**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**__________________**




**FORM 10-K**




(Mark
      One)


**x**
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**
                **SECURITIES
                  EXCHANGE ACT OF 1934**




**For
      the fiscal year ended December 31, 2005**





**OR**




**o**
            **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 0-2****1803**


__________________




**AFTERMARKET
      TECHNOLOGY CORP.**


**(Exact
      name of registrant as specified in its charter)**






**DELAWARE**
            **95-4486486**(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                No.)**1400
                Opus Place, Suite 600, Downers Grove, IL**
            **60515**(Address
                of principal executive offices)
            (Zip
                Code)






**Registrant's
      telephone number, including area code: (630) 271-8100**


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


**Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par
      value**







Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes **o** No **x**





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes **o** **** No **x**





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





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 this Form 10-K or any amendment to
      this Form 10-K. **x**





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
      accelerated filer **o**     Accelerated
      filer **x**      Non-accelerated
      filer **o**


Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes **o** **** No **x**





The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant (based on the closing price of such stock, as reported by the Nasdaq
      National Market, on June 30, 2005) was $370.5 million.





The
      number of shares outstanding of the Registrant's Common Stock, as of February
      10, 2006, was 21,801,711 shares.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





None.
















**AFTERMARKET
      TECHNOLOGY CORP.**





**ANNUAL
      REPORT ON FORM 10-K**


**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2005**





ITEM
                1.
            BUSINESSITEM
                1A.
            RISK
                FACTORSITEM
                1B.
            UNRESOLVED
                STAFF
                COMMENTSITEM
                2.
            PROPERTIESITEM
                3.
            LEGAL
                PROCEEDINGSITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERSITEM
                5.
            MARKET
                FOR REGISTRANT’S COMMON EQUITY,
                RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
                SECURITIESITEM
                6.
            SELECTED
                FINANCIAL
                DATAITEM
                7.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONSITEM
                7A.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURES
                ABOUT MARKET RISKITEM
                8.
            CONSOLIDATED
                FINANCIAL STATEMENTS AND
                SUPPLEMENTARY DATAITEM
                9.
            CHANGE
                IN AND DISAGREEMENTS WITH
                ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM
                9A.
            CONTROLS
                AND
                PROCEDURESITEM
                9B.
            OTHER
                INFORMATIONITEM
                10.
            DIRECTORS
                AND EXECUTIVE OFFICERS OF
                THE REGISTRANTITEM
                11.
            EXECUTIVE
                COMPENSATIONITEM
                12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM
                13.
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONSITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND
                SERVICESITEM
                15.
            EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES




i
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          of Contents





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**





This
      Annual Report contains forward-looking statements (as such term is defined
      in
      Section 27A of the Securities Act of 1933 and Section 21E of the
      Securities Exchange Act of 1934) and information relating to us that are based
      on the current beliefs of our management as well as assumptions made by and
      information currently available to management, including statements related
      to
      the markets for our products, general trends in our operations or financial
      results, plans, expectations, estimates and beliefs. In addition, when used
      in
      this Annual Report, the words "may," "could," "should," "anticipate," "believe,"
      "estimate," "expect," "intend," "plan," "predict" and similar expressions and
      their variants, as they relate to us or our management, may identify
      forward-looking statements. These statements reflect our judgment as of the
      date
      of this Annual Report with respect to future events, the outcome of which is
      subject to risks, which may have a significant impact on our business, operating
      results or financial condition. Readers are cautioned that these forward-looking
      statements are inherently uncertain. Should one or more of these risks or
      uncertainties materialize, or should underlying assumptions prove incorrect,
      actual results or outcomes may vary materially from those described herein.
      We
      undertake no obligation to update forward-looking statements. The risks
      identified in Item 1A. “Risk Factors,” among others, may impact forward-looking
      statements contained in this Annual Report.





