<PAGE>   1
                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

     For the fiscal year ended December 31, 2000

                                       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.)

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

                                 Yes [X] No [ ]

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

     Aggregate market value of the Registrant's common stock held by
non-affiliates: N/A. The number of outstanding shares of the registrant's Common
Stock as of March 31, 2001 was 940 shares of class A, 1000 shares of Class B and
40 shares of Class H, all of which are owned by Heat Holdings Corp. On February
2, 2000, a wholly-owned subsidiary of Heat Holdings Corp. was merged with and
into the Registrant with the Registrant becoming a wholly-owned subsidiary of
Heat Holdings Corp. and each share of Registrant's then outstanding common stock
was converted into $25.50 in cash. The Registrant's Common Stock is no longer
publicly traded; however, the Registrant's Senior Notes are publicly traded.

    Documents incorporated by reference: none

<PAGE>   2

                                     PART I

ITEM 1. BUSINESS

COMPANY INTRODUCTION

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

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

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

     On February 2, 2000 we were acquired in a merger with Heat Holdings Corp.,
a corporation newly formed by Willis Stein & Partners II, L.P. ("the
Purchaser"). Pursuant to the merger, Aavid stockholders received $25.50 in cash
for each outstanding share of common stock. In addition, all outstanding stock
options and warrants were cashed out. 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 designs, manufacturers
and distributes thermal management products that dissipate unwanted heat from
microprocessors and industrial electronics products, and include Applied Thermal
Technologies, Inc.'s thermal design, validation and consulting services; and
Fluent, which develops and markets CFD software.

INDUSTRY OVERVIEW(1)

     THERMAL MANAGEMENT

     In today's electronic environment, microprocessors and their associated
power supplies, hard drives, advanced video chips and other

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

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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.

     The worldwide electronic thermal management market is divided between
solutions that are internally designed and produced by OEMs (i.e., "in-house"
thermal solutions) and those that are externally supplied by thermal management
companies (i.e., "outsourced" thermal solutions). Based on our experience in the
industry and industry data, we estimate that the size of the in-house thermal
solutions market is approximately $0.8 billion and the size of the outsourced
thermal solutions market is approximately $2.9 billion, or 78.4% of the
worldwide electronic thermal management market. As thermal management problems
become increasingly complex, we believe that manufacturers will increasingly
outsource their thermal management design and production in order to focus on
their core competencies. We further believe that the market for the types of
thermal management products and services we offer in our existing geographic
locations comprises only 45% of the $2.9 billion outsourced thermal solutions
market. We believe that, as the market leader, we will benefit from the expected
growth in the worldwide electronic thermal management market and that, through
geographic and product expansion, we have an opportunity to address a larger
portion of the outsourced segment of this market than we currently address.

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

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

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

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

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

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

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

     COMPUTATIONAL FLUID DYNAMICS SOFTWARE

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

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

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

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

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

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

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

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

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

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.

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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 28 years of
experience in the area of fluid flows and thermal management and H. Ferit
Boysan, president of our CFD software business, has 21 years of experience in
the area of fluid flows and CFD software.

BUSINESS STRATEGY

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

CAPITALIZE ON STRONG THERMAL MANAGEMENT INDUSTRY GROWTH

     We believe that our existing thermal management markets will continue to
experience 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 $1.6 billion part of the outsourced thermal management market that we
do not currently serve by entering into new geographic markets and introducing
new products that complement our existing product offerings.

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 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 146 Ph.D.s and 210 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.

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MARKETS AND CUSTOMERS

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

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

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

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

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

     No customer represented more than 10% of our thermal management net sales
during 2000 or 1999. Intel accounted for approximately 22% of net sales during
1998.

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

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

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THERMAL MANAGEMENT PRODUCTS AND SERVICES

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

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

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

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

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

Liquid Cooling and Phase Change Devices        These devices include cold plates, heat     -   Moves highly concentrated heat
                                               pipes and other liquid cooling designs          from 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 Centers   Applied Thermal Technologies' facilities    -   Analyzes customers' thermal
                                               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     -   Designs, simulates and prototypes
                                               design, test and validation hardware and        thermal management solutions
                                               software.                                       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

                                       7
<PAGE>   8

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.

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

<TABLE>
<CAPTION>
PRODUCT                                                        DESCRIPTION                               FEATURES
-------                                                        -----------                               --------
<S>                                            <C>                                         <C>
Fluent                                         Fluent is general purpose CFD software      -   Provides a choice of solver
                                               used across a wide range of industries          options 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         -   Structured and solution-adaptive
                                               hypersonic) flows. Fluent contains              unstructured mesh capability
                                               physical models for a wide range of         -   Enables easier problem setup
                                               applications including turbulent flows,
                                               heat transfer, reacting flows, chemical
                                               mixing, combustion and multi-phase flows.

Fidap                                          Fidap is general purpose CFD software for   -   Offers complete mesh flexibility
                                               the simulation of incompressible or         -   Provides a wide range of
                                               compressible flows, including prediction        physical models, with particular
                                               of liquid-free surfaces, non-Newtonion          strength for application in the
                                               rheology and advanced radiation modeling.       materials 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   -   Reduces design costs
                                               and thermal management in electronics       -   Reduces the time-to-market of
                                               design.                                         high-performance electronic systems


Airpak                                         Airpak, like Icepak, is a                   -   Used to determine the layout of
                                               fully-interactive, object-based CFD             ventilation systems in rooms and
                                               software tool. Airpak is specifically           buildings in order to provide maximum
                                               designed to analyze air flow,                   comfort and air quality.
                                               contamination and thermal comfort in room
                                               and building designs.
                                                                                           -   Assesses the risk of airborn
                                                                                               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    -   Allows users to import
                                               mesh types, and GAMBIT brings together          geometries created under other
                                               all of Fluent's options in one                  CAD/CAE packages into the Fluent
                                               environment.                                    suite of software products.

                                                                                           -   Enables users to automatically
                                                                                               create unstructured tetrahedral
                                                                                               meshes for extremely complex
                                                                                               geometries
                                                                                           -   Provides a concise and powerful set
                                                                                               of solid modeling-based geometry
                                                                                               tools with both geometry and
                                                                                               "clean-up" functions
</TABLE>

SALES AND SUPPORT

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

TECHNOLOGY

     We believe that technology leadership is essential to our growth strategy
and have focused our approximately 146 Ph.D.s and 210 engineers on the
development of technology in two areas:

                                       8
<PAGE>   9

THERMAL MANAGEMENT TECHNOLOGY

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

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

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

COMPUTATIONAL FLUID 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; vacuum die casting; engineered materials and net shape part
manufacturing technology; direct chip mounting to extruded heat sinks; and
highly thermally conductive adhesive and interface systems.

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

SUPPLIERS

     We purchase raw aluminum, aluminum extrusion, aluminum coil and various
components from a limited number of outside sources. We purchase substantially
all of our aluminum coil stock from a single supplier. We believe that
purchasing aluminum extrusion and coil stock

                                       9
<PAGE>   10

from a limited number of suppliers is necessary to obtain lower prices and to
consistently achieve the tolerances and design and delivery flexibility that we
require.

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

COMPETITION

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

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

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

BACKLOG AND LICENSE RENEWAL

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

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

EMPLOYEES

     As of December 31, 2000 we had a total of 3,219 employees including
approximately 816 contract employees in China. Except for the employees in our
manufacturing facility in Mexico, none of our employees is represented by labor
unions or collective bargaining units. We believe that our relationship with our
employees is good.

RISK FACTORS

     This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements regarding our expected
future financial position, results of operations, cash flows, financing plans,
business strategy, competitive position, plans and objectives and words such as
"anticipate," "believe," "estimate," "expect," "intend," "plan" and other
similar expressions are forward-looking statements. Such forward looking
statements are inherently uncertain, and holders of our securities must
recognize that actual results could differ materially from those projected or
contemplated in the forward-looking statements as a result of a variety of
factors, including the factors set forth below. Holders of our securities should
not place undue reliance on these forward-looking statements.

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

                                       10
<PAGE>   11

RISKS RELATING TO OUR BUSINESS


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

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

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

OUR BUSINESS IS DEPENDENT ON THE SEMICONDUCTOR MARKET.

     A significant portion of our net sales has been, and is expected to
continue to be, dependent upon sales of thermal management products for
industrial electronics applications, consisting primarily of integrated
circuits. However, a significant portion of our net sales has been, and is
expected to continue to be, dependent upon sales of thermal management products
for computer and networking applications, consisting primarily of
microprocessors and related chip sets. Our sales for industrial electronics
applications accounted for approximately 51%, 34% and 37% of our net sales
(excluding sales of a special product we manufactured for Intel (the "Intel
Special Product")), in 2000, 1999 and 1998, respectively. Our sales for computer
and networking applications (excluding sales of the Intel Special Product)
accounted for approximately 29%, 41% and 38% of our net sales in 2000, 1999 and
1998, respectively. The thermal management market for computer and networking
applications is characterized by rapid technological change, short product life
cycles, greater pricing pressure and increasing foreign and domestic competition
as compared to the thermal management market for industrial electronics
applications.

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

                                       11
<PAGE>   12

     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.

     The semiconductor industry is currently in a downward cycle marked by
decreasing product demand which adversely affected our results of operation for
the fourth quarter and full year 2000, and will likely adversely affect our
results of operation into at least the second half of 2001.

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, 2000, 1999 and 1998, 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 determines to compete with us, we could experience
cost increases, a deterioration of service from our suppliers, or interruptions,
delays or a reduction in raw material supply that may cause us to fail to meet
delivery schedules to customers. Although we believe that viable alternate
suppliers exist for the aluminum coil stock and components, any unanticipated
interruption of supply would have a short-term material adverse effect on us.

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

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

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

                                       12
<PAGE>   13

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

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.

OUR INTERNATIONAL OPERATIONS EXPOSE US TO ADDITIONAL RISKS.

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

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

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

                                       13
<PAGE>   14

WE DEPEND ON A LIMITED NUMBER OF MANUFACTURING FACILITIES.

     A significant part of our net sales is currently derived from products
manufactured at our manufacturing facility in Guang Dong Province in The
People's Republic of China. We commenced manufacturing at this facility in early
1998 and have expanded this facility to 120,000 square feet. This facility has
grown to generate significant revenues for us, representing 14.0% of net sales
in 1999 and 8.3% of net sales in 2000. We only have limited experience in
managing operations in China and, although we have focused significant
management resources on this operation, we cannot provide assurance that this
business will be successful. Because of the growth of our operations in China
and the increasing percentage of net sales from China, an inability to
successfully manage this business or an interruption in the operations at this
facility could have a material adverse effect on our overall financial
performance until we are able to obtain substitute production capability with
similar low operating costs.

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

WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY.

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

                                       14
<PAGE>   15

RISKS RELATED TO OUR INDEBTEDNESS

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

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

<TABLE>
<CAPTION>
                                                   AS OF DECEMBER 31,
                                                          2000
                                                   ------------------
                                                 (DOLLARS IN THOUSANDS)

<S>                                                   <C>
Total debt (including current portion)                $ 204,002
Stockholders' equity                                    100,159
Debt to stockholders' equity                              203.7%
</TABLE>

    Our substantial indebtedness could have important consequences to holders of
our senior notes. For example, it could:

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

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

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

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

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

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

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

                                       15
<PAGE>   16

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

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

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

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

     At December 31, 2000, the Company was not in compliance with the leverage
ratio covenant required by the amended and restated credit facility and the
indenture under which our senior notes were issued. As a result, the Company's
stockholders are required to make an equity contribution of up to $25.0 million
sufficient to allow the Company to pay down enough debt to achieve a 4.5 to 1
leverage ratio based on total leverage at December 31, 2000. Subsequent to
December 31, 2000, certain of the Company's stockholders and their affiliates
agreed, subject to definitive documentation, to make an equity contribution of
$8.0 million in cash and up to $25.0 million in principal amount of senior notes
in full satisfaction of this obligation. This contribution is required to be
made by May 15, 2001. In addition, the Company and the lenders under the amended
and restated credit facility have agreed, subject to definitive documentation,
to amend the facility such that the last three required quarterly principal
payments in 2001 under the facility will be prepaid with $6 million of the
proceeds of the equity contribution, and the four required principal payments in
2002 will be reduced by $0.5 million each, reflecting application of the
remaining cash equity contribution. Further, certain covenant ratios and ratio
definitions will be amended to levels which the Company expects to meet through
December 31, 2001 and the available line of credit will be reduced to $17.0
million from $22.0 million. Based on the equity contribution, the Company's
event of non-compliance with the leverage ratio covenant at December 31, 2000
will be cured.

RISKS RELATED TO THE SENIOR NOTES


OUR CONTROLLING STOCKHOLDER, WILLIS STEIN, MAY HAVE INTERESTS THAT CONFLICT WITH
HOLDERS OF THE SENIOR 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 notes. In addition, the
equity investors may have an interest in pursuing acquisitions, divestitures or
other transactions that, in their judgment, could enhance their equity
investment, even though such transactions might involve risks to the holders of
the senior notes.

                                       16
<PAGE>   17

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

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

     As of December 31, 2000, we had $58.7 million of senior debt outstanding,
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 notes will be blocked in the event
of a payment default under the amended and restated credit facility and may be
blocked for up to 179 consecutive days in any given year in the event of
non-payment defaults on senior debt. In the event of a default on the senior
notes and any resulting acceleration of the senior notes, the holders of senior
debt then outstanding will be entitled to payment in full in cash of all
obligations in respect of such senior debt before any payment or distribution
may be made with respect to the senior notes.

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

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

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

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

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

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

     If a bankruptcy case or lawsuit is initiated by our unpaid creditors, the
debt represented by the senior notes and the guarantees of the senior notes by
certain of our subsidiaries may be reviewed under the federal bankruptcy laws
and comparable provisions of state fraudulent transfer laws. Under these laws,
the debt could be voided, or claims in respect of the senior notes and the
guarantees could be subordinated to all other debts of Aavid or its subsidiaries
if, among other things, the court found that, at the time we incurred the debt
represented by the senior notes and the subsidiaries incurred the debt
represented by the guarantee, we or any subsidiary:

     -    received less than reasonably equivalent value or fair consideration
          for the incurrence of such debt; and
     -    were insolvent or rendered insolvent by reason of such incurrence; or
     -    were engaged in a business or transaction for which the remaining
          assets constituted unreasonably small capital; or
     -    intended to incur, or believed that we or a subsidiary executing a
          guarantee thereof would incur, debts beyond the ability to pay such
          debts as they matured; or
     -    intended to hinder, delay or defraud creditors.

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

                                       17
<PAGE>   18

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

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

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

ITEM 2. PROPERTIES

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

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

     Aavid Thermalloy has a total of approximately 860,000 square feet of
manufacturing space with locations in Laconia and Franklin, New Hampshire;
Dallas and Terrell, Texas; Mexico; the United Kingdom; Italy; Germany (Curamik
facility); Malaysia; Singapore; Taiwan; China; and Toronto, Canada. We employ a
broad range of aluminum fabrication and processing capabilities. Manufacturing
operations consist of extrusion, cutting, stamping, machining, assembling and
finishing, including anodizing capabilities. We have a substantial in-house tool
and die capability that enables us to create our own extrusion and progressive
stamping dies and other production tooling. Fluent's total sales, marketing,
development, and support facilities consist of approximately 145,000 square
feet.

     Aavid Thermalloy closed down its manufacturing facility in Manchester, New
Hampshire at the end of 1998 due to a change in product mix at a major customer.
In addition, in connection with the consolidation of Aavid with Thermalloy
following the acquisition of Thermalloy, we closed facilities in Santa Ana,
California; Hong Kong; Corby, U.K. and High Wycombe, U.K. and are closing our
Dallas, Texas facility in the first half of 2001.

                                       18
<PAGE>   19

We 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-Manufacturing; Curamik-Sales and
                                                               Marketing
Franklin, NH...................................................Aavid.Thermalloy-Aluminum Extrusion
Laconia, NH....................................................Aavid.Thermalloy-Manufacturing
Lebanon, NH....................................................Fluent-Software Development, Sales and Marketing
Santa Clara, CA................................................Applied.Thermal Technologies-Research and Development
                                                               and Consulting
Terrell, TX....................................................Aavid.Thermalloy-Manufacturing

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

* Facility to be closed in 2001


ITEM 3. LEGAL PROCEEDINGS

     Following the public announcement of the merger with Heat Merger Corp.,
lawsuits were filed against us, Willis Stein, our directors, and one former
director in the Court of Chancery of the State of Delaware by certain of our
stockholders. The complaints alleged, among other things, that our directors
breached their fiduciary duties and sought to enjoin, preliminarily and
permanently, the merger and also sought compensatory damages. The stockholder
plaintiffs, on behalf of our public stockholders, also sought class action
certification for their lawsuits. On March 11, 2001 the stockholders plaintiffs
filed to dismiss the class action without prejudice. We are awaiting a final
court order approving the dismissal.

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

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

None

                                       19
<PAGE>   20

                                     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 amended and
restated credit facility and senior 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 for
the periods indicated. The following tables should be read in conjunction with
"Management Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements, and related Notes thereto of
the Company included elsewhere herein.

     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.


