows (used in) provided by investing activities:
   Proceeds from sale of property, plant and equipment .................           48            188           1,764
   Purchases of property, plant and equipment ..........................       (5,440)        (4,009)         (4,721)
   Payment for acquisition, net of cash acquired .......................       (3,041)            --              --
   Proceeds from sale of division/subsidiary ...........................           --             --          31,524
                                                                              -------        -------        --------
      Net cash (used in) provided by investing activities ..............       (8,433)        (3,821)         28,567
Cash flows (used in) provided by financing activities:
   Issuance of preferred stock and warrant .............................           --             --          12,000
   Repayments of line of credit, net ...................................         (538)          (157)        (10,078)
   Advances under debt obligations .....................................           --            178          11,727
   Principal payments under debt obligations ...........................       (2,396)        (2,141)        (39,191)
                                                                              -------        -------        --------
      Net cash used in financing activities ............................       (2,934)        (2,120)        (25,542)
Foreign exchange effect on cash and cash equivalents ...................         (480)        (2,172)         (1,751)
                                                                              -------        -------        --------
Net increase (decrease) in cash and cash equivalents ...................       13,081          2,934          (2,241)
Cash and cash equivalents, beginning of year ...........................       15,231         12,297          14,538
                                                                              -------        -------        --------
Cash and cash equivalents, end of year .................................      $28,312        $15,231        $ 12,297
                                                                              =======        =======        ========
Supplemental disclosure of cash flow information:
   Interest paid .......................................................      $16,537        $16,656        $ 17,834
                                                                              =======        =======        ========
   Income taxes paid ...................................................      $ 1,517        $ 1,850        $  2,456
                                                                              =======        =======        ========
Supplemental disclosure of non-cash investing activities:
Reconciliation of assets acquired and liabilities assumed in
   acquisition:
   Fair value of assets acquired .......................................      $ 3,130        $    --        $     --
   Cash paid for assets ................................................       (3,088)            --              --
                                                                              -------        -------        --------
      Liabilities assumed ..............................................      $    42        $    --        $     --
                                                                              =======        =======        ========
   Capital lease obligations incurred for purchases of new equipment ...      $ 1,730        $   558        $    376
</TABLE>

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


                                       54
<PAGE>
                        AAVID THERMAL TECHNOLOGIES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

A. BACKGROUND

     Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is a leading
global provider of thermal management solutions for electronic products and the
leading developer and marketer of computational fluid dynamics ("CFD") software.
Each of these businesses has an established reputation for high product quality,
service excellence and engineering innovation in its market. Aavid designs,
manufactures and distributes on a worldwide basis thermal management products
that dissipate unwanted heat, which can degrade system performance and
reliability, from microprocessors and industrial electronics products. Aavid's
products, which include heat sinks, interface materials and attachment
accessories, fans, heat spreaders and liquid cooling and phase change devices
that it configures 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. Aavid's 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 3,000
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.

     The Company has been privately held since February 2, 2000, when it was
acquired by Heat Holdings Corp., a corporation formed by Willis Stein & Partners
II, L.P and other investors. Heat Holdings II Corp., an affiliate of Heat
Holdings, owns 89% of the common equity of Aavid Thermalloy LLC, the thermal
management hardware business. The Company controls Aavid Thermalloy LLC through
a preferred equity interest and holds a 5% common equity interest and, thus,
consolidates Aavid Thermalloy LLC in its results within the accompanying
financial statements. The investment by Heat Holdings II Corp. has been recorded
as minority interest within the accompanying financial statements.

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 inter-company
transactions have been eliminated.

CONCENTRATION OF CREDIT RISK

     Financial instruments that potentially subject the Company to significant
concentration of credit risk consist 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, considering historical losses, existing economic conditions
and individual customers' credit worthiness. The Company's write-offs of
accounts receivable have not been significant during the periods presented. At
December 31, 2004 and 2003, there were no individual customer accounts
receivable balances greater than 10% of total accounts receivable.

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


                                       55
<PAGE>
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 at
date of purchase of three months or less.

     The estimated fair value of the Company's financial instruments, including
accounts receivable, accounts payable and cash equivalents approximates carrying
value. The fair value of the Company's long-term debt instruments under the
Company's senior credit facilities also approximates carrying value due to their
variable interest rates and relatively short maturities. The fair value of the
Company's 12 3/4% senior subordinated notes was $134,952 at December 31, 2004
and $123,809 at December 31, 2003.

INVENTORIES

     Inventories are valued at the lower of the actual cost to purchase and/or
manufacture the inventory or the current estimated market value of the
inventory, using the first-in, first-out (FIFO) method of accounting, and
consists of materials, labor and overhead. The Company regularly reviews its
inventory quantities on hand and records a provision for excess and obsolete
inventory based primarily on the estimated forecast of product demand and
production demand for the next twelve months. As demonstrated in 2004 and 2003,
demand for the Company's products can fluctuate significantly. A significant
increase in demand for the Company's products could result in a short-term
increase in the cost of inventory purchases and production costs while a
significant decrease in demand could result in an increase in the amount of
excess inventory quantities on hand. In addition, the Company's industry is
characterized by rapid technological change, frequent new product development
and rapid product obsolescence that could result in an increase in the amount of
obsolete inventory quantities on hand. Additionally, the Company's estimates of
future product demand may prove to be inaccurate, in which case the Company may
have understated or overstated the provision required for excess or obsolete
inventory. In the future, if the Company's inventory is determined to be
overvalued, the Company would be required to recognize such costs in our cost of
goods sold at the time of determination. Likewise, if the Company's inventory is
determined to be undervalued, the Company may have over-reported our cost of
sales in previous periods and would be required to recognize such additional
operating income at the time of sale. Therefore, although the Company makes
every effort to ensure the accuracy of its forecasts of future product demand,
any significant unanticipated changes in demand or technological developments
could have a significant impact on the value of the Company's inventory and
reported operating results.

SHIPPING AND HANDLING COSTS

     Shipping and handling costs are included in cost of goods sold in the
accompanying consolidated statements of operations.


                                       56
<PAGE>
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; computer
equipment - 3 to 5 years; furniture and fixtures - 5 years; and vehicles - 4 to
5 years) using both the straight-line and accelerated methods of depreciation.
Leasehold improvements are amortized using the straight-line method over the
lesser of the original term of the respective lease or the estimated useful life
of the asset.

     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 recognized.

INTANGIBLE ASSETS

     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 intangible assets consist principally of
goodwill and developed technology.

     The Company accounts for goodwill in accordance with the provision of SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives.
SFAS No. 142 also requires the identification of reporting units, which the
Company deemed to be the operating segments described in Note M. Goodwill is
allocated to the reporting units for the purposes of goodwill impairment
testing, which is performed at least annually. The impairment test is also
performed if an event occurs or when circumstances change between annual tests
that would more likely than not reduce the fair value of a reporting unit below
its carrying value. Intangible assets with finite lives will continue to be
amortized over their estimated useful lives as follows:

<TABLE>
<CAPTION>
INTANGIBLE ASSETS          YEARS
-----------------         ------
<S>                       <C>
Developed technology      4 to 7
Deferred financing fees   4 to 7
Non-compete agreements         2
</TABLE>

Information regarding intangible assets at December 31 follows:

<TABLE>
<CAPTION>
                                                  2004                      2003
                                        -----------------------   -----------------------
                                          GROSS                     GROSS
                                        CARRYING    ACCUMULATED   CARRYING    ACCUMULATED
                                         AMOUNT    AMORTIZATION    AMOUNT    AMORTIZATION
                                        --------   ------------   --------   ------------
<S>                                     <C>        <C>            <C>        <C>
Amortized intangible assets:
   Developed technology .............    $ 9,556     $ (7,314)    $  8,056     $ (6,538)
   Deferred financing fees ..........      7,463       (5,012)       7,463       (3,983)
   Non-compete agreements ...........        252          (53)          --           --
                                         -------     --------     --------     --------
Total amortized intangible assets ...    $17,271     $(12,379)    $ 15,519     $(10,521)
                                         =======     ========     ========     ========
Unamortized intangible assets:
   Goodwill .........................    $40,026                  $ 39,433
                                         =======                  ========
</TABLE>

     Aggregate amortization expense for the year ended December 31, 2004, 2003
and 2002, was $1,880, $4,399 and $5,189, respectively. Amortization expense for
each of the next five years is estimated as follows.

<TABLE>
<S>       <C>
2005...   $1,985
2006...    2,007
2007...      425
2008...      300
2009...      175
</TABLE>


                                       57
<PAGE>
     The Company assessed the impairment of identifiable intangibles in
accordance with the requirements of SFAS No. 142, and determined that no
impairment had occurred for the years ended December 31, 2004, 2003 or 2002.

LONG-LIVED ASSETS

     The Company periodically considers whether there has been a permanent
impairment in the value of its long-lived assets, primarily property, plant and
equipment, in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The Company evaluates various factors, including
current and projected future operating results and the undiscounted cash flows
for the under-performing long-lived assets. The Company then compares the
carrying amount of the asset to the estimated future undiscounted cash flows
expected to result from the use of the asset. To the extent that the estimated
future undiscounted cash flows are less than the carrying amount of the asset,
the asset is written down to its estimated fair market value and an impairment
loss is recognized. The value of the impaired long-lived assets is adjusted
periodically based on changes in these factors. At December 31, 2004, the
Company determined, based on its evaluation, that the carrying value of its
long-lived assets was appropriate.