**PART
      I**


**ITEM
                1.**
            **BUSINESS**





**Overview**





We
      provide outsourced engineering solutions and supply chain logistics services
      to
      the light and medium/heavy-duty vehicle aftermarket and consumer electronics
      industries. Through our Drivetrain Business, we provide customized
      remanufacturing services focused on complex light vehicle drivetrain products,
      such as automatic transmissions and engines, that are primarily sold through
      the
      service, repair and parts organizations of our customers. Through our Logistics
      Business, we offer value-added supply-chain services to the consumer electronics
      and light vehicle aftermarket industries, including fulfillment, returns
      management, reverse logistics, test, repair and other related services. We
      generally provide services under contractual relationships with customers that
      distribute high-value, complex products.





We
      believe our service offerings are differentiated from those of our competitors
      by the degree of customization we provide coupled with our focus on quality
      and
      the consistency of our performance. We
      have
      developed business processes, technical capabilities and information technology
      systems that allow us to design flexible and scaleable solutions
      that help our
      customers reduce their costs, improve their supply chain efficiency and enhance
      their profitability. W e manage,
      monitor and communicate detailed information about our processes and our
      customers’ shipments, returns, products and inventory on a real-time basis. This
      information is readily accessible to our customers, easy-to-use, and customized
      to fit their needs. We also use this information to analyze and improve the
      performance of our businesses and to help us achieve our exacting quality and
      service benchmarks.





***Our
      Drivetrain Business***





Our
      Drivetrain Business remanufactures drivetrain products, which we distribute
      primarily to Original Equipment Service ( “ OES”)
      organizations and their outlets. As our OES customers are the service and repair
      organizations of automotive Original Equipment Manufacturers (“OEMs”), we are
      not subject to the same market trends, such as the cyclical nature of new light
      vehicle sales, as “Tier 1” suppliers to the automotive industry. We believe we
      are the largest independent light vehicle automatic transmission remanufacturer
      in the world. Our drivetrain products consist principally of remanufactured
      automatic transmissions and also include remanufactured torque converters,
      valve
      bodies and engines. Our principal drivetrain customers are the North American
      service, repair and parts organizations of Ford, Honda, DaimlerChrysler, Allison
      and the European division of Ford. In addition, we have also sold to customers
      in the independent aftermarket, including AAMCO dealers, AutoZone and Cottman
      Transmission, but
      in
      February 2006 we decided to discontinue this portion of our business. See Item
      8. “Consolidated Financial Statements and Supplementary Data - Note 20” for a
      discussion of our exit from the independent aftermarket
      business.


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          of Contents




Drivetrain
      Business net sales accounted for 65.3%, 73.6%, 76.0%, 70.9% and 72.4% of our
      2005, 2004, 2003, 2002 and 2001 net sales, respectively. Net sales from the
      independent aftermarket business, which we will discontinue in 2006, accounted
      for 5.0% of our total net sales for each of 2005, 2004 and 2003.





Remanufactured
      products are used in the repair of vehicles by dealers and other service outlets
      during both the warranty and post-warranty periods following the sale of a
      vehicle. Remanufacturing is a process through which used cores are returned
      to a
      central facility where they are disassembled and the parts are inspected,
      cleaned, refurbished and tested. We then combine the reusable parts with new
      parts, primarily in a high-volume cellular assembly process, to create
      remanufactured components that are of comparable quality to new components .
      We
      remanufacture some of the most complex components of a vehicle, such as the
      transmission and engine. Generally, our customers and their designated suppliers
      provide transmission parts and cores to us. However, our launch of a
      medium/heavy-duty remanufacturing program with Allison requires taking title
      to
      the core. In cases where we do not take ownership of the cores, our working
      capital requirements are reduced. Furthermore, because we use salvaged parts
      from cores or new parts sourced from our customers and their designated
      suppliers, we are not directly subject to material pricing fluctuations. We
      believe remanufactured products are generally lower in cost than new replacement
      components and frequently facilitate a faster, more reliable repair when
      compared to components that are rebuilt at service outlets. In addition,
      remanufactured components efficiently reuse existing parts and are less damaging
      to the environment.





We
      remanufacture factory-approved transmissions for warranty and/or post-warranty
      replacement of transmissions for Ford, Honda, DaimlerChrysler and select foreign
      OEMs, primarily for use in the United States service and repair organizations
      of
      their dealer networks. We added Allison Transmissions as a customer for
      remanufactured medium/heavy-duty transmissions during 2005.  Additionally,
      our European facility remanufactures factory-approved gas and diesel engines
      for
      several European OEMs, including Jaguar and the European divisions of Ford
      and
      GM.  These engines are used for warranty and post-warranty replacement, and
      we also provide certain machining services for some of our customers.