                                       20
<PAGE>   21

<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                                                                           THE PERIOD   THE PERIOD
                                                                                                           JANUARY 1,   FEBRUARY 2,
                                                                                                         2000 THROUGH    THROUGH
                                                                                                           FEBRUARY      DECEMBER
                                                 1996(1)(2)      1997(1)       1998(1)       1999(1)(3)    1, 2000(1)   31, 2000(1)
                                               -------------------------------------------------------------------------------------
                                               (PREDECESSOR)  (PREDECESSOR) (PREDECESSOR)  (PREDECESSOR) (PREDECESSOR) (THE COMPANY)
STATEMENT OF OPERATIONS DATA:
(AMOUNTS IN THOUSANDS)

<S>                                            <C>            <C>           <C>            <C>           <C>           <C>
Net sales....................................... $ 106,995      $ 167,745     $ 209,078      $ 214,243     $  23,442     $ 270,184
Cost of goods sold..............................    66,002        107,401       138,431        138,558        15,516       176,982
                                                 ---------      ---------     ---------      ---------     ---------     ---------

   Gross profit.................................    40,993         60,344        70,647         75,685         7,926        93,202
Selling, general and administrative expenses....    27,562         36,709        43,783         51,970         5,214        95,748
Research and development........................     5,674          6,939         6,756          7,528           752         9,935
Restructuring and buyout of compensation
agreement charges (credit)(4)...................        --             --         5,740           (630)           --            --
Acquired in-process research and development(5)      3,446             --            --             --            --        15,000
                                                 ---------      ---------     ---------      ---------     ---------     ---------

   Income (loss) from operations................     4,311         16,696        14,368         16,817         1,960       (27,481)
Interest expense, net...........................    (1,591)        (2,178)       (1,342)        (1,629)         (816)      (23,115)
Other income (expense), net.....................      (577)        (1,201)         (520)           218            22           379
                                                 ---------      ---------     ---------      ---------     ---------     ---------

   Income (loss) before income taxes, minority
interest, and extraordinary item................     2,143         13,317        12,506         15,406         1,166       (50,217)
Provision for income tax expense................    (2,002)        (4,824)       (4,385)        (8,852)         (547)       (1,127)
                                                 ---------      ---------     ---------      ---------     ---------     ---------

   Income (loss) before minority interest and
extraordinary item..............................       141          8,493         8,121          6,554           619       (51,344)
Minority interest...............................        --             --            --            132             6         1,364
                                                 ---------      ---------     ---------      ---------     ---------     ---------
   Income (loss) before extraordinary item......       141          8,493         8,121          6,686           625       (49,980)


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


Net income (loss)............................... $     (30)     $   8,493     $   8,121      $   6,686     $     625     $ (49,980)
                                                 =========      =========     =========      =========     =========     =========


OTHER FINANCIAL DATA:
Adjusted EBITDA(8).............................. $   7,836      $  23,135     $  23,728      $  27,239     $   3,706     $  36,881
Adjusted EBITDA margin(9)......................        7.3%          13.8%         11.3%          12.7%         15.8%         13.7%
Depreciation and amortization................... $   4,102      $   7,640     $   9,880      $  10,072     $   1,155     $  43,998
Capital expenditures............................     7,029         15,992        10,407         12,364           308        11,242
Charge related to the write-up of inventory to
  fair value....................................        --             --            --          2,857           569         3,963
Minority interest...............................        --             --            --           (132)           (6)       (1,364)
Write-off of acquired in-process research and
  development...................................     3,446             --            --             --            --        15,000
Other one-time accruals.........................        --             --            --             --            --           999

BALANCE SHEET DATA AT YEAR END:
Working capital................................. $    9,374     $  22,296     $  30,635      $  47,050                   $  26,768
Total assets....................................     80,221       110,796       126,866        228,952                     386,288
Total long term debt, including current portion.     23,320        23,956        14,650         88,945                     204,002
Stockholders' equity............................     29,353        50,415        71,351         79,568                     100,159
</TABLE>


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, 1999 and the consolidated results of operations
     of the Predecessor for the period from January 1, 2000 to February 1, 2000
     and the years ended December 31, 1999, 1998, 1997 and 1996 (collectively
     "Predecessor financial statements"). 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 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)  Includes the results of operations of Fluid Dynamics International from May
     16, 1996 (the date of the acquisition of Fluid Dynamics International).

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

                                       21
<PAGE>   22

(4)  Represents the charges in 1998 related to (i) the estimated restructuring
     costs incurred with our closure of our Manchester, New Hampshire facility,
     (ii) the termination of the management agreement with Sterling Ventures
     Limited and (iii) a bonus due Mr. Beane, our former President and Chief
     Executive Officer, based on profits in excess of certain thresholds. The
     1999 credit of $630 relates to the reversal of excess restructuring
     reserves which were no longer required upon the completion of the
     Manchester restructuring in the fourth quarter of 1999.

(5)  The $3,446 non-recurring charge in 1996 represents the amount of the
     purchase price allocated to technology acquired in the acquisition of Fluid
     Dynamics International in 1996, which was not fully commercially developed
     and had no alternative future use at the time of acquisition. 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)  Represents charge related to early retirement of debt, net of related tax
     effect.

(7)  On December 31, 2000, the Company's common stock was not publicly traded;
     therefore, earnings per share information is not presented.

(8)  Represents net income before interest, income taxes, depreciation and
     amortization and extraordinary items. Adjusted EBITDA for 2000 also
     includes the following add-backs, as defined in the amended and restated
     credit facility, to net income: non-cash charge to cost of sales related to
     the write-up of inventory to fair value associated with purchase
     accounting, minority interest, non-cash write-off of in-process technology,
     one-time accruals related to increases in inventory and receivables
     reserves and severance associated with a senior executive. Each of these
     components of Adjusted EBITDA can significantly affect our results of
     operations and liquidity and should be considered in evaluating our
     financial performance. Adjusted EBITDA is included because we understand
     that such information is considered to be an additional basis on which to
     evaluate our ability to pay interest, repay debt and make capital
     expenditures. Adjusted EBITDA is not intended to represent and should not
     be considered more meaningful than, or as an alternative to, measures of
     performance, profitability or liquidity determined in accordance with
     generally accepted accounting principles.

(9)  Represents Adjusted EBITDA as a percentage of net sales.


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

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

OVERVIEW

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

     We and our predecessors have been engaged in the development and
manufacture of heat sinks and related thermal management products since 1964. In
August 1995, we acquired all the outstanding capital stock of Fluent for $12.8
million. In February 1996, we completed our initial public offering, whereby we
sold an aggregate of 2,645,000 shares of common stock at a price of $9.50 per
share, from which we received net proceeds of approximately $21.7 million.
During 1996, we further expanded our operations through the acquisitions of (1)
Fluid Dynamics International, Inc., a provider of computational fluid dynamics
software, (2) an aluminum extrusion manufacturing facility located in Franklin,
New Hampshire and (3) Beaver Industries, a manufacturer of heat sinks and
related thermal management products for electrical and electronics parts,
components, ensembles and systems in Toronto, Canada.

                                       22
<PAGE>   23

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

     On February 2, 2000, we were acquired in a merger by Heat Holdings Corp., a
corporation newly formed by Willis Stein & Partners II, L.P. (the "Purchaser").
Pursuant to the merger, Aavid stockholders received $25.50 in cash for each
outstanding share of common stock, and outstanding stock options and warrants
were cashed out. The merger was accounted for using the purchase method.


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. 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. The 2000 results include the combined
results of the Predecessor for the period January 1, 2000 through February 1,
2000 and the Company from February 2, 2000 through December 31, 2000.


<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                   -------------------------------------
                                                                      1998          1999         2000
                                                                   ----------    ----------   ----------

<S>                                                                <C>           <C>          <C>
Net sales......................................................       100.0%        100.0%      100.0%
Cost of goods sold.............................................        66.2          64.7        65.6
                                                                       ----          ----       -----

  Gross profit.................................................        33.8          35.3        34.4
Selling, general and administrative expenses...................        20.9          24.3        34.4
Research and development.......................................         3.2           3.5         3.6
Acquired in-process research and development charge............          --            --         5.1
Restructuring and buyout of compensation arrangements..........         2.8          (0.3)         --
                                                                       ----          ----       -----

  Income from operations.......................................         6.9           7.8        (8.7)
Interest expense, net..........................................        (0.6)         (0.7)       (8.2)
Other income (expense) and net.................................        (0.3)          0.1         0.1
                                                                       ----          ----       -----
  Income before income taxes and minority interest.............         6.0           7.2       (16.7)
Provision for income taxes.....................................        (2.1)         (4.1)        (.6)
                                                                       ----          ----       -----
  Income before minority interest..............................         3.9           3.1       (17.3)
Minority interest in loss of consolidated subsidiaries.........          --            --         0.5
                                                                       ----          ----       -----
   Net Income (loss)...........................................         3.9%          3.1%      (16.8)%
                                                                       ====          ====       =====
</TABLE>

                                       23
<PAGE>   24

2000 COMPARED WITH 1999

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

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED
      NET SALES (DOLLARS IN MILLIONS)                                               DECEMBER 31,
      -------------------------------                                         ------------------------
                                                                                1999            2000           CHANGE
                                                                              --------        --------        --------

<S>                                                                           <C>             <C>             <C>
Computer and Networking ..............................................        $   88.0        $   85.5            (2.8)%
Industrial Electronics ...............................................            73.0           148.3           103.2%
Consulting and Design (Applied) ......................................             1.4             1.8            28.6%
                                                                              --------        --------         -------

                                                                                 162.4           235.6            45.1%
Computer and Networking-Intel Special Product ........................             2.6              --          (100.0%)
                                                                              --------        --------         -------
  Total Aavid Thermalloy .............................................           165.0           235.6            42.8%
  Total Fluent .......................................................            49.2            58.0            17.9%
                                                                              --------        --------         -------
  Total Aavid Thermal Technologies (including Intel Special Product)..        $  214.2        $  293.6            37.1%
                                                                              ========        ========         =======
  Total Aavid Thermal Technologies (excluding Intel Special Product)..        $  211.6        $  293.6            38.8%
                                                                              ========        ========         =======
</TABLE>

     Net sales for 2000 were $293.6 million, an increase of $79.4 million, or
37.1%, compared with $214.2 million for 1999. The increase in sales was
primarily the result of having a full year's worth of results from the
Thermalloy Division, which contributed approximately $99.4 million in sales in
2000, versus the $19.4 million contributed in 1999 (from October 21 through
December 31). Additionally, Fluent's sales increased $8.8 million and consulting
services increased $0.4 million. Sales to the Computer and Network industry
segment experienced a decline from 1999 levels of $2.5 million ($9.8 million
after excluding the increase of revenues from the acquisition of Thermalloy).
This decrease was primarily due to a decline in the semi-conductor industry as a
whole, which adversely impacted 2000 performance and which will likely adversely
impact the first half of 2001 and may adversely impact the second half of 2001.
In addition, the Company has deferred expansion of a new fan business in Asia
and does not anticipate significant revenues to be generated from this business
until the second half of 2001. Foreign exchange rates in 2000 also had a
negative impact on revenues. Had foreign exchange rates in 2000 remained
consistent with 1999 exchange rates, the Company's revenues would have been
approximately $5.3 million higher than reported.

     Aavid Thermalloy's net sales were $235.6 million for 2000, an increase of
$70.6 million million, or 42.8%, compared with $165.0 million for 1999. This
increase was primarily the result of having 12 months of Thermalloy sales
included in 2000 results which contributed an additional $80 million of sales
and an increase of $0.4 million of consulting services sales, offset by a
reduction of approximately $9.8 million in Computer and Networking sales as
mentioned above. Industrial electronics net sales increased 103.2% for the year
ended December 31, 2000 compared to the year ended December 31, 1999, primarily
due to the inclusion of Thermalloy revenues for an entire year. 1999 sales
included Thermalloy sales from October 22, 1999 through December 31, 1999.

     Fluent's net sales were $58.0 million for 2000, an increase of $8.8
million, or 17.9%, over $49.2 million for 1999. The increase was spread among
all product offerings due primarily to increased sales to new customers for
computational fluid dynamics software, as well as the success of
application-specific products.

     Excluding net sales for the Intel Special Product, international net sales
(which include North American exports) increased to 42.2% of net sales for the
year ended December 31, 2000 as compared with 37.7% for the year ended December
31, 1999.

     Our gross profit in 2000 was $101.1 million, an increase of $25.4 million,
or 33.6% higher than $75.7 million in 1999. Our gross margin decreased from
35.3% in 1999 to 34.4% in 2000. Our gross margin in the fourth quarter of 1999
was negatively impacted by certain purchase accounting and acquisition related
adjustments which decreased gross profit by $3.8 million. Excluding these
purchase accounting and acquisition related adjustments, gross margin for 1999
was 37.1%. Our gross margin in the first quarter of 2000 was similarly impacted
and was reduced by $4.5 million in acquisition related charges. Our gross margin
in 2000 would have been 36.0% without these charges. A small part of the
decrease in gross margin resulted from the acquisition of Thermalloy which
caused Fluent's higher gross margin business to become a smaller percentage of
the overall Company's gross profit. Furthermore, underutilization of factories
contributed to the decrease in margins; however, this is being addressed through
the on-going integration process which has included the shut-down of duplicative
operations in Santa Ana, California; Hong Kong, China; Corby, U.K.; and High
Wycombe, U.K. and will be substantially complete once the Dallas facility is
shut-down as of June 30, 2001.

     Our selling, general and administrative expenses were $71.4 million, or
24.3% of net sales, for 2000 as compared to $52.0 million, or 24.3% of net
sales, for 1999. The increase in selling, general and administrative expenses in
gross dollars resulted primarily from S,G&A expenses related to Thermalloy which
was included in our results for an entire year, whereas in 1999 we only included
the S,G&A of Thermalloy from October 22, 1999 through December 31, 1999. Also,
Fluent's S,G&A has increased $4.4 million as Fluent enhanced their

                                       24
<PAGE>   25

sales and support infrastructure to accommodate their revenue growth. On a
percentage of net sales basis, S,G&A in 2000 remained consistent with 1999.

     $31.3 million of intangible asset amortization recorded in 2000 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
$10.7 million, or 3.6% of net sales, in 2000 as compared to $7.5 million, or
3.5% of net sales, in 1999. The increase in research and development expenses
was primarily due to increased expenditures at Fluent.

     In connection with the Merger, the Company allocated $15.0 million of the
purchase price to in-process research and development projects. This allocation
represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete software research and development projects of Fluent, Inc. At
the date of the merger, the development of these projects had not yet reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the merger
date.

     The Company allocated values to the in-process research and development
based on an in-depth assessment of the R&D projects. The value assigned to these
assets was limited to significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of the acquired in-process
technologies.

     The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on historical
results, estimates of relevant market sizes and growth factors, expected trends
in technology, and the nature and expected timing of new product introductions
by the Company and its competitors. The resulting net cash flows from such
projects are based on management's estimates of cost of sales, operating
expenses, and income taxes from such projects.

     The nature of the efforts to develop the acquired in-process technologies
into commercially viable products and services principally related to the
completion of certain planning, designing, coding, prototyping, and testing
activities that were necessary to establish that the developmental software
technologies met their design specifications including functional, technical,
and economic performance requirements. At the merger date, the technologies
under development were between 40% and 80% complete, based upon project
man-month and cost data. Anticipated completion dates ranged from 6 to 18
months, at which times the Company expects to begin selling the developed
products. Development costs to complete the R&D were estimated at approximately
$4.0 million.

     Fluent's primary in-process R&D projects involved developing: (i) Fluent
version 6.0; (ii) Gambit version 2.0; (iii) materials processing functionality;
and, (iv) advanced infrastructure technology. Fluent 6.0 represents the
Company's next-generation computational fluid dynamics (CFD) software engine.
Gambit 2.0 includes new pre-processor CFD technologies. The development of
materials processing technologies is designed to address CFD needs in new
markets. The advanced infrastructure technology establishes a new platform upon
which future products will be more efficiently and rapidly developed.

     Aggregate revenues for the developmental Fluent products were estimated to
peak within three years of acquisition and then decline steadily as other new
products and technologies are expected to enter the market. Operating expenses
were estimated based on historical results and management's analysis of Fluent's
cost structure. Projected operating expenses as a percentage of revenues were
expected to be stable for the foreseeable future.

     The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. A discount rate of 18
percent was considered appropriate for the in-process R&D, and a discount rate
of 15 percent was appropriate for the existing products and technologies. These
discount rates were commensurate with the Fluent's long history and market
leadership position. The discount rate utilized for the in-process technology
was higher than Aavid's cost of capital due to the inherent uncertainties
surrounding the successful development of the purchased in-process technology,
the useful life of such technology, the profitability levels of such technology
and the uncertainty of technological advances that are unknown at this time.

     With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the development efforts of Fluent prior to the
close of the merger. In doing so, consideration was given to each major
project's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete the projects.

                                       25
<PAGE>   26

     The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the merger. No assurance can be given, however,
that the underlying assumptions used to estimate sales, development costs or
profitability, or the events associated with such projects, will transpire as
estimated. For these reasons, actual results may vary from projected results.
The most significant and uncertain assumptions relating to the in-process
projects relate to the projected timing of completion of, and revenues
attributable to, each project.

     If these projects are not successfully developed, the sales and
profitability of the Fluent division may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired

     Our loss from operations in 2000 was $25.5 million, a decline of $41.7
million from operating income of $16.2 million in 1999 (excluding non-recurring
charges (credits)). The decrease in income from operations is primarily the due
to amortization related to goodwill and other intangible assets resulting from
the Merger of $31.2 million. In addition, as mentioned above, the Company
wrote-off $15.0 million of in-process technology related to Fluent. These two
charges were partially off-set by an increase in income from operations at
Fluent of $4.2 million. Fluent's income from operations as a percentage of net
sales increased to 20.1% in 2000, compared with 15.3% in 1999. Fluent's
operating margins increased primarily because selling, general and
administrative expenditures grew at a slower rate than sales.

     Our net interest charges were $23.9 million in 2000, a $22.3 million
increase over interest charges of $1.6 million in 1999. This increase in
interest charges resulted from significantly higher levels of indebtedness
incurred in connection with the Willis Stein merger and the acquisition of
Thermalloy in October of 1999.

     The Company incurred a tax provision in 2000 despite having significant
operating losses because of significant non-deductible goodwill amortization and
in-process R&D charges and a foreign tax provision of $5.1 million 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 incurred subsequent to
year end. Because the Company is in a net operating loss carryforward position
for U.S. tax purposes, the Company will not receive any tax benefit from foreign
tax credits. 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.