REVENUE RECOGNITION

THERMAL PRODUCTS

     Revenue is recognized when products are shipped. The Company offers certain
distributors limited rights of return and stock rotation rights. Due to these
return rights, the Company continuously monitors and tracks product returns and
records a provision for the estimated future amount of such future returns,
based on historical experience and any notification received of pending returns.
While such returns have historically been within the Company's expectations and
provisions established, there can be no guarantee that the Company will continue
to experience the same return rates that it has in the past. Any significant
decrease in product demand experienced by distributor customers and the
resulting credit returns could have a material adverse impact on the Company's
operating results for the period or periods in which such returns materialize.

SOFTWARE

The Company recognizes revenue on its software license and maintenance
arrangements in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition", as amended by SOP 98-9, and related pronouncements. The
pronouncements provide specific industry guidance and stipulate that revenue
recognized from software arrangements is to be allocated to each element of the
arrangement based on relative fair values of the elements, such as software
products, upgrades, enhancements, post-contract customer support ("PCS"), and
training. In accordance with SOP 97-2, the Company recognizes revenue from
software licenses and related ancillary products when:

     -    Persuasive evidence of an arrangement exists, which is typically when
          a non-cancelable sales and software license agreement has been signed;

     -    Delivery, which is typically FOB shipping point, is complete for the
          software (either physically or electronically) and related ancillary
          products;

     -    The customer's fee is deemed to be fixed or determinable and free of
          contingencies or significant uncertainties;

     -    Collectibility is probable, and;

     -    Vendor-specific objective evidence ("VSOE") of fair value exists for
          all undelivered elements, typically PCS and professional services.

The Company licenses its software products under both perpetual and annual
license arrangements.


                                       58
<PAGE>
For perpetual license arrangements, the Company uses the residual method to
recognize revenue. Under the residual method, the fair value (VSOE) of the
undelivered elements (typically PCS) is deferred and the remaining portion of
the arrangement fee is allocated to the delivered elements (software) and is
recognized as revenue, assuming all other conditions for revenue recognition
have been satisfied. The Company recognizes revenue from the undelivered PCS
element ratably over the period of the PCS arrangement.

For annual license arrangements, with unbundled PCS, since VSOE of value for the
PCS does not exist, the Company recognizes revenue for both the software license
and the PCS ratably over the 12-month term of the license.

Training and consulting revenues are recognized upon completion of services or,
in certain instances, on the proportional performance method. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined.

COMPREHENSIVE INCOME

     SFAS No. 130, "Reporting Comprehensive Income", requires reporting and
display of comprehensive income and its components. SFAS No. 130 requires
companies to report all changes in stockholders' equity during a period, except
those resulting from investment by owners and distribution to owners, in
comprehensive income (loss) in the period in which they are recognized.
Accordingly, the foreign currency translation adjustments are included in other
comprehensive income (loss).

USE OF ACCOUNTING ESTIMATES

     The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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 No. 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 rates during the year. All cumulative translation
gains and losses from the translation into U.S. dollars are included as a
separate component of stockholders' equity in the consolidated balance sheets.
Transaction gains and losses are included in the consolidated statements of
operations. Net foreign currency gains included in the consolidated statement of
operations were $902, $2,460 and $465 for the years ended December 31, 2004,
2003 and 2002, respectively.

NEW ACCOUNTING PRONOUNCEMENTS

     In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46") to clarify the conditions under which
assets, liabilities and activities of another entity should be consolidated into
the financial statements of a company. FIN 46 requires the consolidation of a
variable interest entity by a company that bears the majority of the risk of
loss from the variable interest entity's activities, is entitled to receive a
majority of the variable interest entity's residual returns, or both. The
provisions of FIN 46, required to be adopted in fiscal 2005, are not expected to
have a material impact on the Company's financial position or results of
operations.

     In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151 clarify
that abnormal amounts of idle facility expense,


                                       59
<PAGE>
freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during fiscal years beginning
after November 23, 2004. It is not believed that the adoption of SFAS No. 151
will have a material impact on the consolidated financial position, results of
operations or cash flows of the Company.

C. SALE OF BUSINESSES AND DISCONTINUED OPERATION

     On July 17, 2002, the Company sold all of the outstanding shares of Aavid
Thermalloy Holdings, GmbH, which in turn owned approximately 89.4% of the
outstanding shares of curamik electronics GmbH, pursuant to a Share Sale and
Purchase Agreement between the Company and Electrovac Fabrikation
Electrotechnischer Spezialartikel GesmbH dated July 10, 2002 (the "Sale
Agreement"). Under the Sale Agreement, the Company received consideration of
$31,524, subject to possible adjustment based upon the level of consolidated net
assets of Curamik and certain indemnification obligations of the Company. The
Company recorded a pre-tax gain on the sale of $7,082 in the accompanying
statements of operations for the year ended December 31, 2002. $27,683 of the
sale proceeds was used to pay down senior debt. The sale of curamik and its
related operating results have been excluded from the results from continuing
operations and is classified as a discontinued operation in 2002, in accordance
with the requirements of SFAS No. 144 "Accounting for Impairment or Disposal of
Long-Lived Assets".

     The following is a summary of the results of discontinued operations for
the year ended December 31, 2002:

<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                             DECEMBER 31,
                                                                 2002
                                                             ------------
<S>                                                          <C>
Net sales ................................................      $9,314
                                                                ------
Loss before income taxes and minority interest ...........         (64)
Income tax expense .......................................        (320)
                                                                ------
Loss before minority interest ............................        (384)
Minority interest in loss of consolidated subsidiaries ...          27
                                                                ------
Loss from discontinued operations ........................        (357)
Gain on sale of discontinued operations ..................       7,082
                                                                ------
Income from discontinued operations ......................      $6,725
                                                                ======
</TABLE>

D. ACCOUNTS RECEIVABLE

     The components of accounts receivable at December 31, 2004 and 2003 are as
follows:

<TABLE>
<CAPTION>
                                         DECEMBER 31,
                                      -----------------
                                        2004      2003
                                      -------   -------
<S>                                   <C>       <C>
Accounts receivable ...............   $50,621   $42,209
Allowance for doubtful accounts ...    (2,387)   (2,201)
                                      -------   -------
                                      $48,234   $40,008
                                      =======   =======
</TABLE>

E. INVENTORIES

     The components of inventories at December 31, 2004 and 2003 are as follows:

<TABLE>
<CAPTION>
                                         DECEMBER 31,
                                      -----------------
                                        2004      2003
                                      -------   -------
<S>                                   <C>       <C>
Raw materials .....................   $ 4,233   $2,065
Work-in-process ...................     4,896    4,123
Finished goods ....................     3,616    3,395
                                      -------   ------
                                      $12,745   $9,583
                                      =======   ======
</TABLE>


                                       60
<PAGE>
F. PROPERTY, PLANT, AND EQUIPMENT

     Property, plant, and equipment, recorded at cost, by major classification
at December 31, 2004 and 2003 consist of the following:

<TABLE>
<CAPTION>
                                         DECEMBER 31,
                                      -----------------
                                        2004      2003
                                      -------   -------
<S>                                   <C>       <C>
Land ..............................   $ 1,665   $ 1,547
Building and improvements .........    15,962    14,447
Machinery and equipment ...........    27,932    23,951
Computer equipment ................    19,526    17,035
Furniture and fixtures ............     4,888     3,833
Vehicles ..........................       452       225
Machinery-in-progress .............       228       140
                                      -------   -------
                                       70,653    61,178
Less accumulated depreciation .....    42,357    34,076
                                      -------   -------
                                      $28,296   $27,102
                                      =======   =======
</TABLE>

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

G. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

     Included in accrued expenses and other current liabilities at December 31,
2004 and 2003 are the following:

<TABLE>
<CAPTION>
                                          DECEMBER 31,
                                       -----------------
                                         2004      2003
                                       -------   -------
<S>                                    <C>       <C>
Employee related ...................   $17,298   $13,368
Accrued interest ...................     6,620     6,610
Accrued sales and property taxes ...     1,632       820
Other accrued expenses .............     4,994     6,018
                                       -------   -------
                                       $30,544   $26,816
                                       =======   =======
</TABLE>

H. DEBT OBLIGATIONS

     Debt obligations at December 31, 2004 and 2003 consist of the following:

<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                           -------------------
                                                                                             2004       2003
                                                                                           --------   --------
<S>                                                                                        <C>        <C>
Term Loans under a Loan and Security Agreement payable in 40 consecutive
   quarterly installments ranging from $215 to $359 commencing November 1, 2002. At
   December 31, 2004 the interest rates on the Term Loans ranged from 5.26% to 5.75% ...   $  8,249   $  9,685
Revolving Loans under a Loan and Security Agreement which matures on July 31,
   2006. At December 31, 2004 the interest rate on the Revolving Loans ranged
   from 4.92% to 5.50% .................................................................      6,472      6,976
12 3/4% Senior Subordinated Notes due February 1, 2007 .................................    121,777    120,977
Term loans payable through 2014 with monthly payments of approximately $7
   through 2007 and annual payments of approximately $19 through 2014. At December
   31, 2004 the interest rates on the term loans ranged from 1.01% to 3.33% ............        389        564
Capitalized lease obligations ..........................................................      1,580        608
                                                                                           --------   --------
                                                                                            138,467    138,810
Less current portion ...................................................................      8,948      9,043
                                                                                           --------   --------
Debt Obligations, net of current portion ...............................................   $129,519   $129,767
                                                                                           ========   ========
</TABLE>


                                       61
<PAGE>
     On February 2, 2000, as part of the transactions relating to the
acquisition of the Company by Heat Holdings, 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 $0.0001 per share, and 60 shares of the Company's Class H Common Stock,
par value $0.0001 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") (see note (Q) for selected consolidating financial
statements of parent, guarantors and non-guarantors). The Notes were issued
pursuant to an Indenture (the "Indenture") among the Company, the Subsidiary
Guarantors and Bankers Trust Company, as trustee. $4,560 of the proceeds from
the sale of the Units was allocated to the fair value of the Warrants and
$143,752 was allocated to the Notes, net of original issue discount of $1,688.
The total discount of $6,248 is being accreted over the term of the notes, using
the effective interest rate method. This accretion is recorded as interest
expense within the accompanying statements of operations for the years ended
December 31, 2004, 2003 and 2002. In May 2001, certain of the Company's
stockholders purchased $26,191 principal amount of Senior Subordinated Notes and
contributed them to the Company for cancellation in satisfaction of their
obligations resulting from the Company's failure to achieve their required
leverage ratio at December 31, 2000.