We
      generally sell our products to each customer pursuant to a supply arrangement
      for individual transmission or engine models, which supply arrangement typically
      may be terminated by the customer on 90 days notice or less. Our existing
      contracts for transmission remanufacturing with Ford and DaimlerChrysler both
      expired on December 31, 2005. We have reached agreement on terms and conditions
      for contract renewals through 2008 with both Ford and DaimlerChrysler and expect
      to finalize these contracts in the near term.





We
      work
      to develop and maintain strong relationships at many levels, in both the
      corporate and factory organizations of our drivetrain customers. We began
      remanufacturing transmissions for DaimlerChrysler’s Chrysler division and Ford
      in 1989, and Honda in 2002.  Over the past few years, we have strengthened
      our relationships with many of our other Drivetrain Business customers, as
      evidenced by the award of new business with Honda, Ford, Jaguar, and Isuzu.
      We
      believe that we are the largest provider of remanufactured transmissions to
      DaimlerChrysler, Ford and Honda for light vehicles in North America.





Our
      facilities that remanufacture transmissions for OEMs have QS-9000 or ISO-9000
      certification, a complete quality management system developed for manufacturers
      who subscribe to the ISO 9002 quality standards.  The system is designed to
      help suppliers, such as us, develop a quality system that emphasizes defect
      prevention and continuous improvement in manufacturing processes.





***Our
      Logistics Business***





Our
      Logistics Business provides a number of value-added services that generate
      operational efficiencies for our customers through the outsourcing of certain
      supply chain functions. Specifically, our Logistics Business provides
      value-added warehousing and distribution, reverse logistics, turnkey order
      fulfillment, electronic equipment testing, and refurbishment and repair
      services. We generally do not take ownership of inventory. As a result, we
      do
      not face the risk of inventory obsolescence, and we require relatively less
      working capital than logistics service providers who take ownership of
      inventory. Our principal customers are currently in the consumer electronics
      and
      automotive industries and include Cingular, Nokia, LG, T-Mobile, Delphi,
      Visteon, GM and Thales. Logistics
      Business segment sales accounted for 34.7%, 26.4%, 24.0%, 29.1% and 27.6% of
      our
      2005, 2004, 2003, 2002 and 2001 net sales, respectively.


2
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          of Contents





We
      determine our logistics process in close consultation with our customers. Our
      information technology systems allow rapid integration with our customers’
systems and, in conjunction with our customized processes, help us to meet
      demanding logistics and repair requirements. By improving our customers’
inventory turns and speed of repair and refurbishments, as well as enabling
      our
      customers to realize value from returned products, we believe we help our
      customers increase their profitability, reduce their capital investments and
      enhance their opportunities for growth . We
      customize our products and services to meet the specific individual needs of
      customers instead of offering one standard suite of products and
      services.





Our
      logistics customers market and distribute complex and serialized consumer
      electronics such as cellular phones, wireless devices, navigation devices,
      and
      light vehicle audio systems and instrument clusters. As
      part
      of our service offering, we remanufacture, repair and distribute light vehicle
      audio systems and instrument and display clusters primarily for Delphi, Visteon,
      and GM, and various mobile electronics products, such as navigation systems,
      primarily for Delphi, GM and Thales. We also offer returned material reclamation
      and core management and disposition services.





We
      provide bulk and direct fulfillment of cellular telephones to Cingular and
      its
      partners.  We deliver products both to Cingular retail locations and
      directly to individuals who order a cellular phone, and provide inventory
      tracking and management, process all warranty-service exchanges and perform
      handset testing and repair. Growth
      in
      our Logistics Business has largely been with Cingular (historically through
      AT&T Wireless, which was acquired by Cingular in October 2004). Since
      Cingular’s acquisition of AT&T Wireless, we have expanded on certain lines
      of service we previously provided to AT&T Wireless. Revenue for these
      services grew significantly in 2005, more than offsetting the loss of the
      accessory packaging services that we previously provided to AT&T Wireless,
      and we expect them to grow further in 2006. In addition to new business from
      Cingular, we signed agreements and launched new business with a number of new
      logistics customers in 2004 and 2005 that we expect to generate additional
      sales
      in 2006.