1999 COMPARED WITH 1998

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

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

<S>                                                                           <C>             <C>             <C>

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

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

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

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

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

                                       26
<PAGE>   27

ended December 31, 1999 compared to the year ended December 31, 1998. Industrial
electronics net sales were significantly impacted in the third quarter and
fourth quarters of 1998 and to a lesser extent in the first quarter of 1999 by
the Asian economic slowdown.

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

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

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

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

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

     In 1997, we opened a facility in Manchester, New Hampshire specifically for
the production of a special heat dissipating plate for Intel Corporation (the
"Intel Special Product"). In the second half of July 1998, Intel notified us of
significant reductions in expected purchases of the Intel Special Product. As a
result, during the third quarter of 1998, we decided to close our Manchester
facility and we recorded a non-recurring pre-tax charge of $4.9 million,
reflecting the costs associated with such closure. The non-recurring revenues
related to the Intel Special Product were approximately $2.6 million, or 1% of
net sales in 1999, $47.0 million, or 22% of net sales in 1998, and approximately
$24.7 million, or 15% of sales in 1997. The Intel Special Product had a lower
gross margin than our other thermal management products. Intel remains one of
our major customers, although sales to Intel in 1999 were less than 5% of total
sales. No customer generated more than 10% of sales in 1999.

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

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

                                       27
<PAGE>   28

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

LIQUIDITY AND CAPITAL RESOURCES

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

     Net cash provided by operating activities for the year ended December 31,
2000 was $24.2 million compared to $15.8 million for the year ended December 31,
1999. We had $26.8 million in working capital as of December 31, 2000 compared
with $47.1 million for the prior year period. At December 31, 2000, accounts
receivable days sales outstanding ("DSO") were 66 days, which compares with 71
days at December 31, 1999. At December 31, 2000, inventory turns were 6.4 times,
which compares with 6.0 times at December 31, 1999.

     During the year ended December 31, 2000, we made capital expenditures of
$11.7 million compared with $13.1 million in 1999. Of these amounts, $0.2
million and $0.7 million related to assets acquired under capital leases in 2000
and 1999, respectively.

     In connection with the Merger, pursuant to which we became a wholly-owned
subsidiary of Heat Holdings Corp., we amended and restated our credit facility
to, among other things, add Heat Holdings as a guarantor, permit the issuance of
the senior notes and amend certain of the financial ratios and restrictive
covenants to reflect such issuance. The amended and restated credit facility,
which replaced our $100 million revolving credit and term loan facility,
currently consists of a $53 million term loan facility (the "Term Facility") and
a $17 million revolving credit facility, including a $2 million letter of credit
subfacility (the "Revolving Facility"). The Term Facility, all of which was
borrowed on February 2, 2000 to repay amounts outstanding under our existing
credit facility, matures on March 31, 2005, and is being amortized in 18
consecutive quarterly installments, commencing December 31, 2000, as follows:
five quarterly payments of $2 million each; four quarterly payments of $2.5
million each; four quarterly payments of $2.75 million each; two quarterly
payments of $3.2 million each; two quarterly payments of $3.9 million; and a
final payment of $7.8 million. The Revolving Facility matures on March 31, 2005.
The Credit Facility bears interest at a rate equal to, at our option, either (1)
in the case of Eurodollar loans, the sum of (x) the interest rate in the London
interbank market for loans in an amount substantially equal to the amount of
borrowing and for the period of borrowing selected by us and (y) a margin of
between one and one-half percent and two and one-quarter percent (depending on
our consolidated leverage ratio (as defined in the credit agreement)) or (2) the
sum of (A) the higher of (x) Canadian Imperial Bank of Commerce's prime or base
rate or (y) one-half percent plus the latest overnight federal funds rate plus
(y) a margin of between one quarter percent and one percent (depending on our
consolidated leverage ratio). The Credit Facility may be prepaid at any time in
whole or in part without penalty, and must be prepaid to the extent of certain
equity or asset sales and excess cash flow.

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

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

                                       28
<PAGE>   29

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

     At December 31, 2000, the Company was not in compliance with the leverage
ratio covenant required by the amended and restated credit facility and the
indenture under which our senior notes were issued. As a result, the Company's
stockholders are required to make an equity contribution of up to $25.0 million
sufficient to allow the Company to pay down enough debt to achieve a 4.5 to 1
leverage ratio based on total leverage at December 31, 2000. Subsequent to
December 31, 2000, certain of the Company's stockholders and their affiliates
agreed, subject to definitive documentation, to make an equity contribution of
$8.0 million in cash and up to $25.0 million in principal amount of senior notes
in full satisfaction of this obligation. This contribution is required to be
made by May 15, 2001. In addition, the Company and the lenders under the amended
and restated credit facility have agreed, subject to definitive documentation,
to amend the facility such that the last three required quarterly principal
payments in 2001 under the facility will be prepaid with $6 million of the
proceeds of the equity contribution, and the four required principal payments in
2002 will be reduced by $0.5 million each, reflecting application of the
remaining cash equity contribution. Further, certain covenant ratios and ratio
definitions will be amended to levels which the Company expects to meet through
December 31, 2001 and the available line of credit will be reduced to $17.0
million from $22.0 million. Based on the equity contribution, the Company's
event of non-compliance with the leverage ratio covenant at December 31, 2000
will be cured.

     During the first half of 2001 the Company plans to close its Dallas, Texas
facility. In connection with the closure, the Company expects to record a
one-time restructuring charge within the statement of operations for the first
quarter of 2001. This one-time charge will include estimated amounts related to
employee severance, write-off of fixed assets and write-off of most of a prepaid
lease intangible asset that was originally recorded as part of the Thermalloy
acquisition. The total restructuring charge is estimated to be in the range of
$10.0 million to $13.5 million, of which approximately $4.0 million to $5.0
million relates to the write-off of the prepaid lease intangible. The estimated
cash component of the restructuring charge is primarily related to employee
severance and is expected to be in the range of $2.5 million to $3.5 million.
The balance of the charge, $3.5 million to $5.0 million, is related to estimated
fixed asset write-offs.

     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 $1.605 million at December 31, 2000.

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


                                       29
<PAGE>   30

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Upward or downward changes in market interest rates and their impact on the
reported interest expense of the Company's variable rate borrowings will affect
the our future earnings; however, a ten percent change in 2000 effective
interest rates would have an approximate $0.5 million impact on our earnings for
2001, based on debt composition and rates in effect at December 31, 2000.

     The Company did not enter into foreign currency forward exchange contracts
or any other derivatives during 1999 or 1998. However, in 2000 the Company
entered into forward exchange contracts to hedge certain intercompany sales
transactions between a German operating company and a United States operating
company. The Company had contracts outstanding for the sale of $1,200 U.S.
Dollars for 2,466 German Marks. As these derivatives are intended to hedge
anticipated transactions, they do not qualify for hedge accounting as of
December 31, 2000 under Statement of Financial Accounting Standards No. 52 and
thus the related gain (loss) on these contracts are recognized currently. On
this basis of valuation, the gain (loss) for the future effects of the contracts
will be approximately $(22). The fair value of open forward exchange contracts
at December 31, 2000 was a liability of approximately $22, as determined by the
counterparty financial institution and represents the present value of the
gain/(loss) as if the settlement were to have taken place on December 31, 2000.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Financial Statements and supplementary data required pursuant to this Item
begin on page 41 of this Report.

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

     Not applicable.



                                       30
<PAGE>   31

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

    The following table sets forth the names of each of the our directors as of
March 31, 2001, their ages, the year in which each became a director and their
principal occupations during the past five years:

<TABLE>
<CAPTION>
                                        YEAR
                                        FIRST
                                        BECAME                                   PRINCIPAL OCCUPATION
        NAME               AGE         DIRECTOR                              DURING THE PAST FIVE YEARS
---------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>          <C>         <C>
Daniel H. Blumenthal       37           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, and as a corporate tax attorney
                                                    with Latham & Watkins, a national law firm, from 1988 to 1993.

Avy H. Stein               46           2000        Mr. Stein became a director upon consummation of the Merger on February 2,
                                                    2000. Mr. Stein has been a managing director of Willis Stein & Partners
                                                    since its inception in 1994. Prior to that time, he served as a managing
                                                    director of CIVC, a private investment firm, from 1989 to 1994. Prior to his
                                                    tenure at CIVC, Mr. Stein served as a special consultant for mergers and
                                                    acquisitions to the chief executive officer of NL Industries, Inc.; as the
                                                    chief executive officer and principal shareholder of Regent Corporation; as
                                                    president of Cook Energy Corporation and as an attorney with Kirkland &
                                                    Ellis, a national law firm. Mr. Stein also serves as a director of CTN Media
                                                    Group, Inc., Racing Champions Corporation and Tremont Corporation.

Ronald F. Borelli          64           1993        Mr. Borelli has been a Director of the Company since October 1993, and
                                                    Chairman of the Board since 1996. He served as Chief Executive Officer from
                                                    October, 1996  through  December, 1999. Prior to joining the Company and
                                                    since 1989, Mr. Borelli was the Chief Executive Officer and a Director of
                                                    Spectra, Inc., a hot melt ink jet company focusing on color printers. From
                                                    1982 to March 1989 Mr. Borelli was a Senior Vice President of SCI Systems.
                                                    Prior thereto he spent 20 years at Honeywell in a variety of engineering and
                                                    management positions.

Bharatan R. Patel          52           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.

Charles A. Dickinson       77           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       62           1994        Mr. Steadman served as Chairman of the Board from February 1995 until
                                                    October 1996;  Director of Tech/Ops Sevcon, Inc.; Chairman of Visibility,
                                                    Inc. 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>


                                       31
<PAGE>   32

MEETINGS OF THE BOARD OF DIRECTORS

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

     During the fiscal year ended December 31, 2000, our Board of Directors held
5 formal meetings. Each director attended at least 75% of the meetings of the
Board of Directors held during 2000.

BOARD COMMITTEES

     Our Board of Directors did not have committees during the year ending
December 31, 2000.

EXECUTIVE OFFICERS

     Our executive officers are as follows:

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

<S>                                                <C>  <C>
Ronald F. Borelli.............................     64   Chairman of the Board of Directors
Bharatan R. Patel.............................     52   President and Chief Executive Officer, Aavid Thermal Technologies, Inc. and
                                                        Aavid Thermalloy; Chief Executive Officer, Fluent; Director
Bryan A. Byrne................................     53   Vice President and Chief Financial Officer
John W. Mitchell..............................     52   Vice President and General Counsel, Aavid
H. Ferit Boysan...............................     53   President and Chief Operating Officer, Fluent
Peter L. Christie.............................     55   Vice President and Chief Financial Officer of Fluent
</TABLE>

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

     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 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.

     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.

                                       32
<PAGE>   33

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

     In March, 2001 Gerald Walle joined Aavid Thermalloy as its President and
Chief Operating Officer. Mr. Walle comes to Aavid from Empirix Inc. where he was
the Chief Financial Officer. From 1987 to 1999 he was the General Manager of the
Microelectronics Division of Millipore Corporation. Prior to his tenure at
Millipore, Gerald was the International Marketing Manager for Instrumentation
Laboratory, a global manufacturer and distributor of clinical chemistry and
blood gas analyzers owned by Allied-Signal and Fisher Scientific Group. Mr.
Walle has also been the International Business Development Manager at Bendix and
served as a management consultant with Mars & Co., Paris, France and the Boston
Consulting Group, Paris, France.


ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION OF EXECUTIVE OFFICERS

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

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                                     LONG-TERM
                                                                                                                    COMPENSATION
                                                                                       COMPENSATION                    AWARDS
                                                                          -----------------------------------  ---------------------
                                                                               ANNUAL                          SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION                            FISCAL YEAR             SALARY             BONUS                OPTIONS
---------------------------                      ---------------------    ----------------   ----------------  ---------------------
<S>                                              <C>                      <C>                <C>               <C>
Bharatan R. Patel(1).............................         2000               $ 346,858           $      --                 --
Chief Executive Officer                                   1999                 244,115             125,000             24,950
                                                          1998                 225,000                  --             10,000

Brian A. Byrne (2)...............................         2000               $ 120,577           $      --                 --
Vice President and                                        1999                     N/A                 N/A                N/A
Chief Financial Officer                                   1998                     N/A                 N/A                N/A

H. Ferit Boysan(3)...............................         2000               $ 171,875           $ 149,213                 --
President and Chief Operating Officer of                  1999                 169,365             137,300             24,950
Fluent                                                    1998                 165,858              79,065              5,000

John W. Mitchell..............................            2000               $ 210,422           $      --                 --
Vice President, General                                   1999                 196,088              75,000             10,000
Counsel and Secretary                                     1998                 185,228                  --              3,000

Peter L. Christie.............................            2000               $ 137,914           $ 100,427                 --
Chief Financial Officer                                   1999                 125,077              27,920              3,000
of Fluent                                                 1998                  39,583              15,000             10,000
</TABLE>


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

(2)  Mr. Byrne became joined the Company as Chief Financial Officer in April,
     2000.

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


                                       33
<PAGE>   34

EMPLOYMENT AGREEMENTS

     Aavid has entered into an employment agreements with Messrs. Patel, Byrne
and Mitchell, which currently expire on July 1, 2005 and Fluent has entered into
an employment agreement with Mr. Boysan, which currently expires on July 1,
2005.

     The employment agreements require each employee to devote his full business
time and best efforts, business judgment, skill and knowledge exclusively to the
advancement of the business and interests of Aavid. The employment agreements
currently provide for the payment of a base salary to Messrs. Patel, Boysan,
Mitchell and Byrne equal to $350,000, $200,000, $210,000, and $165,000,
respectively, subject to increase at the discretion of the board of directors of
their respective employers. Each employment agreement provides that the employee
will continue to receive his base salary, 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%, 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

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

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

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

                                       34
<PAGE>   35

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

     After the Merger, each of Messrs. Steadman and Dickinson received an annual
fee of $15,000 and $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 stock
of Aavid (excluding detachable warrants, sold to noteholders in connection with
the sale of the senior notes, to acquire, in the aggregate, 60 shares of Class A
common stock and 60 shares of Class H common stock, representing 3% of the
common stock of Aavid (on a fully diluted basis)).

     The following table sets forth certain information regarding the beneficial
ownership of the issued and outstanding common stock of Holdings as of March 1,
2001. None of our executive officers or directors own any Holdings securities,
except as set forth below.

                             BENEFICIAL OWNERSHIP(1)

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

<S>                                  <C>                        <C>                       <C>                        <C>
Willis Stein(3)                             4,938,500.0                4,938,500.0                9,877,000              67.10%
The Chase Manhattan Bank, as
trustee for First Plaza Group Trust(4)      1,210,416.5                1,210,416.5                2,420,833              16.45%
Nassau Capital(5)                             484,167.0                  484,167.0                  968,334               6.58%
Abbott Capital Management(6)                  484,167.0                  484,167.0                  968,334               6.58%
BancBoston Investments, Inc.(7)               242,083.5                  242,083.5                  484,167               3.29%
</TABLE>

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

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

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

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

                                       35
<PAGE>   36

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

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

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

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

     Our executive officers and certain of our employees own approximately 8% 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

                                     PART IV

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

(a)  Financial Statements and Financial Schedules

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

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


                                       36
<PAGE>   37

NO.       DESCRIPTION
---       -----------

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

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

3.1       Certificate of Incorporation (2)

3.2       By-laws(2)

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

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

10.1      Employment Agreement, dated as of May 1, 1999, between Bharatan R.
          Patel and Fluent(5)

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

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

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

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

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

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

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

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

10.10     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)

21.0      Subsidiaries of Registrant(2)


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


                                       37
<PAGE>   38

                                   SIGNATURES

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

                                   AAVID THERMAL TECHNOLOGIES, INC.

                                   By: /s/ Bharatan R. Patel
                                      ------------------------------------------
                                      Bharatan R. Patel President and Chief
                                      Executive Officer April 13, 2001

Dated April 17, 2001

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

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

<S>                                     <C>                                          <C>
/s/ Bharatan Patel                      President and CEO                            April 17, 2001
---------------------------------       (Principal Executive Officer)
Bharatan Patel

/s/ Brian Byrne                         Chief Financial Officer                      April 17, 2001
---------------------------------       (Principal Financial and Accounting
Brian Byrne                             Officer)

/s/ Ronald Borelli                      Director and Chairman of the Board           April 17, 2001
---------------------------------
Ronald Borelli

/s/ Avy H. Stein                        Director                                     April 17, 2001
---------------------------------
Avy H. Stein

/s/ Daniel H. Blumenthal                Director                                     April 17, 2001
---------------------------------
Daniel H. Blumenthal

/s/ Charles A. Dickinson                Director                                     April 17, 2001
---------------------------------
Charles A. Dickinson

/s/ David R.A. Steadman                 Director                                     April 17, 2001
---------------------------------
David R.A. Steadman
</TABLE>


                                       38
<PAGE>   39

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



AAVID THERMAL TECHNOLOGIES, INC.