     On August 1, 2002, the Company entered into a new credit facility (the
"Loan and Security Agreement") consisting of a $27,500 asset based facility. The
facility consists of a term loan component which requires quarterly principal
payments of between $215 and $359 which commenced November 1, 2002. The Loan and
Security Agreement also consists of a revolving line of credit component. All
borrowings under the credit facility are secured by substantially all assets of
the Company. Availability under the line of credit component is determined by a
borrowing base of 85% of eligible accounts receivable and 50% of eligible
inventory, as defined in the Loan and Security Agreement. At August 1, 2002, the
available borrowing base was $23,880, of which $22,620 was drawn at closing.
Debt outstanding under the Loan and Security Agreement bears interest at a rate
equal to, at the Company's option, either (1) in the case of LIBOR rate loans,
the sum of the offered rate for deposits in United States dollars for a period
equal to such interest period as it appears on Telerate page 3750 as of 11:00am
London time and a margin of between 2.5% and 2.85%, or (2) the sum of LaSalle
Business Credit's prime rate plus a margin of between .25% and .50%. At December
31, 2004, the interest rates on the Loan and Security Agreement ranged from
4.92% to 5.75%. Availability under the revolving line of credit was $19,650 at
December 31, 2004, of which $6,472 had been drawn.

     The Company incurred costs for underwriting, legal and other professional
fees in connection with the issuance of the Notes and the establishment of other
credit facilities. These costs have been capitalized as deferred financing fees
and are being amortized over the respective terms of the related debt. This
amortization is recorded in interest expense in the accompanying statements of
operations for the years ended December 31, 2004, 2003, and 2002.

     The Company had no letters of credit outstanding at December 31, 2004 or
2003.

     Debt maturities payable for the five years subsequent to December 31, 2004
and thereafter are as follows:

<TABLE>
<S>             <C>
2005.........   $  8,948
2006.........      7,366
2007.........    122,000
2008.........         32
2009.........         20
Thereafter...        101
                --------
Total........   $138,467
                ========
</TABLE>


                                       62
<PAGE>

I. EQUITY

COMMON AND PREFERRED STOCK

     The Company's amended and restated certificate of incorporation authorizes
the Company to issue 1,400 shares of Class A Common Stock, par value $0.0001 per
share; 1,400 shares of Class B Common Stock, par value $0.0001 per share; 200
shares of Class H Common Stock, par value $0.0001 per share; 100 shares of
Series A Preferred Stock, par value $0.0001 per share; and 100 shares of Series
B Preferred Stock, par value $0.0001 per share. As of December 31, 2004, the
Company had issued and outstanding 1,019 shares of Class A Common Stock, 1,079
shares of Class B Common Stock, 40 shares of Class H Common Stock, 68 shares of
Series A Preferred Stock and 68 shares of Series B Preferred Stock.

Common Stock

     In the election of directors, the holders of Class B Common Stock will be
entitled to elect two directors or a greater number established in the Bylaws
(the "Class B Directors") and the Class A Common Stock and the Class H Common
Stock, voting together as a single class, will be entitled to elect the number
of directors established in the Bylaws (the "Class A Directors").

     Except as otherwise provided by law, the vote of any class of Common Stock,
voting as a separate class, will be necessary to approve a merger of Aavid into
another corporation if the merger would adversely affect the rights of the
class. In addition, except as otherwise provided by law, the vote of the holders
of at least 66 2/3% of the holders of Class H Common Stock, voting as a separate
class, is necessary for certain transactions, including dividends made with
proceeds from the disposition of Aavid Thermalloy, LLC in any of our businesses
other than a business operated by Aavid Thermalloy, LLC or its successors.

     The Company is permitted to pay dividends on the Class A and B Common Stock
out of funds legally available and on the Class H Common Stock only out of the
lesser of (a) our funds legally available therefor and (b) the Available
Hardware Dividend Amount, as defined in the amended and restated certificate of
incorporation. Dividends payable in a class or series of capital stock may be
paid only in the same class or series.

     If the Company disposes of all of its assets and liabilities to a
wholly-owned subsidiary (a "Corporate Subsidiary"), the Company's board of
directors may declare that all of the outstanding shares of Class A Common Stock
and/or Class B Common Stock will be exchanged on a pro rata basis for all of the
outstanding shares of the common stock of the Corporate Subsidiary having
substantially similar rights, qualifications, limitations and restrictions to
the Class A Common Stock and Class B Common Stock, respectively. Any share of
Class A Common Stock or Class B Common Stock that is issued on conversion or
exercise of any convertible securities will immediately upon issuance pursuant
to such conversion or exercise be redeemed for $0.0001 in cash.

     If the Company consummates a disposition of Aavid Thermalloy, LLC to any
person, the Company will, on or prior to the first business day following the
60th day following the consummation of the disposition (a) declare and pay a
dividend in cash and/or in securities or other property received as proceeds of
the disposition to the holders of Class H Common Stock in any amount equal to
the net proceeds of the disposition; or (b) exchange the number of whole shares
of outstanding Class H Common Stock that have an aggregate average market value
of the net proceeds of such disposition, for the property received as proceeds
of such disposition in an amount equal to such net proceeds; or (c) exchange
each outstanding share of Class H Common Stock for a number of shares of Class A
Common Stock or, if there are no shares of Class A Common Stock outstanding,
Class B Common Stock, equal to the average daily ratio of the market value of
the Class H Common Stock to the market value of the Class A Common Stock or
Class B Common Stock, as the case may be.

     The Company's board of directors may, at any time after a dividend or
redemption, declare that each of the remaining outstanding shares of Class H
Common Stock will be exchanged for a number of shares of Class A Common Stock
or, if there are no shares of Class A Common Stock outstanding and shares of
Class B Common Stock are then outstanding, of Class B Common Stock, equal to the
market value ratio of one share of Class H Common Stock to one share of Class A
Common Stock or one share of Class B Common Stock, as the case may


                                       63
<PAGE>
be. If all of the Company's indirect or directly owned common membership
interest in Aavid Thermalloy, LLC (and no other assets or liabilities) is held,
directly or indirectly, by a wholly-owned subsidiary of Aavid (the "Aavid
Thermalloy Subsidiary"), the Company's board of directors may declare that all
of the outstanding shares of Class H Common Stock will be exchanged for all of
the outstanding shares of common stock of the Aavid Thermalloy Subsidiary, on a
pro rata basis.

     After any exchange date or redemption date on which all outstanding Class H
Common Stock was exchanged or redeemed, any share of Class H Common Stock that
is issued on conversion or exercise of any convertible securities will be (a)
exchanged for the kind and amount of shares of capital stock and other
securities and property that the holder would have received had the convertible
security been converted immediately prior thereto; or (b) redeemed for $0.001 in
cash.

     In the event the Company dissolves, liquidates or winds up, the holders of
the outstanding shares of each class of Common Stock will be entitled to receive
a fraction of the funds remaining based on the Market Value of each class of
stock.

Preferred Stock

     Dividends on the Company's Series A and Series B Preferred Stock
("Preferred Stock") shall be paid at the rate of 12% per annum, compounded
annually, of the liquidation value of such shares (plus any accrued and unpaid
dividends as of the end of the previous anniversary of the date of issuance of
such shares) from and including the date of issuance of such shares of Preferred
Stock to and including the first to occur of: (i) the date on which the
liquidation value (plus all accrued and unpaid dividends thereon) of such shares
of Preferred Stock is paid to the holder thereof in connection with the
liquidation of the Corporation or the redemption of such shares of Preferred
Stock by the Company or; (ii) the date on which such shares are otherwise
acquired by the Company. Such dividends shall accrue whether or not they have
been declared and whether or not there are profits, surplus or other funds of
the Company legally available for the payment of dividends, and such dividends
shall be cumulative such that all accrued and unpaid dividends shall be fully
paid or declared with funds irrevocably set apart for payment thereof and shall
be paid before any dividends, distributions, redemptions or other payments may
be made with respect to any Junior Securities, other than Participating
Dividends.

     If any dividend or other distribution in cash or other property is paid
with respect to the Common Stock, a dividend or other distribution in cash or
other property shall also be paid with respect to shares of Preferred Stock, in
an amount equal to the amount a holder of a share of Preferred Stock would have
received had such holder converted such holder's Preferred Stock into Common
Stock immediately prior to the record date (or if no record date is declared,
the payment date) for the dividend.

     On all matters submitted to a vote of the stockholders, each holder of
outstanding shares of Preferred Stock shall have the number of votes such holder
would have had if such holder had converted such holder's Preferred Stock into
Common Stock on the record date of such vote (or, if no record date is
established, immediately prior to such vote).