**Industry
      Background**





***Automotive
      Aftermarket***





Demand
      for replacement or repair of drivetrain products is a function of numerous
      factors, such as the number of vehicles in operation, the average age of
      vehicles and the average number of miles driven per vehicle. Within this overall
      market, factors that influence demand for our remanufactured products, when
      compared to repair services, include product complexity, OEM warranty policies
      governing repair-versus-replace decisions made by their dealers, and the length
      of warranty periods. In addition, we believe increasing demand for our
      remanufacturing services, when compared to repair services, is also driven
      by
      the relatively limited number of qualified repair technicians and repair test
      equipment, and the increase in customer service demands. The demand for our
      products is generally not tied to the cyclical nature of new light vehicle
      sales. We supply our products to the automotive aftermarket, which consists
      of
      parts and services for light vehicles after their original purchase. According
      to the Frost & Sullivan report dated February 2005, the North American
      replacement and repair component of this market for transmissions was
      approximately $2.7 billion in 2004 and expected to grow at a compound annual
      rate of 4.4% from 2004 to 2011 due to the increasing number of vehicles in
      operation, the average age of vehicles and the average number of miles driven
      per vehicle.





***Remanufacturing
      Process***





When
      an
      assembly such as a transmission or engine fails, there are generally three
      alternatives available to return the vehicle to operating condition.  The
      dealer or independent repair shop may:





•
            remove
                the assembly, disassemble it into its component pieces, replace worn
                or
                broken parts with remanufactured or new components, and reinstall
                the
                assembly in the vehicle;





•
            replace
                the assembly with an assembly from a remanufacturer such as us;
                or





•
            replace
                the assembly with a new assembly manufactured by the
                OEM.


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In
      our
      remanufacturing process, we generally obtain used transmissions and engines
      ( “cores” )
      from
      our customers or their designated suppliers.  We then sort the cores by
      vehicle make and model and either place them into immediate production or store
      them until needed.  In the remanufacturing process, we evaluate the cores,
      disassemble them into their component parts and inspect, clean, refurbish and
      test the components that can be incorporated into the remanufactured
      product.  We replace components that we determine to be not reusable or
      repairable with other remanufactured or new components.  We conduct
      inspection and testing at various stages of the remanufacturing process, and
      we
      test each finished assembly on equipment designed to simulate performance under
      operating conditions.  After testing, we generally package completed
      products for immediate delivery.





There
      are
      four primary benefits of using remanufactured components in the repair of
      vehicles:





•
            First,
                costs to the customers associated with remanufactured assemblies
                generally
                are substantially less than costs associated with either assemblies
                that
                have been rebuilt by the dealer following a severe failure or new
                assemblies.  This is due primarily to our lower labor costs and our
                use of high volume manufacturing techniques and salvage methods that
                enable us to refurbish and reuse a high percentage of original
                components.  The cost savings produced by remanufactured assemblies
                help our customers manage their warranty
                expenses.





•
            Second,
                remanufactured assemblies are generally of consistent high quality
                due to
                the precision manufacturing techniques, technical upgrades and rigorous
                inspection and testing procedures we employ in remanufacturing.  By
                contrast, the quality of rebuilt assemblies generally is less consistent
                because it is heavily dependent on the skill level of the particular
                mechanic as well as the availability of adequate tooling and testing
                equipment.   For warranty repairs, consistent quality is
                important to the customer providing the applicable warranty, because
                once
                installed, the remanufactured product is usually covered by the customer’s
                warranty for the balance of the original warranty
                period.





•
            Third,
                replacement of a component with a remanufactured component generally
                takes
                considerably less time than the time needed to rebuild the component,
                thereby significantly reducing the time the vehicle is at the dealer
                or
                repair shop and allowing the dealer and repair shops to increase
                their
                volume of business.