<TABLE>
<CAPTION>
                                                                                                                               PAGE
                                                                                                                               ----
<S>                                                                                                                            <C>
Report of Independent Public Accountants......................................................................................  40

Consolidated Balance Sheets as of December 31, 2000 and 1999..................................................................  41

Consolidated Statements of Operations for the Period from February 2, 2000 Through December 31, 2000,the Period from
 January 1, 2000 Through February 1, 2000 and the years ended December 31, 1999 and 1998......................................  42

Consolidated Statements of Changes in Stockholders' Equity for the Period from February 2, 2000 Through December 31, 2000,
 the Period from January 1, 2000 Through February 1, 2000 and the years ended December 31, 1999 and 1998......................  43

Consolidated Statements of Cash Flows for the Period from February 2, 2000 Through December 31, 2000,
the Period from January 1, 2000 Through February 1, 2000 and the years ended December 31, 1999 and 1998.......................  45

Notes to Consolidated Financial Statements....................................................................................  46

Schedule II -- Valuation & Qualifying Accounts................................................................................  69
</TABLE>


                                       39
<PAGE>   40

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO AAVID THERMAL TECHNOLOGIES, INC.:

We have audited the accompanying consolidated balance sheet of Aavid Thermal
Technologies, Inc. and subsidiaries (a Delaware Corporation) as of December 31,
2000, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the period from February 2, 2000 through
December 31, 2000. We have also audited the accompanying consolidated balance
sheet of the Predecessor as of December 31, 1999 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
period from January 1, 2000 through February 1, 2000 and the years ended
December 31, 1999 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aavid Thermal Technologies,
Inc. and subsidiaries as of December 31, 2000 and the results of their
operations and their cash flows for the period from February 2, 2000 through
December 31, 2000 and the financial position of the Predecessor as of December
31, 1999 and the results of their operations and their cash flows for the period
from January 1, 2000 through February 1, 2000 and the years ended December 31,
1999 and 1998 in conformity with accounting principles generally accepted in the
United States.

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

/s/ ARTHUR ANDERSEN LLP
BOSTON, MASSACHUSETTS
April 16, 2001


                                       40
<PAGE>   41

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

<TABLE>
<CAPTION>
ASSETS                                                                               DECEMBER 31, 2000            DECEMBER 31, 1999
------                                                                              -----------------------------------------------
                                                                                       (THE COMPANY)              (THE PREDECESSOR)
<S>                                                                                 <C>                           <C>
Cash and cash equivalents........................................................        $  23,849                     $  18,273
Accounts receivable-trade, less allowance for doubtful accounts..................           49,094                        53,583
Inventories......................................................................           25,203                        30,059
Refundable taxes.................................................................               --                           333
Deferred income taxes............................................................               --                         1,963
Prepaid and other current assets.................................................            4,625                         4,099
                                                                                         ---------                     ---------
Total current assets.............................................................          102,771                       108,310
Property, plant and equipment, net...............................................           57,013                        60,955
Goodwill, net of accumulated amortization of $21,247 and $3,108 at December 31,
2000 and 1999, respectively......................................................          162,430                        50,330
Developed technology and assembled workforce, net of accumulated amortization of
$9,985 at December 31, 2000......................................................           49,015                            --
Other assets, net................................................................           15,059                         9,357
                                                                                         ---------                     ---------

Total assets.....................................................................        $ 386,288                     $ 228,952
                                                                                         =========                     =========

LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS' EQUITY
---------------------------------------------------------
Current portion of debt obligations..............................................        $  10,768                     $   2,337
Accounts payable-trade...........................................................           18,582                        21,805
Income taxes payable.............................................................            6,250                         4,637
Restructuring charges............................................................            1,274                         2,333
Deferred revenue.................................................................            9,390                         7,765
Deferred income taxes............................................................            1,741                            --
Accrued expenses and other current liabilities...................................           29,998                        22,383
                                                                                         ---------                     ---------
Total current liabilities........................................................           78,003                        61,260
Revolving line of credit.........................................................            7,700                         8,182
Term loan........................................................................           41,000                        78,000
12 3/4% senior subordinated notes................................................          144,290                            --
Other long term debt obligations.................................................              244                           426
Deferred income taxes............................................................            9,977                           707
                                                                                         ---------                     ---------
Total liabilities................................................................          281,214                       148,575

Commitments and contingencies (Note K)

Minority interests in consolidated subsidiaries..................................            4,915                           809

Stockholders' equity:
Common Stock, $0.01 par value; authorized 25,000,000 shares; 9,608,868 shares
issued and outstanding at  December 31, 1999, none at December 31, 2000..........               --                            96
Class A Common Stock, $.0001 par value; authorized 1,000 shares; 940 shares
issued and outstanding at December 31, 2000, none at December 31, 1999...........               --                            --
Class B Common Stock, $.0001 par value; authorized 1,000 shares; 1,000 shares
issued and outstanding at December 31, 2000, none at December 31, 1999...........               --                            --
Class H Common Stock, $.0001 par value; authorized 1,000 shares; 40 shares issued
and outstanding at December 31, 2000, none at December 31, 1999..................               --                            --
outstanding at December 31, 2000, none at December 31, 1999......................
Warrants to purchase 60 shares of Class A common stock and 60 shares of Class H
common stock at December 31, 2000, none at December 31, 1999.....................            4,560                            --
Additional paid-in capital.......................................................          147,187                        58,660
Cumulative translation adjustment................................................           (1,608)                       (1,294)
Retained (deficit) earnings......................................................          (49,980)                       22,106
                                                                                         ---------                     ---------
Total stockholders' equity.......................................................          100,159                        79,568
                                                                                         ---------                     ---------

Total liabilities, minority interests and stockholders' equity...................        $ 386,288                     $ 228,952
                                                                                         =========                     =========
</TABLE>

     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.

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


                                       41
<PAGE>   42

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

<TABLE>
<CAPTION>
                                                                             THE PERIOD FROM
                                                       THE PERIOD FEBRUARY   JANUARY 1, 2000           YEARS ENDED DECEMBER 31,
                                                         2, 2000 THROUGH     THROUGH FEBRUARY          ------------------------
                                                        DECEMBER 31, 2000        1, 2000                1999               1998
                                                        -----------------        -------            ------------       ------------

                                                            (COMPANY)         (PREDECESSOR)        (PREDECESSOR)      (PREDECESSOR)
<S>                                                    <C>                   <C>                   <C>                <C>
Net sales .............................................    $  270,184           $   23,442          $  214,243         $  209,078
Cost of goods sold ....................................       176,982               15,516             138,558            138,431
                                                           ----------           ----------          ----------         ----------
Gross profit ..........................................        93,202                7,926              75,685             70,647
Selling, general and administrative expenses ..........        64,410                5,032              51,970             43,783
Amortization of intangible assets .....................        31,338                  182                  --                 --
Acquired in-process research and development ..........        15,000                   --                  --                 --
Research and development ..............................         9,935                  752               7,528              6,756
Restructuring and buyout of compensation agreement
(credits) charges .....................................            --                   --                (630)             5,740
                                                           ----------           ----------          ----------         ----------

(Loss) income from operations .........................       (27,481)               1,960              16,817             14,368
Interest expense, net .................................       (23,115)                (816)             (1,629)            (1,342)
Other income (expense), net ...........................           379                   22                 218               (520)
                                                           ----------           ----------          ----------         ----------
(Loss) income before income taxes and minority interest       (50,217)               1,166              15,406             12,506
Provision for income taxes ............................        (1,127)                (547)             (8,852)            (4,385)
                                                           ----------           ----------          ----------         ----------
(Loss) income before minority interests ...............       (51,344)                 619               6,554              8,121
Minority interests in loss of consolidated subsidiaries         1,364                    6                 132                 --
                                                           ----------           ----------          ----------         ----------
Net (loss) income .....................................    $  (49,980)          $      625          $    6,686         $    8,121
                                                           ===========          ==========          ==========         ==========
</TABLE>

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.

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


                                       42
<PAGE>   43

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


<TABLE>
<CAPTION>
                                                                              CLASS A              CLASS B             CLASS H
                                                    COMMON STOCK           COMMON STOCK         COMMON STOCK        COMMON STOCK
                                                    ------------           ------------         ------------        ------------
                                                SHARES        AMOUNT     SHARES     AMOUNT    SHARES      AMOUNT   SHARES  AMOUNT
                                                ------        ------     ------     ------    ------      ------   ------  ------

<S>                                           <C>           <C>          <C>       <C>        <C>        <C>       <C>     <C>
Balance, December 31, 1997
(Predecessor) ..........................      7,558,537     $       76      --     $    --        --     $    --     --     $ --
Comprehensive income:
  Net income ...........................             --             --      --          --        --          --     --       --
  Cumulative translation adjustment ....             --             --      --          --        --          --     --       --
Comprehensive income ...................             --             --      --          --        --          --     --       --
Proceeds from exercise of options ......      1,192,117             12      --          --        --          --     --       --
Proceeds from exercise of warrants .....        466,455              5      --          --        --          --     --       --
Proceeds from the issuance of
common stock ...........................         34,282             --      --          --        --          --     --       --
Income tax benefit from stock options...             --             --      --          --        --          --     --       --
                                             ----------     ----------     ---     -------     -----     -------     --     ----
Balance, December 31, 1998
  (Predecessor) ........................      9,251,391     $       93      --     $    --        --     $    --     --     $ --
                                             ==========     ==========     ===     =======     =====     =======     ==     ====

Comprehensive income:
  Net income ...........................             --             --      --          --        --          --     --       --
  Cumulative translation adjustment ....             --             --      --          --        --          --     --       --
Comprehensive income ...................             --             --      --          --        --          --     --       --
Proceeds from exercise of options ......        311,916              3      --          --        --          --     --       --
Proceeds from the issuance of
  common stock .........................         45,561             --      --          --        --          --     --       --
Income tax benefit from stock options...             --             --      --          --        --          --     --       --
                                             ----------     ----------     ---     -------     -----     -------     --     ----
Balance, December 31, 1999
  (Predecessor) ........................      9,608,868     $       96      --     $    --        --     $    --     --     $ --
                                             ==========     ==========     ===     =======     =====     =======     ==     ====

Comprehensive income:
  Net income ...........................             --             --      --          --        --          --     --       --
  Cumulative translation adjustment ....             --             --      --          --        --          --     --       --
Comprehensive income ...................             --             --      --          --        --          --     --       --
Proceeds from exercise of options ......      1,391,254             14      --          --        --          --     --       --
Proceeds from the issuance of
  common stock .........................         17,164             --      --          --        --          --     --       --
Income tax benefit from stock options...             --             --      --          --        --          --     --       --
                                             ----------     ----------     ---     -------     -----     -------     --     ----
Balance, February 1, 2000
  (Predecessor) ........................     11,017,286     $      110      --     $    --        --     $    --     --     $ --
                                             ==========     ==========     ===     =======     =====     =======     ==     ====

---------------------------------------------------------------------------------------------------------------------------------
Willis Stein merger
  re-capitalization (Company) ..........             --             --     940          --     1,000          --     40       --
Issuance of warrants in
  association with 12.75%
  subordinated notes ...................             --             --      --          --        --          --     --       --
Comprehensive loss: ....................             --             --      --          --        --          --     --       --
  Net loss .............................             --             --      --          --        --          --     --       --
  Cumulative translation adjustment ....             --             --      --          --        --          --     --       --
                                             ----------     ----------     ---     -------     -----     -------     --     ----
Comprehensive loss
Balance, December 31, 2000 (Company) ...             --     $       --     940     $    --     1,000     $    --     40     $ --
                                             ==========     ==========     ===     =======     =====     =======     ==     ====
</TABLE>

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.

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


                                       43
<PAGE>   44


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


<TABLE>
<CAPTION>
                                                            ADDITIONAL                    CUMULATIVE      RETAINED
                                                             PAID-IN     COMPREHENSIVE    TRANSLATION     EARNINGS
                                              WARRANTS       CAPITAL     INCOME (LOSS)    ADJUSTMENT      (DEFICIT)       TOTAL
                                              --------      ----------   -------------    -----------     ---------       -----

<S>                                          <C>            <C>          <C>              <C>            <C>            <C>
Balance, December 31, 1997
  (Predecessor) ........................     $      --      $  43,793                     $    (753)     $   7,299      $  50,415
Comprehensive income:
  Net income ...........................            --             --      $   8,121             --          8,121          8,121
  Cumulative translation adjustment ....            --             --           (149)          (149)            --           (149)
                                                                           ---------
Comprehensive income ...................                                   $   7,972
                                                                           =========
Proceeds from exercise of options ......            --          3,469                            --             --          3,481
Proceeds from exercise of warrants .....            --             (5)                           --             --             --
Proceeds from the issuance of common
  stock ................................            --            622                            --             --            622
Income tax benefit from stock options ..            --          8,861                            --             --          8,861
                                             ---------      ---------                     ---------      ---------      ---------
Balance, December 31, 1998 (Predecessor)     $      --      $  56,740                     $    (902)     $  15,420      $  71,351
                                             =========      =========                     =========      =========      =========

Comprehensive income:
  Net income ...........................            --             --      $   6,686             --          6,686          6,686
  Cumulative translation adjustment ....            --             --           (392)          (392)            --           (392)
                                                                           ---------
Comprehensive income ...................                                   $   6,294
                                                                           =========
Proceeds from exercise of options ......            --          1,162                            --             --          1,165
Proceeds from the issuance of common
  stock ................................            --            634                            --             --            634
Income tax benefit from stock options ..            --            124                            --             --            124
                                             ---------      ---------                     ---------      ---------      ---------
Balance, December 31, 1999 (Predecessor)     $      --      $  58,660                     $  (1,294)     $  22,106      $  79,568
                                             =========      =========                     =========      =========      =========
Comprehensive income:
  Net income ...........................            --             --      $     625             --            625            625
  Cumulative translation adjustment ....            --             --            (89)           (89)            --            (89)
                                                                           ---------
Comprehensive income ...................                                   $     536
                                                                           =========
Proceeds from exercise of options ......            --         20,243                            --             --         20,257
Proceeds from the issuance of common
  stock ................................            --            330                            --             --            330
Income tax benefit from stock options ..            --          6,213                            --             --          6,213
                                             ---------      ---------                     ---------      ---------      ---------
Balance, February 1, 2000 (Predecessor)      $      --      $  85,446                     $  (1,383)     $  22,731      $ 106,904
                                             =========      =========                     =========      =========      =========

------------------------------------------------------------------------------------------------------------------------------------
  Willis Stein merger
re-capitalization (Company) ............            --        147,187                            --             --        147,187
  Issuance of warrants in
association with 12.75% subordinated
  notes ................................         4,560             --                            --             --          4,560
Comprehensive loss:
  Net loss .............................            --             --      $ (49,980)            --        (49,980)       (49,980)
  Cumulative translation adjustment ....            --             --         (1,608)        (1,608)            --         (1,608)
                                             ---------      ---------      ---------      ---------      ---------      ---------
Comprehensive loss .....................                                   $ (51,588)
                                                                           =========
Balance, December 31, 2000 (Company) ...     $   4,560      $ 147,187                     $  (1,608)     $ (49,980)     $ 100,159
                                             =========      =========                     =========      =========      =========
</TABLE>


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.

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


                                       44
<PAGE>   45


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

<TABLE>
<CAPTION>
                                                                                                   YEARS ENDED DECEMBER 31,
                                                                                                   ------------------------
                                               THE PERIOD FEBRUARY 2, THE PERIOD JANUARY 1,
                                               2000 THROUGH DECEMBER  2000 THROUGH FEBRUARY
                                                      31, 2000               1, 2000                1999                 1998
Cash flows provided by (used for) operating    ---------------------- ---------------------  -----------------    -----------------
  activities:                                       (THE COMPANY)       (THE PREDECESSOR)    (THE PREDECESSOR)    (THE PREDECESSOR)
<S>                                            <C>                    <C>                    <C>                  <C>
Net (loss) income                                     $ (49,980)           $     625            $   6,686            $   8,121
Adjustments to reconcile net (loss) income
  to net cash provided by operating
  activities:
   Depreciation and amortization                         43,998                1,155               10,072                9,880
   Acquired in-process research and
     development                                         15,000                   --                   --                   --
   Charge from inventory write-up to fair
     value                                                3,963                  569                   --                   --
   (Gain) loss on sale of property, plant
     and equipment                                         (135)                  --                  284                   17
   Deferred income taxes                                  3,834                  (22)               4,081               (2,172)
   Accretion of discount on senior
     subordinated notes to interest expense                 539                   --                   --                   --
   Minority interests in loss of
     consolidated subsidiaries                           (1,364)                  (6)                (132)                  --

Changes in assets and liabilities, net of
  effects from acquisitions:
   Accounts receivable-trade                              5,267                 (578)              (3,596)               1,949
   Inventories                                            5,402                 (499)                (996)              (1,468)
   Refundable taxes                                          --                   --                   72                1,766
   Prepaid and other current assets                      (1,224)                 (53)                (450)              (4,861)
   Other long term assets                               (10,971)                 137               (4,386)                 153
   Accounts payable-trade                                (5,419)               2,346               (4,325)               1,201
   Income taxes payable                                     399                  337                1,128                  331
   Deferred revenue                                       1,516                  109                2,304                  574
   Accrued expenses and other current
     liabilities                                          9,768                 (473)               5,065               13,452
                                                      ---------            ---------            ---------            ---------
         Total adjustments                               70,573                3,022                9,121               20,822
                                                      ---------            ---------            ---------            ---------
         Net cash provided by operating
           activities                                    20,593                3,647               15,807               28,943

Cash flows used in investing activities:
   Payments for acquisitions, net of cash
     acquired                                                --                   --              (82,759)                  --
   Proceeds from sale of property, plant
     and equipment                                        1,119                   --                  158                   20
   Purchases of property, plant and
     equipment                                          (11,242)                (308)             (12,364)             (10,407)
   Note receivable                                           --                   --                1,459                   86
                                                      ---------            ---------            ---------            ---------
         Net cash used in investing
           activities                                   (10,123)                (308)             (93,506)             (10,301)

Cash flows (used in) provided by financing
  activities:
   Issuance of common stock, net of
     expenses                                                --                  349                1,799                4,103
   Advances under line of credit                          7,700                   --                8,182              128,366
   Repayments of line of credit                          (8,182)                  --                  (21)            (133,898)
   Advances under other debt obligations                 53,176                   --               79,201                  581
   Principal payments under debt
     obligations                                        (82,000)                 (25)             (13,275)              (4,335)
   Payment of merger and financing expenses             (17,192)                  --                   --                   --
   Repurchase of common stock, options and
     warrants                                          (261,267)                  --                   --                   --
   Net proceeds from 123/4% senior
     subordinated notes and warrants                    148,312                   --                   --                   --
   Proceeds from investors                              152,000                   --                   --                   --
                                                      ---------            ---------            ---------            ---------
         Net cash (used in) provided by
           financing activities                          (7,453)                 324               75,886               (5,183)

Foreign exchange effect on cash and cash
  equivalents                                            (1,015)                 (89)                  59                 (351)
                                                      ---------            ---------            ---------            ---------

Net increase (decrease) in cash and cash
  equivalents                                             2,002                3,574               (1,754)              13,108
Cash and cash equivalents, beginning of
  period                                                 21,847               18,273               20,027                6,919
                                                      ---------            ---------            ---------            ---------

Cash and cash equivalents, end of period              $  23,849            $  21,847            $  18,273            $  20,027
                                                      =========            =========            =========            =========

Supplemental disclosure of cash flow
  information:
Interest paid                                         $  17,595            $     834            $   2,592            $   1,685
                                                      =========            =========            =========            =========
Income taxes paid                                         3,895                  117                2,818                1,917
                                                      =========            =========            =========            =========

Supplemental disclosure of non-cash
  investing activities:
Reconciliation of assets acquired and
  liabilities assumed in acquisitions:
   Fair value of assets acquired                      $ 434,686            $      --            $ 107,026            $      --
   Cash paid for assets                                (156,560)                  --              (84,593)                  --
                                                      ---------            ---------            ---------            ---------
         Liabilities assumed                          $ 278,126            $      --            $  22,433            $      --
                                                      =========            =========            =========            =========
Notes receivable for stock issued                     $     664            $      --            $      --            $      --
Capital lease obligations incurred for
  purchases of new equipment:                         $     156            $      --            $     733            $      --
</TABLE>

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.