     Upon any liquidation, dissolution or winding up of the Company, each holder
of Preferred Stock shall be entitled to be paid, before any distribution or
payment is made upon any Junior Securities, an amount in cash equal to the
greater of (i) the aggregate liquidation value of all Shares of Preferred Stock
held by such holder (plus any accrued and unpaid dividends) or (ii) the amount
such holder of Preferred Stock would receive if the holder converted all of such
holder's shares of Preferred Stock into shares of Common Stock immediately prior
to such liquidation, dissolution or winding up of the Company.

     At any time after April 13, 2022, the Company may redeem the Preferred
Stock by delivering a written notice of such redemption at least thirty days
prior to the redemption date. For each share of Preferred Stock which is to be
redeemed, the Company shall be obligated on the redemption date to pay the
holder of such share an amount equal to the liquidation value of such share
(plus any accrued and unpaid dividends).

     At any time and from time to time, any holder of Preferred Stock may
convert all or any portion of the Preferred Stock (including a fraction of a
share) held by such holder into a number of shares of Common Stock


                                       64
<PAGE>
computed by multiplying the number of shares to be converted by $10.00 and
dividing the result by the applicable conversion price then in effect ($3.55 is
the initial conversion price). The initial conversion price may be adjusted from
time to time for certain dilutive events.

     The Preferred Stock also contains automatic conversion features whereby
upon the closure of a qualifying public offering or upon the vote of a majority
of Preferred Stockholders each share of Preferred Stock is converted to Common
Stock as described above.

     The liquidation value of any share of Preferred Stock as of any particular
date shall be $75,738.83 per share, as such amount is adjusted for stock splits,
stock dividends and similar transactions. The total liquidation value of the
Preferred Stock is $14,280 at December 31, 2004. Total cumulative unpaid
dividends at December 31, 2004 were $4,024.

WARRANTS AND ADDITIONAL EQUITY CONTRIBUTIONS

     In connection with the issuance of the 12 3/4% Senior Subordinated Notes,
the Company issued warrants to purchase 60 shares of Class A common stock and 60
shares of Class H common stock. The warrants are exercisable on or after an
exercise event, as defined, and will expire on February 1, 2007. Each warrant
entitles its holder to purchase 0.0004 shares of Class A common stock and 0.0004
shares of Class H common stock, subject to adjustment, as defined, at an
exercise price of $0.01 per share.

     On May 4, 2001 certain of the Company's stockholders and their affiliates
made an equity contribution of $8,000 in cash and $26,191 in principal amount of
senior subordinated notes in order to cure an event of non-compliance with
certain financial ratio covenants related to the Company's senior credit
facility. As part of the equity contribution discussed above, Heat Holdings
contributed to Aavid Thermal Technologies, Inc. an aggregate of $8,000 in cash
and $26,191 in principal amount of Aavid Thermal Technologies, Inc.'s 12 3/4%
senior subordinated notes due 2007 in exchange for: (a) a warrant to purchase
2,224,472.5 Series B Preferred Units of Aavid Thermalloy, LLC held beneficially
and of record by Aavid Thermal Technologies, Inc. and (b) 78.871 shares of Aavid
Thermal Technologies, Inc. Class A Common Stock and 78.871 shares of Aavid
Thermal Technologies, Inc. Class B Common Stock, par value $.01 per share. The
portion of the equity contribution related to the warrants has been recorded in
additional paid-in capital.

     On January 30, 2002, Heat Holdings contributed to Aavid Thermal
Technologies, Inc. an aggregate of $12.0 million in cash in exchange for: (a) a
warrant to purchase 174,389 Series B Preferred Units of Aavid Thermalloy, LLC
held beneficially and of record by Aavid Thermal Technologies, Inc., and (b)
67.71 shares of Aavid Thermal Technologies, Inc. Series A Preferred Stock, par
value $.0001 per share, and 67.71 shares of Aavid Thermal Technologies, Inc.
Series B Preferred Stock, par value $.0001 per share. The portion of the equity
contribution related to the warrant has been recorded in additional paid-in
capital.

MANAGEMENT INCENTIVE PURCHASE PROGRAM

     During 2000, the Board of Directors approved the Management Incentive
Purchase Program (the "Program"). The Program provides for the grant and
purchase of non-voting restricted stock of Fluent, Aavid Thermalloy and
Enductive Solutions to and by certain employees and directors of the Company.
Shares acquired pursuant to the Program are subject to a right of repurchase by
the Company, which lapses as the stock vests. In the event of termination of
services, the Company has the right to repurchase unvested shares at the
original issuance price.

     The vesting is generally five years. The Board of Directors set aside
approximately 10% of the common equity ownership in Aavid Thermalloy, Fluent and
Enductive Solutions for the Program. The 10% of common equity in each company is
equal to approximately 56,296 shares in Aavid Thermalloy, LLC, 28,149 shares in
Fluent, Inc. and 500 shares in Enductive Solutions, Inc.


                                       65
<PAGE>
<TABLE>
<CAPTION>
                               AAVID THERMALLOY SHARES       FLUENT SHARES      ENDUCTIVE SOLUTIONS SHARES
                               -----------------------   --------------------   --------------------------
                                             WEIGHTED                WEIGHTED                  WEIGHTED
                                              AVERAGE                 AVERAGE                   AVERAGE
          RESTRICTED             NUMBER OF   EXERCISE    NUMBER OF   EXERCISE      NUMBER OF   EXERCISE
         STOCK AWARDS              SHARES      PRICE       SHARES      PRICE         SHARES      PRICE
         ------------            ---------   --------    ---------   --------      ---------   --------
<S>                            <C>           <C>         <C>         <C>        <C>            <C>
Balance at December 31, 2002       32,089     $10.00       26,347     $10.00          500       $10.00
                                   ======     ======       ======     ======         ====       ======
Issued during 2003                     --         --           --         --           --           --
Canceled during 2003                   --         --           --         --         (250)       10.00
                                              ------       ------     ------         ----       ------
Balance at December 31, 2003       32,089     $10.00       26,347     $10.00          250       $10.00
                                   ======     ======       ======     ======         ====       ======
Issued during 2004                     --         --           --         --           --           --
Canceled during 2004                   --         --           --         --           --           --
                                   ------     ------       ------     ------         ----       ------
Balance at December 31, 2004       32,089     $10.00       26,347     $10.00          250       $10.00
                                   ======     ======       ======     ======         ====       ======
Vested at December 31, 2004        25,108     $10.00       21,077     $10.00          150       $10.00
                                   ======     ======       ======     ======         ====       ======
</TABLE>

     As of December 31, 2004, the Company held notes receivable for stock in the
amount of $587 from employees in consideration for the purchase of common stock.
The notes bear interest at 7%. Notes issued in connection with Aavid Thermalloy
shares are due October 1, 2007 or upon termination of employment and are
collateralized by the underlying common stock. Notes issued in connection with
Fluent and Enductive Solutions shares are due November 1, 2007 or upon
termination of employment and are collateralized by the underlying common stock.
In addition, the interest due and the 60% of the note balance are full recourse
to the employee. These notes are recorded in other long term assets in the
accompanying consolidated balance sheets.

J. INCOME TAXES

     Income (loss) from continuing operations before income taxes for domestic
and foreign operations are as follows:

<TABLE>
<CAPTION>
                 YEAR ENDED DECEMBER 31,
              ----------------------------
                2004      2003      2002
              -------   -------   --------
<S>           <C>       <C>       <C>
Domestic...   $(4,702)  $(6,885)  $(14,560)
Foreign....    17,162     4,858     (3,903)
              -------   -------    -------
              $12,460   $(2,027)  $(18,463)
              =======   =======   ========
</TABLE>

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

<TABLE>
<CAPTION>
                                   YEAR ENDED DECEMBER 31,
                                  -------------------------
                                   2004     2003      2002
                                  ------   ------   -------
<S>                               <C>      <C>      <C>
Federal provision (benefit):
   Current.....................   $   --   $   --   $    --
   Deferred....................       --       --        --
                                  ------   ------   -------
                                      --       --        --
State provision (benefit):
   Current.....................      615      504       500
   Deferred....................       --       --        --
                                  ------   ------   -------
                                     615      504       500
Foreign provision (benefit):
   Current.....................    4,429    1,237     1,570
   Deferred....................     (237)    (114)   (1,253)
                                  ------   ------   -------
                                   4,192    1,123       317
                                  ------   ------   -------
Total provision ...............   $4,807   $1,627   $   817
                                  ======   ======   =======
</TABLE>

     The Company has approximately $81,528 of U.S. federal net operating loss
carryforwards available to reduce future taxable income, if any. These net
operating loss carryforwards expire through 2024, 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. These loss carryforwards have an
annual limitation of approximately $13,000 per year as a result of the Merger
described in Note A. A reconciliation of the income tax provision (benefit) at
the statutory federal income tax rate to the Company's actual income tax
provision is as follows:


                                       66
<PAGE>
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                                --------------------------
                                                  2004     2003      2002
                                                -------   ------   -------
<S>                                             <C>       <C>      <C>
Expected federal tax.........................   $ 4,236   $ (689)  $(6,277)
State income taxes, net of federal benefit...       406      333       330
Foreign related..............................     3,386    1,180     3,274
(Decrease) increase in valuation allowance...    (3,389)     743     3,264
Other........................................       168       60       226
                                                -------   ------   -------
   Total income tax (benefit) expense........   $ 4,807   $1,627   $   817
                                                =======   ======   =======
</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 2004, 2003 and 2002, the Company provided for
U.S. income taxes on undistributed earnings from its foreign subsidiaries as it
is the Company's intention to repatriate those earnings from its foreign
operations in future years.