•
            Fourth,
                the environmental benefits of remanufacturing may be significant.  We
                annually re-process thousands of tons of materials that would otherwise
                have been discarded. Remanufacturing in our facilities, when compared
                to
                rebuilding at various dealers, generally results in a more efficient
                reuse
                of parts and a more controlled recycling of scrap materials and excess
                fluids.  This in turn leads to associated cost savings and benefits
                to customers that are increasingly focused on environmental compliance
                issues.








***Logistics
      Industry***





Logistics
      can generally be defined as the management and transportation of materials
      and
      inventory throughout the supply chain as well as the provision of value-added
      services such as assembly, packaging, programming, testing and repair.  The
      logistics industry has expanded rapidly over the last 15 years due to
      dramatic improvements in technology, increased demand in customer service
      requirements, and the significant value proposition provided to companies by third
      party logistics (3PL) providers. As
      more
      companies focus on core competencies, many companies have decided to outsource
      the management of all or part of their supply chain as a means to reduce costs,
      increase asset and labor flexibility and improve customer service.  As a
      result, 3PL providers have become extensively involved in the full range of
      customer supply chain functions.  The operational efficiencies of a 3PL
      provider enable companies to reduce investments in facilities, information
      technology, inventory and personnel.  Third-party services include turnkey
      supply chain services, such as order fulfillment, product labeling and
      packaging, inventory and warehouse management, product return, refurbishment
      and
      repair, electronics equipment testing, reverse logistics and the physical
      movement of goods. According to Armstrong & Associates, Inc., the 3PL market
      grew at a 14.1% compound annual rate from $45.3 billion in 1999 to $76.9 billion
      in 2003.


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We
      compete in the value-added warehousing market, a subset of the 3PL market,
      which
      we believe is fragmented, with no dominant industry player, and growing rapidly.
      According to the Armstrong & Associates, Inc. report dated December 2004,
      this market size was estimated to be $19.8 billion of gross revenues in
      2003.








**Our
      Competitive Strengths**





We
      believe we offer products and solutions that improve our customers’ profits and
      operations as a result of our competitive strengths, which include the
      following:





***Customized
      Service Offering***





We are
      recognized by our customers for our high level of service and our flexibility
      in
      providing product and service solutions. Our
      logistics approach involves our team of specialists who work with the client
      to
      understand the specific deliverables required by that client, understand
      communication points within the supply chain, design solutions, establish
      operational and business metrics, eliminate waste and improve efficiencies.
      We
      offer a broad array of products and services to our logistics customers, which
      allows us to work with the customer to customize our
      products and services to meet the specific individual needs of the customer
      instead of offering one standard suite of products and services. We believe
      our
“One-Size-Fits-One” approach helps us attract and retain customers. For
      instance, for Cingular, our supply chain management services include product
      warranty and returns, order entry processing, testing and repair, warehousing,
      picking, kitting, customized packaging, shipping and delivery of wireless
      handsets, including wireless data devices.  Our integrated logistics
      services also include inventory management and private labeling. This customized
      approach has allowed us to add Nokia, T-Mobile, LG and Thales as new customers.








***High
      Quality Through Engineering and Technical Know-How***





Our
      remanufactured products are of consistent high quality due to the precision
      manufacturing techniques, technical upgrades and rigorous inspection and testing
      procedures employed in our remanufacturing processes. We partner with our
      customers to design processes that help ensure that our remanufacturing of
      complex products such as automatic transmissions, valve bodies, torque
      converters, engines and automotive electronics replicates OEM quality and test
      procedures.  Our remanufacturing process is completed by testing products
      using state-of-the-art equipment such as sophisticated test stands that enable
      us to replicate OEM test procedures. We are committed to upholding the quality
      of our customers’ products and hold QS-9000 Certification, ISO-9000
      Certification and Ford’s Q1 Certification. We monitor our procedures and
      processes, which allows us to identify and to quickly correct situations that
      could impact our product quality. We have a team of engineers dedicated to
      enhancing and adding new products, sharing innovative solutions and reducing
      our
      customers’ expenses. Our engineering capabilities include developing new
      products.