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


                                       45
<PAGE>   46


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

A. OPERATIONS AND MERGER

     Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is the leading
global provider of thermal management solutions for electronic products and the
leading developer and marketer of computational fluid dynamic ("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 3,500
national and international customers including OEMs, distributors, and contract
manufacturers through a highly integrated network of software, development,
manufacturing, sales and distribution locations throughout North America,
Europe, and the Far East.

     On February 2, 2000, the Company was acquired by Heat Holdings Corp., a
corporation newly formed by Willis Stein & Partners II, L.P. Pursuant to the
merger, Aavid stockholders received $25.50 in cash for each outstanding share of
common stock. In addition, all outstanding stock options and warrants were
cashed out. The Merger was accounted for using the purchase method.

     The Merger and related transaction costs were funded by a cash contribution
from Heat Holdings and an affiliate of $152,000, proceeds of $148,312, net of
original issue discount, from the sale by the Company of 12 3/4% senior
subordinated notes and warrants due 2007, $54,700 pursuant to a new credit
facility entered into by the Company, and approximately $4,653 of cash on hand.
Additionally, the Company used $7,085 of cash on hand to pay financing fees
associated with the senior credit facility and 12 3/4% senior subordinated
notes. Net assets on the date of acquisition were $156,560. Based upon fair
value of assets acquired and liabilities assumed, goodwill of $183,676 was
established. Approximately $113,705 of this goodwill is attributable to Aavid
Thermalloy, the hardware business, and will be amortized over 20 years. The
remainder, $69,971, is attributable to Fluent, the CFD software business, and
will be amortized over 4 years. Management does not believe that the final
purchase price allocation will produce materially different results than those
reflected herein. The fair value of assets acquired and liabilities assumed at
February 2, 2000 was as follows:

<TABLE>
<S>                                                           <C>
Cash                                                          $  11,619
Inventory                                                        33,799
Accounts receivable                                              54,161
Other current assets                                              4,618
Fixed assets                                                     57,743
Goodwill                                                        183,676
In-process research and development                              15,000
Developed technology                                             49,000
Assembled workforce                                              10,000
Deferred financing fees                                           8,707
Other non-current assets                                          6,363
Trade payables                                                  (24,152)
Accrued expenses and taxes payable                              (28,964)
Deferred tax liabilities                                        (17,144)
Deferred revenue                                                 (7,874)
Long term debt, including current portion                      (199,190)
Minority Interest                                                  (802)
                                                              ---------
  Fair market value of net assets acquired                    $ 156,560
                                                              =========
</TABLE>

     Of the $152,000 cash contribution, $4,811 was invested by Heat Holdings II
Corp., an affiliate of Heat Holdings, to acquire 95% 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. Based on the allocation methodology as defined within the
Aavid Thermalloy LLC Agreement, $1,519 of losses at Aavid Thermalloy, LLC were
allocated to the minority interest held by Heat Holdings II Corp. for the year
ended December 31, 2000.


                                       46
<PAGE>   47


B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

These financial statements reflect the consolidated financial position of the
Company as of December 31, 1999 and the consolidated results of operations and
cash flows of the Company for the period from January 1, 2000 to February 1,
2000 and the years ended December 31, 1999 and 1998 (collectively "Predecessor
financial statements"). 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. The accompanying financial
statements as of December 31, 2000 and for the period from February 2, 2000 to
December 31, 2000 reflect the consolidated financial position, results of
operations, and cash flows of the Company subsequent to the date of the merger
and include adjustments required under the purchase method of accounting. 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. The 2000 amounts included in the following notes include the combined
results of the Predecessor for the period from January 1, 2000 through February
1, 2000 and the Company from February 2, 2000 through December 31, 2000.

PRINCIPLES OF CONSOLIDATION

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

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. The Company's write-offs of accounts receivable have not
been significant during the periods presented. At December 31, 2000 and 1999,
there were no individual customer accounts receivable balances greater than 10%
of total accounts receivable. The Company's sales have been primarily
denominated in U.S. dollars, and the effects of foreign exchange fluctuations
are not considered to be material.

INCOME TAXES

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

RESEARCH AND DEVELOPMENT

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

IN-PROCESS RESEARCH AND DEVELOPMENT

     In connection with the merger, the Company allocated $15,000 of the
purchase price to in-process research and development projects. This allocation
represented the estimated fair value based on risk-adjusted cash flows related
to the incomplete software research and development projects of Fluent, Inc. At
the date of the merger, the development of these projects had not yet reached
technological feasibility and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the merger
date.


                                       47
<PAGE>   48


     The Company allocated values to the in-process research and development
based on an in-depth assessment of the R&D projects. The value assigned to these
assets was limited to significant research projects for which technological
feasibility had not been established, including development, engineering and
testing activities associated with the introduction of the acquired in-process
technologies.

     The value assigned to purchased in-process technology was determined by
estimating the costs to develop the acquired technology into commercially viable
products, estimating the resulting net cash flows from the projects, and
discounting the net cash flows to their present value. The revenue projection
used to value the in-process research and development was based on historical
results, estimates of relevant market sizes and growth factors, expected trends
in technology, and the nature and expected timing of new product introductions
by the Company and its competitors. The resulting net cash flows from such
projects are based on management's estimates of cost of sales, operating
expenses, and income taxes from such projects.

     The nature of the efforts to develop the acquired in-process technologies
into commercially viable products and services principally related to the
completion of certain planning, designing, coding, prototyping, and testing
activities that were necessary to establish that the developmental software
technologies met their design specifications including functional, technical,
and economic performance requirements. At the merger date, the technologies
under development were between 40% and 80% complete, based upon project
man-month and cost data. Anticipated completion dates ranged from 6 to 18
months, at which times the Company expects to begin selling the developed
products. Development costs to complete the R&D were estimated at approximately
$4,000.

     Fluent's primary in-process R&D projects involved developing: (i) Fluent
version 6.0; (ii) Gambit version 2.0; (iii) materials processing functionality;
and, (iv) advanced infrastructure technology. Fluent 6.0 represents the
Company's next-generation computational fluid dynamics (CFD) software engine.
Gambit 2.0 includes new pre-processor CFD technologies. The development of
materials processing technologies is designed to address CFD needs in new
markets. The advanced infrastructure technology establishes a new platform upon
which future products will be more efficiently and rapidly developed.

     Aggregate revenues for the developmental Fluent products were estimated to
peak within three years of acquisition and then decline steadily as other new
products and technologies are expected to enter the market. Operating expenses
were estimated based on historical results and management's analysis of Fluent's
cost structure. Projected operating expenses as a percentage of revenues were
expected to be stable for the foreseeable future.

     The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. A discount rate of 18
percent was considered appropriate for the in-process R&D, and a discount rate
of 15 percent was appropriate for the existing products and technologies. These
discount rates were commensurate with the Fluent's long history and market
leadership position. The discount rate utilized for the in-process technology
was higher than Aavid's cost of capital due to the inherent uncertainties
surrounding the successful development of the purchased in-process technology,
the useful life of such technology, the profitability levels of such technology
and the uncertainty of technological advances that are unknown at this time.

     With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the development efforts of Fluent prior to the
close of the merger. In doing so, consideration was given to each major
project's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete the projects.

     The Company believes that the foregoing assumptions used in the forecasts
were reasonable at the time of the merger. No assurance can be given, however,
that the underlying assumptions used to estimate sales, development costs or
profitability, or the events associated with such projects, will transpire as
estimated. For these reasons, actual results may vary from projected results.
The most significant and uncertain assumptions relating to the in-process
projects relate to the projected timing of completion of, and revenues
attributable to, each project.

     If these projects are not successfully developed, the sales and
profitability of the Fluent division may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.

CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS

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

     The estimated fair value of the Company's financial instruments including
accounts receivable, accounts payable and cash equivalents equals carrying
value. The fair value of the Company's long-term debt instruments under the
Company's amended and restated credit facility


                                       48
<PAGE>   49


is also estimated at 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 $128,250 at December 31, 2000.

INVENTORIES

     For the year ending December 31, 2000 and 1999, inventories were valued at
the lower of cost or market (first-in, first-out), and consist of materials,
labor and overhead.

PROPERTY, PLANT AND EQUIPMENT

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

     Repairs and maintenance are charged against income when incurred; renewals
and betterments are capitalized. When property, plant, and equipment are retired
or sold, their cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is 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, developed technology, assembled workforce and prepaid rent.
Intangibles are being amortized on a straight-line basis over the following
estimated useful lives:

<TABLE>
<CAPTION>
    INTANGIBLE ASSETS                       YEARS
    -----------------                       -----

<S>                                        <C>
Goodwill                                   4 to 20
Developed Technology                       4 to 7
Assembled Workforce                           4
Prepaid Rent                                  9
Deferred Financing Fees                    5 to 7
</TABLE>

IMPAIRMENT OF LONG-LIVED ASSETS

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

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

     Subsequent to December 31, 2000, the Company formalized plans to close its
Dallas, Texas facility. Certain assets carried in the financial statements
related to the Dallas facility are currently being analyzed by management and
will be written off during the first quarter of 2001 as part of a one-time
restructuring charge. These assets include certain fixed assets as well as a
prepaid rent intangible asset established as part of the purchase accounting
related to the acquisition of Thermalloy. This intangible prepaid rent asset had
a net book value of $5,103 at December 31, 2000 and it is likely that the
majority of this asset will be written off during the first quarter of 2001.

REVENUE RECOGNITION

THERMAL PRODUCTS

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


                                       49
<PAGE>   50


SOFTWARE

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

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

COMPREHENSIVE INCOME

     As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income", which
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS 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 in the period in
which they are recognized. Accordingly, the foreign currency translation
adjustments, which prior to adoption were reported seperately in
stockholders'equity are included in other comprehensive income.

NET INCOME PER SHARE

     At December 31, 2000 the Company's common stock was not publicly traded;
therefore, earnings per share information is not presented.

USE OF ACCOUNTING ESTIMATES

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

TRANSLATION OF FOREIGN CURRENCY

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

     In June, 1998 the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the value of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. SFAS 133, as
amended by SFAS 137 and 138, is required to be adopted by the Company in the
first quarter of 2001. This statement will not have a significant impact on the
Company.


                                       50
<PAGE>   51


     The Company did not enter into foreign currency forward exchange contracts
or any other derivatives during 1999 or 1998. However, in 2000 the Company
entered into forward exchange contracts to hedge certain intercompany sales
transactions between a German operating company and a United States operating
company. The Company had contracts outstanding for the sale of 1,200 U.S.
Dollars for 2,466 German Marks. As these derivatives are intended to hedge
anticipated transactions, they do not qualify for hedge accounting as of
December 31, 2000 under Statement of Financial Accounting Standards No. 52 and
thus the related gain (loss) on these contracts are recognized currently. On
this basis of valuation, the gain (loss) for the future effects of the contracts
will be approximately $(22). The fair value of open forward exchange contracts
at December 31, 2000 was a liability of approximately $22, as determined by the
counterparty financial institution and represents the present value of the
gain/(loss) as if the settlement were to have taken place on December 31, 2000.

     In December, 1999 the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
SAB 101 provides interpretative guidance on the recognition, presentation and
disclosure of revenue. The Company adopted SAB 101 on January 1, 2000. The
application of SAB 101 did not have a material effect on the Company's financial
position or results of operations.

     On February 14, 2001 the Financial Accounting Standards Board revised its
Proposed Statement of Financial Accounting Standards, Business Combinations and
Intangible Assets - Accounting for Goodwill. As currently proposed, goodwill
already existing as of the effective date of this statement will no longer be
amortized but rather will be accounted for using an impairment approach. The
provisions of this statement would begin the first quarter following issuance of
the final statement, which is currently expected in the second quarter of 2001.
If enacted in its currently proposed form, the statement will significantly and
favorably impact the Company's results of operations after adoption because of
the significant goodwill that resulted from the acquisition of the Company in
February, 2000.

C. ACQUISITION OF BUSINESSES

     On October 21, 1999, the Company purchased all of the stock of the
Thermalloy Division of Bowthorpe plc (Thermalloy) and 85.4% of the stock of
Curamik Electronics Gmbh (Curamik) (the Thermalloy Acquisition) for a cash
purchase price of $84,593, including transaction costs of $2,804. Thermalloy
designs, manufactures and sells a wide variety of standard and proprietary heat
sinks and associated products, similar to those produced by our thermal
management business, within the computer and networking and industrial
electronics (including telecommunications) industries. Curamik is a German
corporation that manufactures direct bonded copper ceramic substrates that are
used in the power semiconductor and other industrial electronics industries.
Aavid used $12,619 of its cash on hand and $84,593 of borrowings under a new
credit facility to complete the Thermalloy Acquisition, repay $12,619 of
outstanding debt, and pay transaction costs.

     The Thermalloy acquisition has been accounted for under the purchase method
of accounting. The results of operations for Thermalloy and Curamik since
October 21, 1999 have been presented in the accompanying consolidated statement
of operations for the year ended December 31, 1999. Goodwill acquired was
amortized on a straight-line basis using a 20 year life from October 21, 1999
through February 2, 2000. The fair value of assets acquired and liabilities
assumed at October 21, 1999 was as follows:

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

     Approximately $2,130 was recorded as restructuring charges in connection
with the acquisition. The restructuring plans 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 operations
in Hong Kong and the United Kingdom, (b.) the elimination of duplicative
selling, general and administration functions on a global basis and (c.) the
termination of certain contractual obligations. These activities to resulted in
a workforce reduction of approximately 136 individuals. The Company finalized
these plans during 2000 and the majority of the restructuring activities were
completed by the end of 2000. See Note N.


                                       51
<PAGE>   52


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

                UNAUDITED PROFORMA CONDENSED STATEMENTS OF INCOME

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

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

Pro forma net income                    $  4,625                    $  5,189
</TABLE>

     The pro forma results are not necessarily indicative of either actual
results of operations that would have occurred had the acquisition been made on
January 1, 1998 or future results.

D. ACCOUNTS RECEIVABLE

     The components of accounts receivable at December 31, 2000 and 1999 are as
follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                 --------------------------------------------
                                                     2000                         1999
                                                 -------------              -----------------
                                                 (THE COMPANY)              (THE PREDECESSOR)
<S>                                              <C>                        <C>
Accounts receivable                                $ 52,187                     $ 55,765
Allowance for doubtful accounts                      (3,093)                      (2,182)
                                                   --------                     --------
Net accounts receivable                            $ 49,094                     $ 53,583
                                                   ========                     ========
</TABLE>

E. INVENTORIES

     The components of inventories at December 31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                              DECEMBER 31,
                                ------------------------------------------
                                     2000                       1999
                                -------------            -----------------
                                (THE COMPANY)            (THE PREDECESSOR)
<S>                             <C>                      <C>
Raw materials                      $12,675                    $15,983
Work-in-process                      6,168                      5,245
Finished goods                       6,360                      8,831
                                   -------                    -------
                                   $25,203                    $30,059
                                   =======                    =======
</TABLE>

F. PROPERTY, PLANT, AND EQUIPMENT

     Property, plant, and equipment, recorded at cost, by major classification
as of December 31, 2000 and 1999 consist of the following:

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                               --------------------------------------------
                                                   2000                         1999
                                               -------------              -----------------
                                               (THE COMPANY)              (THE PREDECESSOR)
<S>                                            <C>                        <C>
Land                                             $  1,768                     $  1,774
Building and improvements                          17,407                       17,342
Machinery and equipment                            36,520                       44,035
Furniture and fixtures                              7,525                       16,950
Vehicles                                              415                          983
Machinery-in-progress                               2,076                        5,598
                                                 --------                     --------
                                                   65,711                       86,682
Less accumulated depreciation                      (8,698)                     (25,727)
                                                 --------                     --------
                                                 $ 57,013                     $ 60,955
                                                 ========                     ========
</TABLE>

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


                                       52
<PAGE>   53


G. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

     Included in accrued expenses at December 31, 2000 and 1999 are the
following:

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                 ------------------------------------------
                                                      2000                       1999
                                                 -------------            -----------------
                                                 (THE COMPANY)            (THE PREDECESSOR)
<S>                                              <C>                      <C>
Employee related                                    $11,428                    $ 9,395
Accrued interest                                      8,071                        256
Accrued sales and property taxes                      1,503                      1,826
Merger related                                          438                      3,464
Other accrued expenses                                8,558                      7,442
                                                    -------                    -------
                                                    $29,998                    $22,383
                                                    =======                    =======
</TABLE>

H. DEBT OBLIGATIONS

     Debt obligations as of December 31, 2000 and 1999 consist of the following:

<TABLE>
<CAPTION>
                                                                                                         DECEMBER 31,
                                                                                            ----------------------------------------
                                                                                                 2000                    1999
                                                                                            -------------          -----------------
                                                                                            (THE COMPANY)          (THE PREDECESSOR)
<S>                                                                                         <C>                    <C>
Amended and Restated Term Facility payable in 18 consecutive quarterly
installments, commencing December 31, 2000, ranging from $2,000 to $7,800 each .
At December 31, 2000, the interest rate on the Senior Credit Term Facility was
8.89% ..........................................................................               $ 51,000               $     --

Amended and Restated Revolving Facility which matures on March 31, 2005. At
December 31, 2000, the interest rate on the Senior Revolving Credit Facility was
8.89% ..........................................................................                  7,700                     --

12 3/4% Senior Subordinated Notes due February 1, 2007 .........................                144,290                     --

Revolving Credit Facility which matures on various dates through May 25, 2001
At December 31, 2000, interest rates on the Revolving Credit Facility ranged
from 9.75-10.0% ................................................................                    400                     --

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

Revolving Facility which matures on September 30, 2004. At December 31, 1999,
the interest rate on the Revolving Credit Facility was 8.48%. The Revolving
Facility was amended and restated in 2000 ......................................                     --                  8,182

Capitalized lease obligations ..................................................                    612                    763
                                                                                               --------               --------
                                                                                                204,002                 88,945

Less current portion ...........................................................                 10,768                  2,337
                                                                                               --------               --------

Debt Obligations, net of current portion .......................................               $193,234               $ 86,608
                                                                                               ========               ========
</TABLE>

     On February 2, 2000, as part of the transactions relating to the Merger,
the Company issued 150,000 units (the "Units"), consisting of $150,000 aggregate
principal amount of its 12 3/4% Senior Subordinated Notes due 2007 (the "Notes")
and warrants (the "Warrants") to purchase an aggregate of 60 shares of the
Company's Class A Common Stock, par value $0.0001 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 (P) 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
statement of operations for the period February 2, 2000 to December 31, 2000.