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

<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                           -------------------
                                             2004       2003
                                           --------   --------
<S>                                        <C>        <C>
Tax credits.............................   $  1,373   $  1,373
Inventory reserves and capitalization...        638      1,071
Accounts receivable reserves............        643        595
Vacation and benefit reserves...........        651        621
Unremitted foreign earnings.............    (12,199)    (7,171)
Restructuring reserves..................        118        269
Other liabilities and reserves..........      6,001      5,961
Depreciation............................       (761)    (1,214)
Net operating loss carryforwards........     27,778     26,455
Acquired intangibles....................     (9,673)    (9,765)
Valuation allowance.....................    (13,439)   (16,828)
                                           --------   --------
Net deferred tax assets.................   $  1,130   $  1,367
                                           ========   ========
</TABLE>

     SFAS No. 109 "Accounting for Income Taxes", requires a valuation allowance
against deferred tax assets if it is more likely than not that some or all of
the deferred tax assets will not be realized. Due to the uncertainty surrounding
the Company's ability to realize the full benefit of the deferred tax assets, a
valuation allowance in the amount of $13,439 and $16,828 has been established at
December 31, 2004 and 2003, respectively.

     The American Jobs Creation Act of 2004 (the "Jobs Act"), enacted on October
24, 2004, provides for a temporary 85% dividends received deduction on certain
foreign earnings repatriated by the end of 2005. To qualify for the deduction,
the earnings must be reinvested in the United States pursuant to a domestic
reinvestment plan established by the chief executive officer and approved by the
board of directors. Certain other criteria must be satisfied as well.

     The Company is in the process of evaluating whether it will repatriate
foreign earnings under the provisions of the Jobs Act. The Company expects to
determine the amounts and sources of foreign earnings to be repatriated, if any,
during 2005.

     The Company is not in a position to determine the impact of a qualifying
repatriation, should it choose to make one, on its income tax expense for 2005.

K. COMMITMENTS AND CONTINGENCIES

LEASES

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


                                       67
<PAGE>
<TABLE>
<CAPTION>
                                                    OPERATING   CAPITAL
                                                      LEASES     LEASES
                                                    ---------   -------
<S>                                                 <C>         <C>
YEARS ENDING DECEMBER 31,
2005 ............................................    $ 4,590     $  988
2006 ............................................      3,781        476
2007 ............................................      2,951        182
2008 ............................................      2,075         14
2009 ............................................      2,053         --
Thereafter ......................................      3,324         --
                                                     -------     ------
Total minimum lease payments ....................    $18,774      1,660
                                                     =======
Less amount representing interest ...............                    80
                                                                 ------
Present value of total minimum lease payments ...                 1,580
Less current portion ............................                   945
                                                                 ------
Long-term capital lease obligations .............                $  635
                                                                 ======
</TABLE>

     Lease expense was approximately $7,397, $6,723 and $6,978 for the years
ended December 31, 2004, 2003 and 2002, respectively.

LITIGATION

     The Company is involved in various legal proceedings that are incidental to
the conduct of its business, none of which it believes could reasonably be
expected to have a materially adverse effect on the Company's 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 the Company has agreed to purchase certain minimum quantities
which approximate $73 at December 31, 2004.

MEXICO LABOR AGREEMENT

     The Company is currently operating its Monterrey, Mexico facility under an
annual collective bargaining agreement with its manufacturing employees. The
contract covered 165 employees on December 31, 2004 and expires in March, 2005.
The Company is currently renegotiating this agreement.

L. 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 contributions were approximately $729, $646 and $555 for
the years ended December 31, 2004, 2003 and 2002, respectively.

M. SEGMENT REPORTING

     Aavid provides thermal management solutions for microprocessors and
integrated circuits ("ICs") for digital and power applications. In February
2000, the business was consolidated into two operating segments: thermal
management products and computational fluid dynamics ("CFD") software. 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.


                                       68
<PAGE>
     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.

     The following summarizes the continuing operations of each reportable
segment for the years ended December 31, 2004, 2003 and 2002:

<TABLE>
<CAPTION>
                         REVENUES FROM                    DEPRECIATION     RESTRUCTURING
                            EXTERNAL       INTEREST           AND             CHARGES
                           CUSTOMERS     EXPENSE, NET   AMORTIZATION (1)     (CREDITS)
                         -------------   ------------   ----------------   -------------
<S>                      <C>             <C>            <C>                <C>
2004
   Thermal Products...      $122,726       $13,938           $ 5,121           $ (6)
   CFD Software.......       104,405         3,978             2,982             --
   Corporate Office...            --            24                 3             --
                            --------       -------           -------           ----
   Total..............      $227,131       $17,940           $ 8,106           $ (6)
2003
   Thermal Products...      $101,583       $13,274           $ 6,252           $(90)
   CFD Software.......        86,584         5,824             5,204             --
   Corporate Office...            --          (961)               10             --
                            --------       -------           -------           ----
   Total..............      $188,167       $18,137           $11,466           $(90)
2002
   Thermal Products...      $ 89,577       $13,977           $ 6,950           $858
   CFD Software.......        72,365         4,700             4,949             --
   Corporate Office...            --         1,464                23             --
                            --------       -------           -------           ----
   Total..............      $161,942       $20,141           $11,922           $858
</TABLE>

(1)  Does not include amortization associated with deferred financing fees and
     accretion of bond discount as these amounts are included in "Interest
     Expense, net".

<TABLE>
<CAPTION>
                                            INCOME
                                         (LOSS) FROM
                         INCOME TAX       CONTINUING      ASSETS (NET OF
                          PROVISION   OPERATIONS BEFORE    INTERCOMPANY       CAPITAL
                          (BENEFIT)         TAXES            BALANCES)     EXPENDITURES
                         ----------   -----------------   --------------   ------------
<S>                      <C>          <C>                 <C>              <C>
2004
   Thermal Products...    $ 1,548         $ (7,852)          $ 66,831         $2,010
   CFD Software.......      5,856           20,493            119,457          3,427
   Corporate Office...     (2,597)            (181)           (14,598)             3
                          -------         --------           --------         ------
   Total..............    $ 4,807         $ 12,460           $171,690         $5,440
2003
   Thermal Products...    $   861         $(12,253)          $ 54,374         $  929
   CFD Software.......      2,886            9,181            103,271          3,078
   Corporate Office...     (2,120)           1,045            (11,952)             2
                          -------         --------           --------         ------
   Total..............    $ 1,627         $ (2,027)          $145,693         $4,009
2002
   Thermal Products...    $   289         $(20,689)          $ 26,175         $2,026
   CFD Software.......      1,952            5,473             91,895          2,695
   Corporate Office...     (1,424)          (3,247)            20,982             --
                          -------         --------           --------         ------
   Total..............    $   817         $(18,463)          $139,052         $4,721
</TABLE>


                                       69
<PAGE>
     The following table provides geographic information about the Company's
continuing 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 ENDED DECEMBER 31,
                               ------------------------------------------------------------------------
                                        2004                     2003                     2002
                               ----------------------   ----------------------   ----------------------
                               LONG-LIVED               LONG-LIVED               LONG-LIVED
                                 ASSETS     NET SALES     ASSETS     NET SALES     ASSETS     NET SALES
                               ----------   ---------   ----------   ---------   ----------   ---------
<S>                            <C>          <C>         <C>          <C>         <C>          <C>
United States...............    $60,664     $114,629     $61,815     $104,735     $68,712     $ 90,382
Taiwan......................      3,460       19,814         618       12,428         621        9,261
China.......................        980       28,480         848       25,750       1,232       14,791
United Kingdom..............      2,411       24,273       2,434       22,153       2,304       18,868
Italy.......................      2,241       22,572       2,609       15,428       2,786       10,768
Japan.......................      1,686       17,606       1,455       12,955       1,160        8,677
Mexico......................        322        9,120         548        8,772         851       11,198
Other International.........      4,176       51,414       3,537       43,041       2,988       36,584
Intercompany eliminations...       (358)     (60,777)       (358)     (57,095)       (358)     (38,587)
                                -------     --------     -------     --------     -------     --------
Consolidated................    $75,582     $227,131     $73,506     $188,167     $80,296     $161,942
                                =======     ========     =======     ========     =======     ========
</TABLE>

     There were no individual customers who made up more than 10% of
consolidated revenues for the years ended December 31, 2004, 2003 or 2002.

N. RESTRUCTURING CHARGES AND RESERVES

     Approximately $2,130 of restructuring charges were recorded in connection
with the Company's October 1999 acquisition of Thermalloy, the thermal
management business of Bowthorpe plc. The restructuring plan included
initiatives to integrate the operations of the Company and Thermalloy and reduce
overhead. The primary components of these plans related to (a) the closure of
duplicative Thermalloy operations in Hong Kong and the United Kingdom, (b) the
elimination of duplicative selling, general and administration functions of
Thermalloy on a global basis and (c) the termination of certain contractual
obligations. During the year ended December 31, 2000, 136 individuals were
terminated under the restructuring plan. The following amounts have been charged
against the Thermalloy restructuring reserves during the years ended December
31, 2004 and 2003:

<TABLE>
<CAPTION>
                                                                     TRANSFERS FROM
                                                                          OTHER
                                                                      RESTRUCTURING
                                                   CHARGES AGAINST      RESERVES
                                                  RESERVES FOR THE       FOR THE        RESTRUCTURING
                               RESTRUCTURING         YEAR ENDED        YEAR ENDED     RESERVES BALANCE
                            RESERVES BALANCE AT     DECEMBER 31,      DECEMBER 31,     AT DECEMBER 31,
                              JANUARY 1, 2004           2004              2004              2004
                            -------------------   ----------------   --------------   ----------------
<S>                         <C>                   <C>                <C>              <C>
Lease terminations and
   leasehold improvements
   reserve                          $  2                $ (2)              $--              $ --
Employee separation                  200                 (40)               --               160
                                    ----                ----               ---              ----
Total                               $202                $(42)              $--              $160
                                    ====                ====               ===              ====
</TABLE>


<TABLE>
<CAPTION>
                                                                     TRANSFERS FROM
                                                                          OTHER
                                                                      RESTRUCTURING
                                                   CHARGES AGAINST      RESERVES
                                                  RESERVES FOR THE       FOR THE        RESTRUCTURING
                               RESTRUCTURING         YEAR ENDED        YEAR ENDED     RESERVES BALANCE
                            RESERVES BALANCE AT     DECEMBER 31,      DECEMBER 31,     AT DECEMBER 31,
                              JANUARY 1, 2003           2003              2003              2003
                            -------------------   ----------------   --------------   ----------------
<S>                         <C>                   <C>                <C>              <C>
Lease terminations and
   leasehold improvements
   reserve                          $461               $(358)            $(101)             $  2
Employee separation                  139                 (40)              101               200
                                    ----               -----             -----              ----
Total                               $600               $(398)            $  --              $202
                                    ====               =====             =====              ====
</TABLE>


                                       70
<PAGE>
During 2001, the Company ceased manufacturing operations in Dallas and Terrell,
Texas, Loudwater, United Kingdom and its fan factory in China. Additionally, the
Company reduced its workforce in New Hampshire, Europe and Asia, including both
selling, general and administrative and manufacturing personnel. In connection
with these actions, the Company recorded a restructuring charge within the
statement of operations during 2001. This restructuring charge totaled $16,885
and included amounts related to employee severance, lease terminations,
write-off of fixed assets and write-off of a prepaid lease intangible asset that
was originally recorded as part of the Thermalloy acquisition. Approximately 524
individuals were terminated under the restructuring plan. The following amounts
have been charged against these reserves during the years ended December 31,
2004 and 2003:

<TABLE>
<CAPTION>
                                              RESTRUCTURING    CHARGES AGAINST   RESTRUCTURING
                                               CREDITS FOR    RESERVES FOR THE      RESERVES
                           RESTRUCTURING     THE YEAR ENDED      YEAR ENDED        BALANCE AT
                         RESERVES BALANCE      DECEMBER 31,     DECEMBER 31,      DECEMBER 31,
                        AT JANUARY 1, 2004        2004              2004              2004
                        ------------------   --------------   ----------------   -------------
<S>                     <C>                  <C>              <C>                <C>
Employee separation            $  4              $  --             $  (4)             $--
Fixed asset  reserves           933               (625)             (308)              --
                               ----              -----             -----              ---
Total                          $937              $(625)            $(312)             $--
                               ====              =====             =====              ===
</TABLE>

<TABLE>
<CAPTION>
                                                  RESTRUCTURING    CHARGES AGAINST   RESTRUCTURING
                                                 PROVISIONS FOR    RESERVES FOR THE     RESERVES
                               RESTRUCTURING     THE YEAR ENDED      YEAR ENDED        BALANCE AT
                             RESERVES BALANCE      DECEMBER 31,     DECEMBER 31,      DECEMBER 31,
                            AT JANUARY 1, 2003        2003              2003              2003
                            ------------------   --------------   ----------------   -------------
<S>                         <C>                  <C>              <C>                <C>
Employee separation               $   44              $ --             $ (40)             $  4
Fixed asset reserves               1,247                --              (314)              933
Lease terminations and
   leasehold improvements
   reserve                           159                --              (159)               --
                                  ------              ----             -----              ----
Total                             $1,450              $ --             $(513)             $937
                                  ======              ====             =====              ====
</TABLE>

During 2002, the Company ceased manufacturing operations in Malaysia and reduced
its workforce in Singapore. In connection with these actions, the Company
recorded a restructuring charge within the statement of operations during 2002.
This restructuring charge totaled $858 and included amounts related to employee
severance, facility costs/lease terminations and write-off of fixed assets.
Approximately 57 individuals were terminated under the restructuring plan. The
following amounts have been charged against these reserves during the years
ended December 31, 2004 and 2003:

<TABLE>
<CAPTION>
                                                 RESTRUCTURING    CHARGES AGAINST   RESTRUCTURING
                                                  CREDITS FOR    RESERVES FOR THE      RESERVES
                              RESTRUCTURING     THE YEAR ENDED      YEAR ENDED        BALANCE AT
                            RESERVES BALANCE      DECEMBER 31,     DECEMBER 31,      DECEMBER 31,
                           AT JANUARY 1, 2004        2004              2004              2004
                           ------------------   --------------   ----------------   -------------
<S>                        <C>                  <C>              <C>                <C>
Fixed asset reserves                $6               $(6)               $--              $--
Facility costs and lease
   terminations                      3                --                 --                3
                                   ---               ---                ---              ---
Total                               $9               $(6)               $--              $ 3
                                   ===               ===                ===              ===
</TABLE>

<TABLE>
<CAPTION>
                                                 RESTRUCTURING    CHARGES AGAINST   RESTRUCTURING
                                                  CREDITS FOR    RESERVES FOR THE      RESERVES
                              RESTRUCTURING     THE YEAR ENDED      YEAR ENDED        BALANCE AT
                            RESERVES BALANCE      DECEMBER 31,     DECEMBER 31,      DECEMBER 31,
                           AT JANUARY 1, 2003        2003              2003              2003
                           ------------------   --------------   ----------------   -------------
<S>                        <C>                  <C>              <C>                <C>
Employee separation               $ 23               $ (8)            $ (15)             $--
Fixed asset reserves                15                 --                (9)               6
Facility costs and lease
   terminations                    165                (82)              (80)               3
                                  ----               ----             -----              ---
Total                             $203               $(90)            $(104)             $ 9
                                  ====               ====             =====              ===
</TABLE>


                                       71
<PAGE>
O. ACQUISITION

     On July 30, 2004, the Company acquired 100% of the outstanding stock of a
small manufacturing company located in Taiwan. The total purchase price of the
acquired company is $4,888, consisting of $3,088 cash paid upon closing and
contingent consideration of $1,800 payable within two years of the closing date
upon the satisfaction of certain conditions. Goodwill will be increased by the
amount of the additional consideration, if any, when it becomes due and payable.
The results of operations of the acquired company since July 30, 2004, are
included in the consolidated statements of operations of the Company for the
year ended December 31, 2004. The fair value of assets acquired and liabilities
assumed at July 30, 2004, is as follows:

<TABLE>
<S>                                                  <C>
Cash .............................................   $   47
Accounts receivable ..............................       38
Inventories ......................................       46
Prepaids and other current assets ................        2
Property, plant and equipment, net ...............      650
Goodwill .........................................      593
Developed technology .............................    1,500
Other long-term assets ...........................      254
Accounts payable .................................      (14)
Accrued expenses and other current liabilities ...      (28)
                                                     ------
   Total                                             $3,088
                                                     ======
</TABLE>

P. QUARTERLY DATA (UNAUDITED)

     Following is a summary of the quarterly results of continuing operations
for the years ended December 31, 2004 and 2003:

<TABLE>
<CAPTION>
                                         FISCAL QUARTER
                        ------------------------------------------------
                         FIRST     SECOND    THIRD     FOURTH     TOTAL
                        -------   -------   -------   -------   --------
<S>                     <C>       <C>       <C>       <C>       <C>
2004
Net sales ...........   $55,617   $56,538   $55,711   $59,265   $227,131
Gross profit ........    27,829    27,916    28,209    30,945    114,899
Net income ..........     1,733     1,712     1,368     2,840      7,653
2003
Net sales ...........   $43,831   $47,590   $44,164   $52,582   $188,167
Gross profit ........    21,378    22,129    21,838    25,761     91,106
Net income (loss) ...    (3,442)   (1,496)   (1,580)    2,864     (3,654)
</TABLE>


                                       72
<PAGE>
Q. SELECTED CONSOLIDATING FINANCIAL STATEMENTS OF PARENT, GUARANTORS AND
NON-GUARANTORS

     The Company's wholly-owned domestic subsidiaries have jointly and severally
guaranteed, on a senior subordinated basis, the principal amount of the
Company's 12 3/4% Senior Subordinated Notes, due 2007. The guarantors include
the combined domestic operations of Aavid Thermalloy, LLC, which directly or
indirectly owns all of the Company's thermal management operations, and Fluent,
Inc., which directly or indirectly owns all of the Company's CFD operations, and
the Company's subsidiary Applied Thermal Technologies, Inc. The non-guarantors
include the combined foreign operations of Aavid Thermalloy, LLC and Fluent,
Inc. The consolidating condensed financial statements of the Company depict
Aavid Thermal Technologies, Inc., the Parent, carrying its investment in
subsidiaries under the equity method and the guarantor and non-guarantor
subsidiaries are presented on a combined basis. Management believes that there
are no significant restrictions on the Parent's and guarantors' ability to
obtain funds from their subsidiaries by dividend or loan. The principal
elimination entries eliminate investment in subsidiaries and intercompany
balances and transactions.