     In connection with the Merger, the Company repaid all of the outstanding
term loan and revolving line of credit under its existing credit facility, which
aggregated approximately $88,200 at December 31, 1999, and entered into an
amended and restated credit facility (the "Amended and Restated Credit
Facility"). The Amended and Restated Credit Facility provides for a $22,000
revolving credit facility (the "Revolving Facility") (of which $1,700 was drawn
at the closing of the Merger) and a $53,000 term loan facility (the "Term
Facility") (which was fully drawn at the closing of the Merger). Subject to
compliance with the terms of the Amended and Restated Credit Facility,
borrowings under the Revolving Facility are available for working capital
purposes, capital expenditures and future acquisitions. The Revolving Facility
will terminate, and all amounts outstanding thereunder will be payable, on March
31, 2005. Principal on the Term Facility is required to be repaid in quarterly
installments commencing December 31, 2000 and ending March 31, 2005 as follows:
five installments of $2,000; four installments of $2,500; four installments of
$2,750; two installments of $3,200; two installments of $3,900; and a final
installment of $7,800. In addition, commencing with the fiscal year ending
December 31, 2001, the Company is required to apply 50% of excess cash flow, as


                                       53
<PAGE>   54


defined, to permanently reduce the Term Facility. The Amended and Restated
Credit Facility bears interest at a rate equal to, at the Company's option,
either (1) in the case of Eurodollar loans, the sum of (x) the interest rate in
the London interbank market for loans in an amount substantially equal to the
amount of borrowing and for the period of borrowing selected by Aavid and (y) a
margin of between 1.50% and 2.25% (depending on the Company's consolidated
leverage ratio (as defined in the Amended and Restated Credit Facility)) or (2)
the sum of the higher of (x) Canadian Imperial Bank of Commerce's prime or base
rate or (y) one-half percent plus the latest overnight federal funds rate plus
(z) a margin of between .25% and 1.00% (depending on the Company's consolidated
leverage ratio). At December 31, 2000, the interest rates on the Term Facility
and the Revolving Facility were 8.89%.

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

     As of December 31, 2000, $7,700 was outstanding under the revolving credit
facility and $51,000 was outstanding under the term facility, of which $10,000
was classified as current within the accompanying balance sheet.

     The Company incurred approximately $7,085 in underwriting, legal and other
professional fees in connection with the issuance of the Notes and the
establishment of the Amended and Restated Credit Facility. 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 statement of operations from February 2, 2000 to
December 31, 2000.

     The Company was also contingently liable at December 31, 1999 for $45
related to outstanding letters of credit. The Company had no letters of credit
outstanding at December 31, 2000.

     Debt maturities payable for the five years and thereafter subsequent to
December 31, 2000 are as follows:

<TABLE>
<S>                                                                   <C>
         2001                                                         $ 10,768
         2002                                                            8,204
         2003                                                           11,037
         2004                                                           14,203
         2005                                                            7,800
   Thereafter                                                          151,990
                                                                      --------

        Total                                                         $204,002
                                                                      ========
</TABLE>

     At December 31, 2000, the Company was not in compliance with the leverage
ratio covenant required by the amended and restated credit facility and the
indenture under which our senior notes were issued. As a result, the Company's
stockholders are required to make an equity contribution of up to $25,000
sufficient to allow the Company to pay down enough debt to achieve a 4.5 to 1
leverage ratio based on total leverage at December 31, 2000. Subsequent to
December 31, 2000, certain of the Company's stockholders and their affiliates
agreed, subject to definitive documentation, to make an equity contribution of
$8,000 in cash and up to $25,000 million in principal amount of senior notes in
full satisfaction of this obligation. This contribution is required to be made
by May 15, 2001. In addition, the Company and the lenders under the amended and
restated credit facility have agreed, subject to definitive documentation, to
amend the facility such that the last three required quarterly principal
payments in 2001 under the facility will be prepaid with $6,000 of the proceeds
of the equity contribution, and the four required principal payments in 2002
will be reduced by $500 each, reflecting application of the remaining cash
equity contribution. Further, certain covenant ratios and ratio definitions will
be amended to levels which the Company expects to meet through December 31, 2001
and the available line of credit will be reduced to $17,000 from $22,000. Based
on the equity contribution, the Company's event of non-compliance with the
leverage ratio covenant at December 31, 2000 will be cured.


                                       54
<PAGE>   55


I. EQUITY

COMMON STOCK

     The Company's amended and restated certificate of incorporation authorizes
the Company to issue 1000 shares of Class A Common Stock, par value $0.0001 per
share; 1,000 shares of Class B Common Stock, par value $0.0001 per share; and
1,000 shares of Class H Common Stock, par value $0.0001 per share. As of
December 31, 2000 the Company had issued and outstanding 940 shares of Class A
Common Stock, 1,000 shares of Class B Common Stock and 40 shares of Class H
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 our 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 our 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 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 our
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; (b) 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 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.


                                       55
<PAGE>   56


WARRANTS

     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.

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 and Aavid Thermalloy 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 both Aavid Thermalloy and Fluent for the Program. The
10% of common equity in each company is equal to approximately 56,296 shares in
Aavid Thermalloy, LLC and 28,149 shares in Fluent, Inc.

<TABLE>
<CAPTION>
                                                           Aavid Thermalloy Shares                     Fluent Shares
                                                                           WEIGHTED                              WEIGHTED
                                                         NUMBER OF          AVERAGE              NUMBER OF        AVERAGE
           RESTRICTED STOCK AWARDS                        SHARES        EXERCISE PRICE            SHARES       EXERCISE PRICE

<S>                                                      <C>            <C>                      <C>           <C>
        Issued during 2000:                               31,807            $ 10.00               26,684          $ 10.00
        Balance at December 31, 2000:                     31,807            $ 10.00               26,684          $ 10.00
                                                          ------            -------               ------          -------

        Vested at December 31, 2000:                          --                N/A                   --              N/A
</TABLE>

     As of December 31, 2000 the Company held notes receivable for stock in the
amount of $664 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 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 balance sheet.

STOCK OPTIONS

     During 1993, an officer of the Company was granted non-qualified stock
options to acquire 249,205 shares of Common Stock at an exercise price of $0.19
per share, and 1,268,795 shares of Common Stock at an exercise price of $2.20
per share. These options vested and became exercisable as to 25% of the
applicable shares immediately, with the remainder ratably in October 1994, 1995,
and 1996, respectively. During 1999 and 1998, respectively, 268,000 and
1,025,000 options were exercised. In addition, between 1993 and 1999, the
Company issued 556,875 non-qualified stock options to Directors of the Company
and certain executives outside of the plans discussed below, at exercise prices
ranging from $0.19 to $16.50. The exercise price of all these options equaled or
exceeded the fair market value on the date of grant, as determined by the Board
of Directors for issuance prior to its initial public offering or market prices
thereafter.

     During 1994, the Company's Board of Directors adopted and approved a stock
option plan for officers and key employees (1994 Stock Option Plan). The 1994
Stock Option Plan provided for the grant to officers and key employees of the
Company of stock options intended to qualify as incentive stock options under
the applicable provisions of the Internal Revenue Code, as well as non-qualified
options. The Company had reserved 894,326 shares of its Common Stock for
issuance under this plan.

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


                                       56
<PAGE>   57


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

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

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

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

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

     As was discussed in Note A, on February 2, 2000 all outstanding stock
options were cashed out based on a value of $25.50 per share in connection with
the Willis Stein merger. The 1994 Stock Option Plan, the Director's Plan and the
Purchase Plan were all terminated in connection with the Merger. At December 31,
2000 there were no stock options outstanding. Due to the insignificant level of
stock option activity during the period January 1, 2000 through February 1,
2000, such activity is not presented in this footnote.

     A summary of historical stock option activity follows:

<TABLE>
<CAPTION>
                                                NUMBER OF           WEIGHTED AVERAGE
                                                 SHARES              EXERCISE PRICE
                                                ---------           ----------------

<S>                                            <C>                  <C>
Outstanding at December 31, 1997                2,312,782                $ 5.76
Granted during 1998                               358,133                 24.07
Exercised during 1998                          (1,191,659)                 2.92
Canceled during 1998                              (49,085)                21.64
                                               ----------                ------
Outstanding at December 31, 1998                1,430,171                $12.16
Granted during 1999                               320,714                 15.73
Exercised during 1999                            (311,916)                 3.73
Canceled during 1999                              (47,715)                21.41
                                               ----------                ------
Outstanding at December 31, 1999                1,391,254                $14.56
                                               ==========                ======
</TABLE>

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

     During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which defines a fair value based
method of accounting for employee stock options, or similar equity instruments,
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans; however, it also allows an entity to continue
to measure compensation costs for those plans using the intrinsic method of
accounting prescribed by APB Opinion 25. Entities electing to remain with the
accounting in APB Opinion 25 must make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined in
SFAS No. 123 has been applied.

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

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

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

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


                                       57
<PAGE>   58


     The total value of options granted during 1995 through 1999 would be
amortized on a pro forma basis over the vesting period of the options. Options
generally vest equally over two to four years. If the Company had accounted for
these plans, including the Employee Stock Purchase Plan, in accordance with SFAS
No. 123, the Company's net income and net income per share would have decreased
or increased, as reflected in the following pro forma amounts:

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                          -----------------------------------------
                                                 1999                    1998
                                          -----------------       -----------------
                                          (THE PREDECESSOR)       (THE PREDECESSOR)
<S>                                       <C>                     <C>
Net income -
   As reported                                $   6,686               $   8,121
   Pro forma                                      2,816                   4,322
Net income per share, diluted -
   As reported                                $    0.68               $    0.86
   Pro forma                                       0.29                    0.46
</TABLE>

J. INCOME TAXES

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

<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31,
                       ------------------------------------------------------------
                         2000                    1999                   1998
                       --------            -----------------      -----------------
                                           (THE PREDECESSOR)      (THE PREDECESSOR)
<S>                    <C>                 <C>                    <C>
Domestic               $(60,783)               $  4,425               $  4,998
Foreign                  11,732                  10,981                  7,508
                       --------                --------               --------
                       $(49,051)               $ 15,406               $ 12,506
                       ========                ========               ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                           ---------------------------------------------------------
                                            2000                    1999                  1998
                                           -------           -----------------     -----------------
                                                             (THE PREDECESSOR)     (THE PREDECESSOR)
<S>                                        <C>               <C>                   <C>
Federal provision (benefit):
   Current                                 $    --                $ 1,095               $ 3,289
   Deferred                                 (3,736)                 3,265                (1,785)
                                           -------                -------               -------
                                            (3,736)                 4,360                 1,504
State provision:
   Current                                     422                    252                   707
   Deferred                                    (98)                   816                  (387)
                                           -------                -------               -------
                                               324                  1,068                   320
Foreign provision:
   Current                                   5,086                  3,424                 2,561
                                           -------                -------               -------

Total provision                            $ 1,674                $ 8,852               $ 4,385
                                           =======                =======               =======
</TABLE>

     The Company has approximately $37,800 of U.S. federal net operating loss
carryforwards available to reduce future taxable income, if any. These net
operating loss carryforwards expire through 2020, and are subject to the review
and possible adjustment by the Internal Revenue Service. Section 382 of the
Internal Revenue Code also contains provisions that could place annual
limitations on the utilization of these net operating loss carryforwards in the
event of a change in ownership, as defined. 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 expense at the statutory
federal income tax rate to the Company's actual income tax expense (benefit) is
as follows:

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                         ---------------------------------------------------
                                                                            2000              1999               1998
                                                                         --------       -----------------  -----------------
                                                                                        (THE PREDECESSOR)  (THE PREDECESSOR)
<S>                                                                      <C>            <C>                <C>
Expected federal tax                                                     $(16,677)          $  5,392           $  4,376
State income taxes, net                                                       214                694                208
Benefit of tax credits                                                         --               (100)              (100)
Non-deductible goodwill                                                     7,197                253                270
Non-deductible write-off of in-process research and development             5,250                 --                 --
Foreign related                                                             1,031               (420)              (284)
Provision on unremitted foreign earnings                                    4,550              3,400                 --
Other                                                                         109               (367)               (85)
                                                                         --------           --------           --------

         Total income tax expense                                        $  1,674           $  8,852           $  4,385
                                                                         ========           ========           ========
</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 2000 and 1999, the Company provided for U.S.
income taxes on $11,732 and $8,400, respectively, of


                                       58
<PAGE>   59


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>
                                                                              YEAR ENDED DECEMBER 31,
                                                                    -------------------------------------------
                                                                        2000                         1999
                                                                    -------------             -----------------
                                                                    (THE COMPANY)             (THE PREDECESSOR)

<S>                                                                 <C>                       <C>
Short-term deferred tax assets (liabilities):
   Tax credits                                                        $  1,373                     $  1,373
   Inventory reserves and capitalization                                 1,035                        1,287
   Accounts receivable reserves                                          1,256                          765
   Vacation and benefit reserves                                           897                          881
   Unremitted foreign earnings                                          (7,317)                      (4,057)
   Restructuring reserves                                                  132                           84
   Other liabilities and reserves                                        1,807                        2,554
                                                                      --------                     --------
                                                                          (817)                       2,887
Valuation allowance                                                       (924)                        (924)
                                                                      --------                     --------
Total short-term deferred tax assets (liabilities)                      (1,741)                       1,963
                                                                      --------                     --------

Long-term deferred tax (liabilities) assets:
   Depreciation                                                         (2,302)                      (2,233)
   Favorable lease                                                      (2,264)                      (2,264)
   Net operating loss carryforwards                                     14,036                        5,950
   Acquired intangibles                                                (19,447)                        (198)
   Other                                                                    --                       (1,962)
                                                                      --------                     --------
Total long-term deferred tax (liabilities) assets                       (9,977)                        (707)
                                                                      --------                     --------
Net deferred tax assets (liabilities)                                 $(11,718)                    $  1,256
                                                                      ========                     ========
</TABLE>

     The Company has provided a valuation allowance of $924 for certain tax
credits whose future realization is uncertain. Any future reduction in the
valuation allowance will be recorded as a reduction to goodwill.

K. COMMITMENTS AND CONTINGENCIES

LEASES

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

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

<S>                                                    <C>
2001                                                   $ 6,805
2002                                                     4,822
2003                                                     3,274
2004                                                     2,345
2005                                                     2,168
Thereafter                                              11,170
                                                       -------
                                                       $30,584
</TABLE>

     Lease expense was approximately $6,955, $5,634 and $3,141 for the years
ended December 31, 2000, 1999 and 1998, respectively.

LITIGATION

     Following the public announcement of the merger with Heat Merger Corp.,
lawsuits were filed against the Company, Willis Stein, the Company's directors,
and one former director in the Court of Chancery of the State of Delaware by
certain of our stockholders. The complaints alleged, among other things, that
the Company's directors breached their fiduciary duties and sought to enjoin,
preliminarily and permanently, the Merger and also sought compensatory damages.
The stockholder plaintiffs, on behalf of the Company's public stockholders, also
sought class action certification for their lawsuits. On March 11, 2001 the
stockholders plaintiffs filed to dismiss the class action without prejudice. The
Company is awaiting a final court order approving the dismissal.

     The Company is involved in various other 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


                                       59
<PAGE>   60


flexibility, and price stability. Under the terms of this agreement the Company
has agreed to purchase certain minimum quantities which approximates $1,605 at
December 31, 2000.

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 contribution was approximately $823, $535 and $280 for
the years ended December 31, 2000, 1999 and 1998, respectively.

M. SEGMENT REPORTING

     Aavid provides thermal management solutions for microprocessors and
integrated circuits ("ICs") for digital and power applications. In connection
with the merger, we consolidated our business 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.