<TABLE>
<CAPTION>
                                                 CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2004
                                           ------------------------------------------------------------------------
                                                       U.S. GUARANTOR   NON-GUARANTOR
                                             PARENT     SUBSIDIARIES     SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                           ---------   --------------   -------------   ------------   ------------
<S>                                        <C>         <C>              <C>             <C>            <C>
ASSETS
Cash and cash equivalents ..............   $     601     $   3,910         $ 23,801      $      --      $  28,312
Accounts receivable-trade, net .........          --        18,383           29,860             (9)        48,234
Inventories ............................          --         5,666            7,338           (259)        12,745
Due (to) from affiliate, net ...........     103,066       (95,776)          29,627        (36,917)            --
Refundable taxes .......................        (348)           --              548            180            380
Deferred income taxes ..................      (4,168)       13,124            1,062         (8,956)         1,062
Prepaid and other current assets .......          75         1,253            4,047             --          5,375
                                           ---------     ---------         --------      ---------      ---------
Total current assets ...................      99,226       (53,440)          96,283        (45,961)        96,108
Property, plant and equipment, net .....           7        16,559           11,626            104         28,296
Investment in subsidiaries .............     (38,833)        6,925               --         31,908             --
Deferred taxes .........................         282            --              434           (282)           434
Other assets, net ......................       2,689        40,930            3,217             16         46,852
                                           ---------     ---------         --------      ---------      ---------
Total assets ...........................   $  63,371     $  10,974         $111,560      $ (14,215)     $ 171,690
                                           =========     =========         ========      =========      =========
LIABILITIES, MINORITY INTERESTS
   AND STOCKHOLDERS' DEFICIT
Accounts payable-trade .................   $     203     $   2,666         $ 16,788      $      --      $  19,657
Current portion of debt obligations ....          --         7,036            1,912             --          8,948
Income taxes payable ...................       3,172          (210)           4,567         (1,118)         6,411
Deferred revenue .......................          --        21,247           21,889             --         43,136
Accrued expenses and other
   current liabilities .................       7,565        11,260           12,086           (204)        30,707
                                           ---------     ---------         --------      ---------      ---------
Total current liabilities ..............      10,940        41,999           57,242         (1,322)       108,859
                                           ---------     ---------         --------      ---------      ---------
Debt obligations, net of current
   portion .............................     121,777         7,400              342             --        129,519
Deferred income taxes ..................      (2,294)        6,930              366         (4,636)           366
                                           ---------     ---------         --------      ---------      ---------
Total liabilities ......................     130,423        56,329           57,950         (5,958)       238,744
                                           ---------     ---------         --------      ---------      ---------
Commitments and contingencies
Minority interests .....................         587            --               --             (2)           585
Stockholders' deficit
Common stock ...........................          --             3            6,267         (6,270)            --
Preferred stock ........................          --        86,222            8,837        (95,059)            --
Warrants ...............................       3,764            --               --             --          3,764
Additional paid-in capital .............     188,007       126,192            8,715       (134,907)       188,007
Cumulative translation adjustment ......      (1,066)          548            8,574         (9,122)        (1,066)
Accumulated deficit ....................    (258,344)     (258,320)          21,217        237,103       (258,344)
                                           ---------     ---------         --------      ---------      ---------
Total stockholders' equity (deficit) ...     (67,639)      (45,355)          53,610         (8,255)       (67,639)
                                           ---------     ---------         --------      ---------      ---------
Total liabilities, minority
   interests and stockholders'
   (deficit) equity ....................   $  63,371     $  10,974         $111,560      $ (14,215)     $ 171,690
                                           =========     =========         ========      =========      =========
</TABLE>


                                       73
<PAGE>
<TABLE>
<CAPTION>
                                                     CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2003
                                               ------------------------------------------------------------------------
                                                           U.S. GUARANTOR   NON-GUARANTOR
                                                 PARENT     SUBSIDIARIES     SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                               ---------   --------------   -------------   ------------   ------------
<S>                                            <C>         <C>              <C>             <C>            <C>
ASSETS
Cash and cash equivalents ..................   $      97     $   5,081         $10,053       $      --      $  15,231
Accounts receivable-trade, net .............          --        15,800          24,199               9         40,008
Inventories ................................          --         5,098           4,548             (63)         9,583
Due (to) from affiliate, net ...............      64,552       (63,135)         19,074         (20,491)            --
Refundable taxes ...........................        (239)          228              (9)            180            160
Deferred income taxes ......................        (263)        9,218           1,172          (8,955)         1,172
Prepaid and other current assets ...........          96         1,390           4,547              --          6,033
                                               ---------     ---------         -------       ---------      ---------
Total current assets .......................      64,243       (26,320)         63,584         (29,320)        72,187
Property, plant and equipment, net .........           5        16,286          10,707             104         27,102
Investment in subsidiaries .................     (30,402)           --              --          30,402             --
Deferred taxes .............................       1,384            --             404          (1,384)           404
Other assets, net ..........................         586        44,459             939              16         46,000
                                               ---------     ---------         -------       ---------      ---------
Total assets ...............................   $  35,816     $  34,425         $75,634       $    (182)     $ 145,693
                                               =========     =========         =======       =========      =========
LIABILITIES, MINORITY INTERESTS
   AND STOCKHOLDERS' DEFICIT
Current portion of debt
   obligations .............................   $      --     $   6,993         $ 2,050       $      --      $   9,043
Accounts payable-trade .....................          88         1,833          11,022              --         12,943
Income taxes payable .......................        (534)        3,790           1,651          (1,118)         3,789
Deferred revenue ...........................          --        19,313          18,344              --         37,657
Accrued expenses and other
   current liabilities .....................       7,450         9,437          10,114              30         27,031
                                               ---------     ---------         -------       ---------      ---------
Total current liabilities ..................       7,004        41,366          43,181          (1,088)        90,463
                                               ---------     ---------         -------       ---------      ---------
Debt obligations, net of current
   portion .................................     120,977         8,443             347              --        129,767
Deferred income taxes ......................     (17,422)       22,057             210          (4,636)           209
                                               ---------     ---------         -------       ---------      ---------
Total liabilities ..........................     110,559        71,866          43,738          (5,724)       220,439
                                               ---------     ---------         -------       ---------      ---------
Commitments and contingencies
   Minority interests ......................         588            --              --              (3)           585
Stockholders' deficit
   Common stock ............................          --            --           4,506          (4,506)            --
Preferred stock ............................          --        67,703           5,000         (72,703)            --
Warrants ...................................       3,764            --              --              --          3,764
Additional paid-in capital .................     188,007       126,191           7,311        (133,502)       188,007
Cumulative translation adjustment ..........      (1,105)          333           5,547          (5,880)        (1,105)
Accumulated deficit ........................    (265,997)     (231,668)          9,532         222,136       (265,997)
                                               ---------     ---------         -------       ---------      ---------
Total stockholders' equity (deficit) .......     (75,331)      (37,441)         31,896           5,545        (75,331)
                                               ---------     ---------         -------       ---------      ---------
Total liabilities, minority interests and
   stockholders' (deficit) equity ..........   $  35,816     $  34,425         $75,634       $    (182)     $ 145,693
                                               =========     =========         =======       =========      =========
</TABLE>