     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 operations of each reportable segment for the
years ending December 31, 2000, 1999 and 1998. 2000 results include the combined
operations of the Company (February 2, 2000 through December 31, 2000) and the
Predecessor (January 1, 2000 through February 1, 2000):

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

<S>                                                  <C>                  <C>                  <C>                    <C>
2000
  Thermal Products                                     $ 235,735             $14,830              $ 11,433               $    --
  CFD Software                                            57,891               6,661                 1,437                    --
  Corporate Office                                            --               2,440                32,283                    --
                                                       ---------             -------              --------               -------
  Total......................................            293,626              23,931                45,153                    --

1999 (the Predecessor)
  Thermal Products                                     $ 165,007             $ 1,660              $  8,306               $  (630)
  CFD Software                                            49,236                 (31)                1,743                    --
  Corporate Office                                            --                  --                    23                    --
                                                       ---------             -------              --------               -------
  Total......................................            214,243               1,629                10,072                  (630)

1998 (the Predecessor)
  Thermal Products                                       170,752               1,087                 8,352                 5,740
  CFD Software                                            38,326                 255                 1,331                    --
  Corporate Office                                            --                  --                   197                    --
                                                       ---------             -------              --------               -------
  Total......................................            209,078               1,342                 9,880                 5,740
</TABLE>


                                       60
<PAGE>   61


<TABLE>
<CAPTION>
                                                                           SEGMENT
                                                                        INCOME BEFORE
                                                                          TAXES AND           ASSETS (NET OF
                                                   INCOME TAX             MINORITY             INTERCOMPANY             CAPITAL
                                                     EXPENSE              INTEREST               BALANCES)           EXPENDITURES
                                                   ----------           -------------         --------------         ------------
<S>                                                <C>                  <C>                   <C>                    <C>
2000
   Thermal Products                                  $ 4,922               $(1,519)              $ 176,389              $ 8,251
   CFD Software                                        4,957                 5,184                  36,436                3,455
   Corporate Office                                   (8,205)              (52,716)                173,463                   --
                                                     -------               -------               ---------              -------
   Total...................................            1,674               (49,051)                386,288               11,706

1999 (the Predecessor)
   Thermal Products                                  $ 4,677               $ 7,707               $ 194,826              $10,224
   CFD Software                                        4,224                 7,821                  30,734                2,855
   Corporate Office                                      (49)                 (122)                  3,392                   18
                                                     -------               -------               ---------              -------
   Total...................................            8,852                15,406                 228,952               13,097

1998 (the Predecessor)
   Thermal Products                                    2,074                 6,490                  95,344                9,038
   CFD Software                                        2,311                 6,036                  25,497                1,153
   Corporate Office                                       --                   (20)                  6,025                  216
                                                     -------               -------               ---------              -------
   Total...................................            4,385                12,506                 126,866               10,407
</TABLE>

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

<TABLE>
<CAPTION>
                                                                               YEAR ENDING DECEMBER 31,
                                                ------------------------------------------------------------------------------------
                                                          2000                        1999                            1998
                                                -----------------------     -------------------------       ------------------------
                                                                                (THE PREDECESSOR)             (THE PREDECESSOR)
                                                             LONG-LIVED                    LONG-LIVED                     LONG-LIVED
                                                REVENUES       ASSETS       REVENUES         ASSETS         REVENUES        ASSETS

<S>                                             <C>          <C>            <C>            <C>              <C>           <C>
       United States                            $196,828      $266,437      $146,547        $ 71,436        $169,765       $ 43,278
       Taiwan                                     13,485         1,567        17,422           1,748          18,789          1,271
       China                                      24,378         3,547        29,899           2,114          13,467          1,431
       United Kingdom                             34,195         1,572        21,509          17,682          18,185          2,612
       Germany                                    21,448         4,255         6,739           3,913           3,469            153
       Other International                        51,884         6,139        34,201          23,749          17,154             73
       Intercompany eliminations                 (48,592)           --       (42,074)             --         (31,751)            --
                                                --------      --------      --------        --------        --------       --------
       Consolidated Revenue                     $293,626      $283,517      $214,243        $120,642        $209,078       $ 48,818
                                                ========      ========      ========        ========        ========       ========
</TABLE>

     Revenues from one customer of Aavid's thermal products division represented
$47,000 of the Company's consolidated revenues for the years ending December 31,
1998. Due to a change in product mix at this customer, revenues from this
customer were less than 10% of total revenues in 2000 and 1999. There were no
other individual customers who made up more than 10% of consolidated revenues
for the years ended December 31, 2000, 1999 or 1998.

N. NON-RECURRING CHARGES AND RESTRUCTURING RESERVES

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

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

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


                                       61
<PAGE>   62


     The following amounts have been provided to and charged against the
Manchester restructuring reserves as of December 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                             RESERVE BALANCE,     CHARGES TO EXPENSE    CHARGES AGAINST THE    RESERVE BALANCE,
DESCRIPTION                                  DECEMBER 31, 1999        OR (INCOME)            RESERVES          DECEMBER 31, 2000


<S>                                          <C>                  <C>                   <C>                    <C>
     Lease terminations and leasehold
       Improvements reserve                         $ 203                     --                (203)                    --
                                                    -----               --------               -----                 ------

     Total                                          $ 203               $     --               $(203)                $   --
                                                    =====               ========               =====                 ======
</TABLE>



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

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

    Purchase commitments                              691                    (12)               (679)                    --

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

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

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

     In the fourth quarter of 1999, the Company completed its restructuring of
the Manchester facility. As a result, excess reserves totaling $630 were
reversed into income in 1999.

     Approximately $2,130 of restructuring charges have been 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 year ended December 31,
2000:

<TABLE>
<CAPTION>
                                                                                         INCREASES TO
                                                                                           RESERVES
                                                                                          CHARGED TO
                                                                 CHARGES AGAINST         GOODWILL FOR
                                                                 RESERVES FOR THE             THE              RESTRUCTURING
                                            RESTRUCTURING           YEAR ENDED             YEAR ENDED         RESERVES BALANCE
                                         RESERVES BALANCE AT       DECEMBER 31,           DECEMBER 31,        AT DECEMBER 31,
                                           JANUARY 1, 2000             2000                   2000                  2000
                                         -------------------     ----------------        -------------        ----------------
<S>                                      <C>                     <C>                     <C>                  <C>
Lease terminations and leasehold
  improvements reserve                         $   670               $   (95)               $   160               $   735
Employee separation                              1,460                (1,606)                   639                   493
                                               -------               -------                -------               -------
Total                                          $ 2,130               $(1,701)               $   799               $ 1,228
                                               =======               =======                =======               =======
</TABLE>

     Approximately $716 of restructuring charges were recorded in connection
with the Merger. The restructuring plans included initiatives to integrate the
operations of the Company and reduce overhead. The primary components of these
plans related to (a) the closure of operations in California and the United
Kingdom and (b) the termination of certain contractual obligations. During the
year ended December 31, 2000, 89 individuals were terminated under the
restructuring plan. The following amounts have been charged against the merger
restructuring reserves during the year ended December 31, 2000:

<TABLE>
<CAPTION>
                                                                 INCREASES TO
                                                                   RESERVES
                                                                  CHARGED TO
                                                                 GOODWILL FOR      CHARGES AGAINST        RESTRUCTURING
                                                                     THE           RESERVES FOR THE         RESERVES
                                            RESTRUCTURING         YEAR ENDED           YEAR ENDED            BALANCE
                                         RESERVES BALANCE AT     DECEMBER 31,         DECEMBER 31,         AT DECEMBER
                                           JANUARY 1, 2000           2000                 2000              31, 2000
                                         -------------------     ------------      ----------------       -------------
<S>                                      <C>                     <C>               <C>                    <C>
Lease terminations and leasehold
  improvements reserve                         $    --               $ 262               $(250)               $  12
Employee separation                                 --                 454                (420)                  34
                                               -------               -----               -----                -----
Total                                          $    --               $ 716               $(670)               $  46
                                               =======               =====               =====                =====
</TABLE>

     During the first half of 2001 the Company plans to close its Dallas, Texas
facility. In connection with the closure, the Company expects to record a
one-time restructuring charge within the statement of operations for the first
quarter of 2001. This one-time charge will include


                                       62
<PAGE>   63


estimated amounts related to employee severance, write-off of fixed assets and
write-off of most of a prepaid lease intangible asset that was originally
recorded as part of the Thermalloy acquisition. The total restructuring charge
is estimated to be in the range of $10.0 million to $13.5 million, of which
approximately $4.0 million to $5.0 million relates to the write-off of the
prepaid lease intangible. The estimated cash component of the restructuring
charge is primarily related to employee severance and is expected to be in the
range of $2.5 million to $3.5 million. The balance of the charge, $3.5 million
to $5.0 million, is related to estimated fixed asset write-offs.

O. QUARTERLY DATA (UNAUDITED)

     Following is a summary of the quarterly results of operations for the years
ended December 31, 2000 and 1999. First quarter of 2000 results include the
combined operations of the Company (February 2, 2000 through March 31, 2000) and
the Predecessor (January 1, 2000 through February 1, 2000). Second, third and
fourth quarter are the results of the Company:

<TABLE>
<CAPTION>
                                                                    FISCAL QUARTER
                                -----------------------------------------------------------------------------------------
                                  FIRST                SECOND             THIRD               FOURTH               TOTAL
                                ---------           ---------           ---------           ---------           ---------

<S>                             <C>                 <C>                 <C>                 <C>                 <C>
2000
Net sales                       $  78,002           $  78,418           $  68,908           $  68,298           $ 293,626
Gross profit                       22,435              27,641              25,802              25,250             101,128
Net loss                          (25,369)             (7,993)             (9,636)             (6,357)            (49,355)

1999 (the Predecessor)
Net sales                       $  49,841           $  47,787           $  47,611           $  69,004           $ 214,243
Gross profit                       18,481              18,640              17,349              21,215              75,685
Net income                          3,168               3,133               3,186              (2,801)              6,686
</TABLE>

P. 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 $150,000 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.


                                       63
<PAGE>   64


<TABLE>
<CAPTION>
                                                         CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2000
                                                         -------------------------------------------------------------
                                                              U.S. GUARANTOR   NON-GUARANTOR
                                                  PARENT       SUBSIDIARIES     SUBSIDIARIES     ELIMINATIONS     CONSOLIDATED
                                                  ------      --------------   -------------     ------------     ------------
<S>                                             <C>           <C>              <C>               <C>              <C>
ASSETS
Cash and cash equivalents ...............       $   9,443        $   4,193        $  10,213        $      --        $  23,849
Accounts receivable-trade, net ..........              --           25,904           22,822              368           49,094
Inventories .............................              --           14,273           10,624              306           25,203
Due (to) from affiliate, net ............          81,116           (8,630)            (378)         (72,108)              --
Refundable taxes ........................            (180)              --               --              180               --
Deferred income taxes ...................          10,757           (2,194)             613           (9,176)              --
Prepaid and other current assets ........             201            1,882            2,551               (9)           4,625
                                                ---------        ---------        ---------        ---------        ---------
Total current assets ....................         101,337           35,428           46,445          (80,439)         102,771
Property, plant and equipment, net ......             536           40,613           15,875              (11)          57,013
Investment in subsidiaries ..............         168,457               --               --         (168,457)              --
Deferred taxes ..........................           1,102           (1,102)              --               --               --
Other assets, net .......................          23,444          168,376           12,992           21,692          226,504
                                                ---------        ---------        ---------        ---------        ---------
Total assets ............................       $ 294,876        $ 243,315        $  75,312        $(227,215)       $ 386,288
                                                =========        =========        =========        =========        =========

LIABILITIES, MINORITY
INTERESTS AND
STOCKHOLDERS' EQUITY
Current portion of debt obligations .....       $   8,000        $     350        $     418        $      --        $   8,768
Accounts payable-trade ..................             103            7,381           11,098               --           18,582
Income taxes payable ....................         (15,253)          17,711            4,490             (698)           6,250
Deferred revenue ........................              --            5,751            3,639               --            9,390
Deferred taxes ..........................           1,741               --               --               --            1,741
Accrued expenses and other
current liabilities .....................           9,225           13,633            8,387               27           31,272
                                                ---------        ---------        ---------        ---------        ---------
Total current liabilities ...............           3,816           44,826           28,032             (671)          76,003
                                                ---------        ---------        ---------        ---------        ---------
Debt obligations, net of current
  portion ...............................         194,990              214               30               --          195,234
  Deferred income taxes .................          (4,753)          19,410              (41)          (4,639)           9,977
                                                ---------        ---------        ---------        ---------        ---------
Total liabilities .......................         194,053           64,450           28,021           (5,310)         281,214
                                                ---------        ---------        ---------        ---------        ---------
Commitments and contingencies
Minority interests ......................             664            3,359            1,283             (391)           4,915
Stockholders' equity:
Common Stock, par value .................              --               --               --               --               --
Warrants ................................           4,560               --               --               --            4,560
Additional paid-in capital ..............         147,187          207,508            6,129         (213,637)         147,187
Cumulative translation adjustment .......          (1,608)           1,861           (2,638)             777           (1,608)
Retained earnings (deficit) .............         (49,980)         (33,863)          42,517           (8,654)         (49,980)
                                                ---------        ---------        ---------        ---------        ---------
Total stockholders' equity ..............         100,159          175,506           46,008         (221,514)         100,159
                                                ---------        ---------        ---------        ---------        ---------
Total liabilities, minority interests and
  stockholders' equity ..................       $ 294,876        $ 243,315        $  75,312        $(227,215)       $ 386,288
                                                =========        =========        =========        =========        =========
</TABLE>


                                       64
<PAGE>   65


<TABLE>
<CAPTION>
                                                      CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1999 (PREDECESSOR)
                                                      ---------------------------------------------------------------------------
                                                                  U.S. GUARANTOR  NON-GUARANTOR
                                                     PARENT        SUBSIDIARIES    SUBSIDIARIES      ELIMINATIONS     CONSOLIDATED
                                                     ------       --------------  -------------      ------------     ------------
<S>                                                <C>            <C>             <C>                <C>              <C>
ASSETS
Cash and cash equivalents ..................       $     148        $   5,134        $  13,040        $     (49)       $  18,273
Notes receivable ...........................              --              200               --             (200)              --
Accounts receivable-trade, less
allowance for doubtful accounts ............              --           27,294           26,606             (317)          53,583
Inventories ................................              --           17,372           13,041             (354)          30,059
Due (to) from affiliates, net ..............         112,125          (28,289)         (16,306)         (67,530)              --
Refundable taxes ...........................            (180)              --              333              180              333
Deferred income taxes ......................           7,066            3,584              573           (9,260)           1,963
Prepaid and other current assets ...........             160            1,746            2,192                1            4,099
                                                   ---------        ---------        ---------        ---------        ---------

Total current assets .......................         119,319           27,041           39,479          (77,529)         108,310
Property, plant and equipment, net .........             146           41,952           20,023           (1,166)          60,955
Investment in subsidiaries .................          45,329               --               --          (45,329)              --
Other assets, net ..........................           1,138           23,352           10,962           24,235           59,687
                                                   ---------        ---------        ---------        ---------        ---------
Total assets ...............................       $ 165,932        $  92,345        $  70,464        $ (99,789)       $ 228,952
                                                   =========        =========        =========        =========        =========

LIABILITIES, MINORITY
INTERESTS AND
STOCKHOLDERS' EQUITY
Current portion of debt obligations ........           2,000              317               20               --            2,337
Accounts payable-trade .....................             254            6,727           14,960             (136)          21,805
Income taxes payable .......................          (6,380)          10,840            4,221           (4,044)           4,637
Deferred revenue ...........................              --            4,408            3,357               --            7,765
Accrued expenses and other current
liabilities ................................           4,586           12,890            7,219               21           24,716
                                                   ---------        ---------        ---------        ---------        ---------
Total current liabilities ..................             460           35,182           29,777           (4,159)          61,260
Debt obligations, net of current portion ...          86,182            1,253            5,295           (6,122)          86,608
Deferred income taxes ......................            (278)           5,725              (99)          (4,641)             707
                                                   ---------        ---------        ---------        ---------        ---------
Total liabilities ..........................          86,364           42,160           34,973          (14,922)         148,575
Commitments and contingencies
Minority interest in consolidated
subsidiary .................................              --               --              809               --              809
Stockholders' equity:
Common stock, $0.01 par value;
authorized 25,000,000 Shares;
9,608,868 shares issued and outstanding ....              96               --               --               --               96
Additional paid-in capital .................          58,660           11,772            2,438          (14,210)          58,660
Cumulative translation adjustment ..........          (1,294)             148           (1,016)             868           (1,294)
Retained earnings ..........................          22,106           38,265           33,260          (71,525)          22,106
                                                   ---------        ---------        ---------        ---------        ---------
Total stockholders' equity .................          79,568           50,185           34,682          (84,867)          79,568
                                                   ---------        ---------        ---------        ---------        ---------
Total liabilities and stockholders' equity .       $ 165,932        $  92,345        $  70,464        $ (99,789)       $ 228,952
                                                   =========        =========        =========        =========        =========
</TABLE>


                                       65
<PAGE>   66


<TABLE>
<CAPTION>
                                                                       CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                                                                     FOR THE PERIOD FROM FEBRUARY 2, TO DECEMBER 31, 2000
                                                            -----------------------------------------------------------------------
                                                                        U.S. GUARANTOR  NON-GUARANTOR
                                                             PARENT      SUBSIDIARIES   SUBSIDIARIES    ELIMINATIONS   CONSOLIDATED
                                                             ------     --------------  -------------   ------------   ------------
<S>                                                         <C>         <C>             <C>             <C>            <C>
Net sales ...............................................   $      --      $ 182,016      $ 133,725      $ (45,557)     $ 270,184
Cost of goods sold ......................................          --        126,909         85,208        (35,135)       176,982
                                                            ---------      ---------      ---------      ---------      ---------
Gross profit ............................................          --         55,107         48,517        (10,422)        93,202
Selling, general and administrative expenses ............       2,937         68,199         31,320         (6,708)        95,748
Acquired research and development .......................          --         15,000             --             --         15,000
Research and development ................................          --          7,565          8,689         (6,319)         9,935
                                                            ---------      ---------      ---------      ---------      ---------
Income (loss) from operations ...........................      (2,937)       (35,657)         8,508          2,605        (27,481)
Interest income (expense) net ...........................      (7,718)       (14,702)          (684)           (11)       (23,115)
Other income (expense), net .............................       2,247          1,335          2,034         (5,237)           379
Equity in income of subsidiaries ........................     (51,220)            --             --         51,220             --
                                                            ---------      ---------      ---------      ---------      ---------
Income (loss) before income taxes and minority
  interests .............................................     (59,628)       (49,024)         9,858         48,577        (50,217)
Income tax benefit (expense) ............................       9,648         (3,471)        (3,954)        (3,350)        (1,127)
                                                            ---------      ---------      ---------      ---------      ---------
Income (loss) before minority interests .................     (49,980)       (52,495)         5,904         45,227        (51,344)
Minority interests in income of consolidated
  subsidiaries ..........................................          --          1,514           (150)            --          1,364
                                                            ---------      ---------      ---------      ---------      ---------
Net income (loss) .......................................   $ (49,980)     $ (50,981)     $   5,754      $  45,227      $ (49,980)
                                                            =========      =========      =========      =========      =========
</TABLE>



<TABLE>
<CAPTION>
                                                                         CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR
                                                                  THE PERIOD FROM JANUARY 1, TO FEBRUARY 1, 2000 (PREDECESSOR)
                                                             ----------------------------------------------------------------------
                                                                         U.S. GUARANTOR  NON-GUARANTOR
                                                               PARENT     SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                               ------    --------------  -------------  ------------   ------------

<S>                                                          <C>         <C>             <C>            <C>            <C>
Net sales ...............................................    $     --       $ 14,810       $ 11,662       $ (3,030)      $ 23,442
Cost of goods sold ......................................          --          9,912          7,796         (2,192)        15,516
                                                             --------       --------       --------       --------       --------
Gross profit ............................................          --          4,898          3,866           (838)         7,926
Selling, general and administrative expenses ............          19          3,324          2,157           (286)         5,214
Research and development ................................          --            577            824           (649)           752
                                                             --------       --------       --------       --------       --------
Income (loss) from operations ...........................         (19)           997            885             97          1,960
Interest (expense), net .................................        (818)            (9)            --             11           (816)
Other income (expense), net .............................         206             13            (21)          (176)            22
Equity in income of subsidiaries ........................       1,256             --             --         (1,256)            --
                                                             --------       --------       --------       --------       --------
Income (loss) before income taxes and minority
  interests .............................................         625          1,001            864         (1,324)         1,166
Income tax benefit (expense) ............................          --           (540)          (419)           412           (547)
                                                             --------       --------       --------       --------       --------
Income (loss) before minority interests .................         625            461            445           (912)           619
Minority interests in loss of consolidated
  subsidiaries ..........................................          --             --              6             --              6
                                                             --------       --------       --------       --------       --------
Net income (loss) .......................................    $    625       $    461       $    451       $   (912)      $    625
                                                             ========       ========       ========       ========       ========
</TABLE>


                                       66
<PAGE>   67


<TABLE>
<CAPTION>
                                                                           CONDENSED CONSOLIDATING STATEMENT OF INCOME
                                                                        FOR THE YEAR ENDED DECEMBER 31, 1999 (PREDECESSOR)
                                                              ----------------------------------------------------------------------
                                                                         U.S. GUARANTOR  NON-GUARANTOR
                                                               PARENT     SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS    CONSOLIDATED
                                                               ------    --------------  -------------  ------------    ------------

<S>                                                          <C>         <C>             <C>            <C>             <C>
Net sales ...............................................     $      --      $ 145,915      $ 109,918      $ (41,590)     $ 214,243
Cost of goods sold ......................................            --         99,948         71,922        (33,312)       138,558
                                                              ---------      ---------      ---------      ---------      ---------
Gross profit ............................................            --         45,967         37,996         (8,278)        75,685
Selling, general and administrative expenses ............         3,847         35,815         19,742         (8,064)        51,340
Research and development ................................            --          6,585          6,178         (5,235)         7,528
                                                              ---------      ---------      ---------      ---------      ---------
Income (loss) from operations ...........................        (3,847)         3,567         12,076          5,021         16,817
Interest income (expense), net ..........................            --           (459)           110         (1,280)        (1,629)
Other income (expense), net .............................         3,724            731         (1,117)        (3,120)           218
Equity in income of subsidiaries ........................         6,760             --             --         (6,760)            --
                                                              ---------      ---------      ---------      ---------      ---------
Income (loss) before income taxes .......................         6,637          3,839         11,069         (6,139)        15,406
Income tax benefit (expense) ............................            49         (2,969)        (3,094)        (2,838)        (8,852)
                                                              ---------      ---------      ---------      ---------      ---------
Income (loss) before minority interests .................         6,686            870          7,975         (8,977)         6,554
Minority interests in loss of consolidated subsidiaries..            --             53             79             --            132
                                                              ---------      ---------      ---------      ---------      ---------
Net income (loss) .......................................     $   6,686      $     923      $   8,054      $  (8,977)     $   6,686
                                                              =========      =========      =========      =========      =========
</TABLE>



<TABLE>
<CAPTION>
                                                                           CONDENSED CONSOLIDATING STATEMENT OF INCOME
                                                                        FOR THE YEAR ENDED DECEMBER 31, 1998 (PREDECESSOR)
                                                             ----------------------------------------------------------------------
                                                                         U.S. GUARANTOR  NON-GUARANTOR
                                                               PARENT     SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                               ------    --------------  -------------  ------------   ------------

<S>                                                          <C>         <C>             <C>            <C>            <C>
Net sales ................................................   $      --      $ 169,717      $  71,584      $ (32,223)     $ 209,078
Cost of goods sold .......................................          --        117,519         46,975        (26,063)       138,431
                                                             ---------      ---------      ---------      ---------      ---------
Gross profit .............................................          --         52,198         24,609         (6,160)        70,647
Selling, general and administrative expenses .............       3,881         32,788         12,229         (5,115)        43,783
Research and development .................................          --          6,033          4,823         (4,100)         6,756
Restructuring and buyout of compensation agreement
  charges ................................................          --          5,740             --             --          5,740
                                                             ---------      ---------      ---------      ---------      ---------
Income (loss) from operations ............................      (3,881)         7,637          7,557          3,055         14,368
Interest income (expense), net ...........................          (3)        (1,427)            88             --         (1,342)
Other income (expense), net ..............................         (19)          (490)          (137)           126           (520)
Equity in income of subsidiaries .........................      11,753             --             --        (11,753)            --
                                                             ---------      ---------      ---------      ---------      ---------
Income (loss) before income taxes ........................       7,850          5,720          7,508         (8,572)        12,506
Income tax benefit (expense) .............................         271         (4,277)        (2,300)         1,921         (4,385)
                                                             ---------      ---------      ---------      ---------      ---------
Net income (loss) ........................................   $   8,121      $   1,443      $   5,208      $  (6,651)     $   8,121
                                                             =========      =========      =========      =========      =========
</TABLE>


                                       67
<PAGE>   68


<TABLE>
<CAPTION>
                                                                           CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                                                                      FOR THE PERIOD FROM FEBRUARY 2, 2000 TO DECEMBER 31, 2000
                                                             ----------------------------------------------------------------------
                                                                         U.S. GUARANTOR  NON-GUARANTOR
                                                               PARENT     SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                               ------    --------------  -------------  ------------   ------------

<S>                                                          <C>         <C>             <C>            <C>            <C>
Net cash provided by (used in) operating activities ....     $ (13,974)     $  20,033      $  14,576      $     (42)     $  20,593
Cash flows used in investing activities:
Proceeds from sale of fixed assets .....................            --             --          1,119             --          1,119
Purchases of property, plant and equipment .............            --         (6,730)        (4,494)           (18)       (11,242)
                                                             ---------      ---------      ---------      ---------      ---------
Net cash provided by (used in) investing activities ....            --         (6,730)        (3,375)           (18)       (10,123)
Cash flows provided by (used in) financing activities:
Advances under other debt obligations ..................        83,937        (23,054)        (7,707)            --         53,176
Principal payments on other debt obligations ...........       (82,025)            25             --             --        (82,000)
Advances under line of credit ..........................         7,700             --             --             --          7,700
Repayments of line of credit ...........................        (8,182)            --             --             --         (8,182)
Payment of merger and financing expense ................       (17,192)            --             --             --        (17,192)
Repurchase of common stock, options and warrants .......      (261,267)            --             --             --       (261,267)
Net proceeds from 12 3/4% senior subordinated notes ....       148,312             --             --             --        148,312
Proceeds from investors ................................       152,000             --             --             --        152,000
                                                             ---------      ---------      ---------      ---------      ---------
Net cash provided by (used in) financing activities ....        23,283        (23,029)        (7,707)            --         (7,453)
Foreign exchange effect on cash and cash equivalents ...            --             --         (1,015)            --         (1,015)
                                                             ---------      ---------      ---------      ---------      ---------
Net increase (decrease) in cash and cash equivalents ...         9,309         (9,726)         2,479            (60)         2,002
Cash and cash equivalents, beginning of period .........           138         14,352          7,294             63         21,847
                                                             ---------      ---------      ---------      ---------      ---------
Cash and cash equivalents, end of period ...............     $   9,447      $   4,626      $   9,773      $       3      $  23,849
                                                             =========      =========      =========      =========      =========
</TABLE>



<TABLE>
<CAPTION>
                                                                        CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR
                                                                   THE PERIOD FROM JANUARY 1, TO FEBRUARY 1, 2000 (PREDECESSOR)
                                                             ----------------------------------------------------------------------
                                                                         U.S. GUARANTOR  NON-GUARANTOR
                                                               PARENT     SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                               ------    --------------  -------------  ------------   ------------

<S>                                                          <C>         <C>             <C>            <C>            <C>
Net cash provided by (used in) operating activities ....     $   (363)     $  9,533        $ (5,614)      $     91        $  3,647
Cash flows used in investing activities:
Purchases of property, plant and equipment .............           --          (288)            (38)            18            (308)
                                                             --------      --------        --------       --------        --------
Net cash used in investing activities ..................           --          (288)            (38)            18            (308)
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses ..............          349            --              --             --             349
Principal payments on debt obligations .................           --           (25)             --             --             (25)
                                                             --------      --------        --------       --------        --------
Net cash provided by (used in) financing activities ....          349           (25)             --             --             324
Foreign exchange effect on cash and cash equivalents ...           --            --             (89)            --             (89)
                                                             --------      --------        --------       --------        --------
Net increase (decrease) in cash and cash equivalents ...          (14)        9,220          (5,741)           109           3,574
Cash and cash equivalents, beginning of period .........          152         5,132          13,035            (46)         18,273
                                                             --------      --------        --------       --------        --------
Cash and cash equivalents, end of period ...............     $    138      $ 14,352        $  7,294       $     63        $ 21,847
                                                             ========      ========        ========       ========        ========
</TABLE>


                                       68
<PAGE>   69


<TABLE>
<CAPTION>
                                                                          CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                                                                         FOR THE YEAR ENDED DECEMBER 31, 1999 (PREDECESSOR)
                                                             ----------------------------------------------------------------------
                                                                         U.S. GUARANTOR  NON-GUARANTOR
                                                               PARENT     SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                               ------    --------------  -------------  ------------   ------------

<S>                                                          <C>         <C>             <C>            <C>            <C>
Net cash provided by (used in) operating activities ....     $   (370)     $ 12,082        $  4,132       $    (37)       $ 15,807
Cash flows used in investing activities:
Payments for acquisitions, net of cash acquired ........      (82,759)           --              --             --         (82,759)
Notes receivable .......................................        1,459            --              --             --           1,459
Proceeds from sale of property, plant and equipment ....           --           158              --             --             158
Purchases of property, plant and equipment .............           --        (9,340)         (3,024)            --         (12,364)
                                                             --------      --------        --------       --------        --------
Net cash used in investing activities ..................      (81,300)       (9,182)         (3,024)            --         (93,506)
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses ..............        1,799            --              --             --           1,799
Advances under line of credit ..........................        8,182            --              --             --           8,182
Repayments of line of credit ...........................          (21)           --              --             --             (21)
Advances under debt obligations ........................       71,778           769           6,783           (129)         79,201
Principal payments on debt obligations .................           --       (11,394)         (1,881)            --         (13,275)
                                                             --------      --------        --------       --------        --------
Net cash provided by (used in) financing activities ....       81,738       (10,625)          4,902           (129)         75,886
Foreign exchange effect on cash and cash equivalents ...           --            --              59             --              59
                                                             --------      --------        --------       --------        --------
Net increase in cash and cash equivalents ..............           68        (7,725)          6,069           (166)         (1,754)
Cash and cash equivalents, beginning of period .........           84        12,857           6,966            120          20,027
                                                             --------      --------        --------       --------        --------
Cash and cash equivalents, end of period ...............     $    152      $  5,132        $ 13,035       $    (46)       $ 18,273
                                                             ========      ========        ========       ========        ========
</TABLE>



<TABLE>
<CAPTION>
                                                                         CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                                                                        FOR THE YEAR ENDED DECEMBER 31, 1998 (PREDECESSOR)
                                                             ----------------------------------------------------------------------
                                                                         U.S. GUARANTOR  NON-GUARANTOR
                                                               PARENT     SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                               ------    --------------  -------------  ------------   ------------

<S>                                                          <C>         <C>             <C>            <C>            <C>
Net cash provided by (used in) operating activities ....     $  (3,957)     $  27,617      $   5,799      $    (516)     $  28,943
Cash flows used in investing activities:
Note receivable ........................................            86             --             --             --             86
Proceeds from sale of property, plant and equipment ....            --             20             --             --             20
Purchases of property, plant and equipment .............          (216)        (7,420)        (2,860)            89        (10,407)
                                                             ---------      ---------      ---------      ---------      ---------
Net cash used in investing activities ..................          (130)        (7,400)        (2,860)            89        (10,301)
Cash flows provided by (used in) financing activities:
Issuance of common stock, net of expenses ..............         4,103             --             --             --          4,103
Advances under line of credit ..........................            --        128,196            170             --        128,366
Repayments of line of credit ...........................            --       (133,898)            --             --       (133,898)
Advances under debt obligations ........................            --          1,156           (764)           189            581
Principal payments on debt obligations .................            --         (4,468)          (225)           358         (4,335)
                                                             ---------      ---------      ---------      ---------      ---------
Net cash provided by (used in) financing activities ....         4,103         (9,014)          (819)           547         (5,183)
Foreign exchange effect on cash and cash equivalents ...            --           (384)            33             --           (351)
                                                             ---------      ---------      ---------      ---------      ---------
Net increase in cash and cash equivalents ..............            16         10,819          2,153            120         13,108
Cash and cash equivalents, beginning of period .........            68          2,038          4,813             --          6,919
                                                             ---------      ---------      ---------      ---------      ---------
Cash and cash equivalents, end of period ...............     $      84      $  12,857      $   6,966      $     120      $  20,027
                                                             =========      =========      =========      =========      =========
</TABLE>


                                       69
<PAGE>   70


                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

ALLOWANCE FOR DOUBTFUL ACCOUNTS:

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

<S>           <C>                       <C>                  <C>                    <C>                   <C>
2000               $ 2,182               $    --               $ 2,082               $(1,171)               $ 3,093
1999               $   921               $   755               $   692               $  (186)               $ 2,182
1998               $   838               $    --               $   533               $  (450)               $   921
</TABLE>

MANCHESTER RESTRUCTURING RESERVES:

<TABLE>
<CAPTION>
                                          RESERVE BALANCE,    CHARGES TO EXPENSE   CHARGES AGAINST THE     RESERVE BALANCE,
DESCRIPTION                              DECEMBER 31, 1999        OR (INCOME)            RESERVES         DECEMBER 31, 2000

<S>                                      <C>                  <C>                  <C>                    <C>
Lease terminations and leasehold
 Improvements reserve                          $ 203                     --                (203)                    --
                                               -----               --------               -----                 ------

  Total                                        $ 203               $     --               $(203)                $   --
                                               =====               ========               =====                 ======
</TABLE>



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

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

Purchase commitments                               691                   (12)                  (679)                    --

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

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

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


THERMALLOY RESTRUCTURING RESERVES:

<TABLE>
<CAPTION>
                              RESERVE BALANCE,                              PAYMENTS OF          RESERVE BALANCE,
DESCRIPTION                   JANUARY 1, 2000     CHARGES TO GOODWILL   RESTRUCTURING COSTS     DECEMBER 31, 2000

<S>                           <C>                 <C>                   <C>                     <C>
Employee separation               $ 1,460               $   639               $(1,606)               $   493

Lease terminations                    670                   160                   (95)                   735
                                  -------               -------               -------                -------

Total                             $ 2,130               $   799               $(1,701)               $ 1,228
                                  =======               =======               =======                =======
</TABLE>



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

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

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

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

WILLIS STEIN RESTRUCTURING RESERVES:

<TABLE>
<CAPTION>
                                    RESERVE BALANCE,                                    PAYMENTS OF             RESERVE BALANCE,
DESCRIPTION                         JANUARY 1, 2000          CHARGES TO GOODWILL     RESTRUCTURING COSTS       DECEMBER 31, 2000

<S>                                 <C>                      <C>                     <C>                       <C>
Employee separation                    $     --                    $ 454                    $(420)                    $  34

Lease terminations                           --                      262                     (250)                       12
                                       --------                    -----                    -----                     -----

Total                                  $     --                    $ 716                    $(670)                    $  46
                                       ========                    =====                    =====                     =====
</TABLE>


                                       70