                                       74
<PAGE>
<TABLE>
<CAPTION>
                                                  CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                                                        FOR THE YEAR ENDED DECEMBER 31, 2004
                                       ---------------------------------------------------------------------
                                                U.S. GUARANTOR   NON-GUARANTOR
                                       PARENT    SUBSIDIARIES     SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                       ------   --------------   -------------   ------------   ------------
<S>                                    <C>      <C>              <C>             <C>            <C>
Net sales ..........................   $   --      $115,984        $173,280        $(62,133)      $227,131
Cost of goods sold .................       --        53,209          95,385         (36,362)       112,232
                                       ------      --------        --------        --------       --------
Gross profit .......................       --        62,775          77,895         (25,771)       114,899
Selling, general and
   administrative expenses .........      182        37,627          39,934          (8,819)        68,924
Restructuring charges ..............       --            --              (6)             --             (6)
Research and development ...........       --        16,214          17,311         (16,867)        16,658
                                       ------      --------        --------        --------       --------
Income (loss) from operations ......     (182)        8,934          20,656             (85)        29,323
Interest income (expense) net ......      (27)      (17,283)           (676)             46        (17,940)
Other income (expense), net ........       25         1,915             (76)           (787)         1,077
Equity in income of subsidiaries ...    5,240            --              --          (5,240)            --
                                       ------      --------        --------        --------       --------
Income (loss) from continuing
   operations before income taxes ..    5,056        (6,434)         19,904          (6,066)        12,460
Income tax benefit (expense) .......    2,597        (3,211)         (4,224)             31         (4,807)
                                       ------      --------        --------        --------       --------
Net income (loss) ..................   $7,653      $ (9,645)       $ 15,680        $ (6,035)      $  7,653
                                       ======      ========        ========        ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                                     CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                                                          FOR THE YEAR ENDED DECEMBER 31, 2003
                                         ----------------------------------------------------------------------
                                                   U.S. GUARANTOR   NON-GUARANTOR
                                          PARENT    SUBSIDIARIES     SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                         -------   --------------   -------------   ------------   ------------
<S>                                      <C>       <C>              <C>             <C>            <C>
Net sales ............................   $    --      $106,207        $140,528        $(58,568)      $188,167
Cost of goods sold ...................        --        47,036          82,197         (32,172)        97,061
                                         -------      --------        --------        --------       --------
Gross profit .........................        --        59,171          58,331         (26,396)        91,106
Selling, general and
   administrative expenses ...........       (42)       37,988          33,724          (9,105)        62,565
Restructuring charges ................        --          (375)            285              --            (90)
Intangible asset impairment charge ...        --          (854)            854              --             --
Research and development .............        --        15,182          17,314         (17,492)        15,004
                                         -------      --------        --------        --------       --------
Income from operations ...............        42         7,230           6,154             201         13,627
Interest income (expense) net ........       961       (18,744)           (336)            (18)       (18,137)
Other income (expense), net ..........        41         2,202           1,565          (1,325)         2,483
Equity in income of subsidiaries .....    (6,819)           --              --           6,819             --
                                         -------      --------        --------        --------       --------
Income (loss) from continuing
   operations before income taxes ....    (5,775)       (9,312)          7,383           5,677         (2,027)
Income tax benefit (expense) .........     2,121        (2,115)         (1,633)             --         (1,627)
                                         -------      --------        --------        --------       --------
Net income (loss) ....................   $(3,654)     $(11,427)       $  5,750        $  5,677       $ (3,654)
                                         =======      ========        ========        ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                                    CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                                                         FOR THE YEAR ENDED DECEMBER 31, 2002
                                        -----------------------------------------------------------------------
                                                   U.S. GUARANTOR   NON-GUARANTOR
                                         PARENT     SUBSIDIARIES     SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                        --------   --------------   -------------   ------------   ------------
<S>                                     <C>        <C>              <C>             <C>            <C>
Net sales ...........................   $     --      $ 91,971        $110,147        $(40,176)      $161,942
Cost of goods sold ..................         --        39,944          67,894         (19,306)        88,532
                                        --------      --------        --------        --------       --------
Gross profit ........................         --        52,027          42,253         (20,870)        73,410
Selling, general and
   administrative expenses ..........      1,787        35,013          28,767          (6,732)        58,835
Restructuring charges ...............         --            --             858              --            858
Research and development ............         --        13,316          13,243         (14,067)        12,492
                                        --------      --------        --------        --------       --------
Income (loss) from continuing
   operations .......................     (1,787)        3,698            (615)            (71)         1,225
Interest income (expense) net .......     (1,437)      (17,571)         (1,181)             48        (20,141)
Other income (expense), net .........          4          (263)         (2,880)          3,592            453
Equity in income of subsidiaries ....    (24,081)           --              --          24,081             --
                                        --------      --------        --------        --------       --------
Income (loss) from continuing
   operations before income taxes ...    (27,301)      (14,136)         (4,676)         27,650        (18,463)
Income tax benefit (expense) ........      1,424        (1,829)           (412)             --           (817)
                                        --------      --------        --------        --------       --------
Income (loss) from continuing
   operations .......................    (25,877)      (15,965)         (5,088)         27,650        (19,280)
Income (loss) from discontinued
   operations .......................     13,322        (6,304)           (293)             --          6,725
                                        --------      --------        --------        --------       --------
Net income (loss) ...................   $(12,555)     $(22,269)       $ (5,381)       $ 27,650       $(12,555)
                                        ========      ========        ========        ========       ========
</TABLE>


                                       75
<PAGE>
<TABLE>
<CAPTION>
                                                         CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                                                               FOR THE YEAR ENDED DECEMBER 31, 2004
                                              ---------------------------------------------------------------------
                                                       U.S. GUARANTOR   NON-GUARANTOR
                                              PARENT    SUBSIDIARIES     SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                              ------   --------------   -------------   ------------   ------------
<S>                                           <C>      <C>              <C>             <C>            <C>
Net cash provided by operating
   activities .............................    $468       $ 6,828          $14,390        $ 3,242        $24,928
Cash flows used in investing activities:
Proceeds from sale of fixed assets ........      --            19               29             --             48
Purchases of property, plant and
   equipment ..............................      (3)       (2,476)          (2,961)            --         (5,440)
Payment for acquisition, net of
   cash acquired ..........................      --        (3,088)              47             --         (3,041)
                                               ----       -------          -------        -------        -------
Net cash used in investing
   activities .............................      (3)       (5,545)          (2,885)            --         (8,433)
Cash flows provided by (used in)
   financing activities:
(Repayments of) advances on line
   of credit, net .........................      --          (487)             (51)            --           (538)
Principal payments under other
   debt obligations .......................      --        (2,182)            (214)            --         (2,396)
                                               ----       -------          -------        -------        -------
Net cash used in financing
   activities .............................      --        (2,669)            (265)            --         (2,934)
Foreign exchange effect on cash
   and cash equivalents ...................      39           215            2,508         (3,242)          (480)
                                               ----       -------          -------        -------        -------
Net increase (decrease) in cash
   and cash equivalents ...................     504        (1,171)          13,748             --         13,081
Cash and cash equivalents,
   beginning of year ......................      97         5,081           10,053             --         15,231
                                               ----       -------          -------        -------        -------
Cash and cash equivalents, end of year ....    $601       $ 3,910          $23,801        $    --        $28,312
                                               ====       =======          =======        -------        =======
</TABLE>

<TABLE>
<CAPTION>
                                                          CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                                                                FOR THE YEAR ENDED DECEMBER 31, 2003
                                              -----------------------------------------------------------------------
                                                         U.S. GUARANTOR   NON-GUARANTOR
                                               PARENT     SUBSIDIARIES     SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                              --------   --------------   -------------   ------------   ------------
<S>                                           <C>        <C>              <C>             <C>            <C>
Net cash provided by (used in)
   operating activities ...................   $   (61)      $ 7,394          $   667        $ 3,047        $11,047
Cash flows used in investing
   activities:
Proceeds from sale of fixed assets ........        --            --              188             --            188
Purchases of property, plant and
   equipment ..............................        (2)         (828)          (3,179)            --         (4,009)
                                              -------       -------          -------        -------        -------
Net cash used in investing
   activities .............................        (2)         (828)          (2,991)            --         (3,821)
Cash flows provided by (used in)
   financing activities:
Advances under other debt
   obligations ............................        --            --              178             --            178
Principal payments on other debt
   obligations ............................        --        (1,900)            (241)            --         (2,141)
(Repayments of) advances on line
   of credit, net .........................        --          (484)             327             --           (157)
                                              -------       -------          -------        -------        -------
Net cash provided by (used in)
   financing activities ...................        --        (2,384)             264             --         (2,120)
Foreign exchange effect on cash
   and cash equivalents ...................    (1,262)       (1,541)           3,678         (3,047)        (2,172)
                                              -------       -------          -------        -------        -------
Net increase (decrease) in cash
   and cash equivalents ...................    (1,325)        2,641            1,618             --          2,934
Cash and cash equivalents,
   beginning of year ......................     1,422         2,440            8,435             --         12,297
                                              -------       -------          -------        -------        -------
Cash and cash equivalents, end of  year ...   $    97       $ 5,081          $10,053        $    --        $15,231
                                              =======       =======          =======        -------        =======
</TABLE>


                                       76
<PAGE>

<TABLE>
<CAPTION>
                                                              CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                                                                   FOR THE YEAR ENDED DECEMBER 31, 2002
                                              ------------------------------------------------------------------------------
                                                             U.S. GUARANTOR    NON-GUARANTOR
                                                PARENT        SUBSIDIARIES     SUBSIDIARIES     ELIMINATIONS    CONSOLIDATED
                                              -----------    --------------    -------------    ------------    ------------
<S>                                           <C>            <C>               <C>              <C>             <C>
Net cash provided by (used in) operating
  activities..............................    $    11,214      $  (18,737)       $   1,714       $   2,294       $   (3,515)
Cash flows used in investing activities:
Proceeds from sale of fixed assets........             --           1,414              350              --            1,764
Proceeds from sale of division............         31,524              --               --              --           31,524
Purchases of property, plant and
  equipment...............................             --          (1,973)          (2,748)             --           (4,721)
                                              -----------      ----------        ---------       ---------       ----------
Net cash provided by (used in) investing
  activities..............................         31,524            (559)          (2,398)             --           28,567
Cash flows provided by (used in)
 financing activities:
Advances under other debt obligations.....             --          11,481              246              --           11,727
Principal payments on other debt
  obligations.............................        (38,192)           (884)            (115)             --          (39,191)
(Repayments of) advances under line of
  credit, net.............................        (17,000)          5,625            1,297              --          (10,078)
Issuance of preferred stock and warrant...         12,000              --               --              --           12,000
                                              -----------      ----------        ---------       ---------       ----------
Net cash provided by (used in) financing
  activities..............................        (43,192)         16,222            1,428              --          (25,542)
Foreign exchange effect on cash and cash
  equivalents.............................          1,027             (80)            (404)         (2,294)          (1,751)
                                              -----------      ----------        ---------       ---------       ----------
Net increase (decrease) in cash and cash
  equivalents.............................            573          (3,154)             340              --           (2,241)
Cash and cash equivalents, beginning of
  year....................................            849           5,594            8,095              --           14,538
                                              -----------      ----------        ---------       ---------       ----------
Cash and cash equivalents, end of year....    $     1,422      $    2,440        $   8,435       $      --       $   12,297
                                              ===========      ==========        =========       =========       ==========
</TABLE>

                                       77

<PAGE>

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

ALLOWANCE FOR DOUBTFUL ACCOUNTS:

<TABLE>
<CAPTION>
           BALANCE AT        PROVISIONS/     WRITE-OFF/     BALANCE AT
        BEGINNING OF YEAR     (CREDITS)     (RECOVERIES)    END OF YEAR
        -----------------    -----------    ------------    -----------
<S>     <C>                  <C>            <C>             <C>
2004        $   2,201        $    1,008      $      822     $    2,387
2003        $   3,194        $      289      $    1,282     $    2,201
2002        $   3,199        $     (296)     $     (291)    $    3,194
</TABLE>

                                       78