***Information
      Technology Capabilities***





We
      use
      information technology to help meet customers’ needs in product security and
      confidentiality, product qualification and identification, inventory management,
      and interactive electronic communication. We also provide customers with
      solutions for their supply chain management, reverse logistics, product tracking
      and product history needs, while maintaining service and quality levels. Our
      use
      of information technology allows us to provide flexible, accurate, customized
      logistics solutions to help meet customer requirements while providing full
      visibility across the supply chain. Our solutions can reduce customer-required
      investment in information technology, and can improve the efficiency of our
      customers’ inventory and supply chains by providing enhanced traceability and
      visibility of inventory, resulting in market-leading performance metrics and
      improved customer profitability. In addition, our information technology systems
      allow for rapid integration with our customers’ systems, enhancing the quality
      of our services.


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***Strong,
      Experienced Management Team***





Our
      executive and operations management team has extensive experience. Our Chief
      Executive Officer, Donald T. Johnson, Jr., has 32 years of experience in the
      logistics and automotive industries, including five years as Global
      Director of Parts, Supply and Logistics for Ford and 26 years within
      Caterpillar’s Parts and Service and Logistics organizations where he became Vice
      President, Caterpillar Logistics. Our
      Vice
      President and Chief Financial Officer, Todd R. Peters, has 21 years of
      financial, acquisition and integration, and automotive operations experience.
      The President of our ATC Logistics Business, William L. Conley, Jr., has 27
      years of logistics experience, and the Vice President of our North American Remanufacturing
      Operations ,
      Brett
      O. Dickson, has 16 years of operational and supply chain management
      experience.








**Our
      Growth Strategies**





Our
      strategy is to be a valued partner that provides remanufacturing, logistics,
      return and repair services for customers that distribute high-value, complex
      products in various markets. We will grow by leveraging our strong customer
      relationships while we develop new customers and products.





***Growth
      Within Our Drivetrain Business***





*Expand
      Our Product Offering and Product Application.* Our
      business and product development teams are working to identify new products
      and
      processes that enable us to compete for additional business with our OES dealer
      customers by helping them to increase their penetration of the drivetrain repair
      market and/or reduce their total warranty costs. For example, we are working
      with certain of our OES customers to (i) develop and implement products and
      strategies designed to enable them to penetrate, or increase their penetration
      of, the post-warranty replacement market for automotive transmissions that
      we
      remanufacture on their behalf, (ii) re-introduce remanufactured transmissions
      as
      a transmission repair alternative in warranty applications, and
      (iii) develop a transmission repair kit product that we will market for
      their use with failed transmissions that are repaired rather than totally
      replaced.





*Enter
      Additional Markets for our Services.* We are
      seeking drivetrain remanufacturing opportunities in markets outside our primary
      light vehicle aftermarket, including the commercial vehicle market. For example,
      in 2005 we were awarded a remanufacturing program by Allison for
      medium/heavy-duty automatic transmissions, which we expect will generate
      $30 million of annualized revenue. We
      believe that our expertise in drivetrain remanufacturing will be directly
      transferable to these other markets over time.





*Expand
      Our International Presence.* In
      2005,
      we generated approximately 94% of our total net sales in North America. We
      believe that our expertise in drivetrain remanufacturing will be directly
      transferable to foreign markets, which generally have a less developed
      drivetrain remanufacturing market than North America. As such we are actively
      pursuing additional opportunities with both new and existing customers to
      provide remanufacturing services in both Europe and Asia. We
      believe that these areas represent an opportunity for growth. We are currently
      working to develop programs with OEMs in the growing Chinese automotive market
      (where we do not currently have a presence).  We continue to explore
      opportunities in the global automotive industry for our products and services
      in
      order to capture new business opportunities and improve
      profitability.





*Emerging
      Technology.* W e
      will
      continue to modestly invest in the *NuVinciTM* Continuously Variable Planetary (CVP) Drive technology to further diversify
      our
      products, markets, customers and revenues. Initially we are focusing on the
      bicycle, light electric vehicle, recreation/garden vehicle and commercial
      vehicle markets. We intend to utilize the strengths, capabilities and capacity
      in our Drivetrain business to develop and commercialize the CVP
      product.





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***Growth
      Within Our Logistics Business***





*Target
      New Customers and Broaden Services Provided to Customers* .
      We
      believe we are well positioned to capitalize on growth in the 3PL services
      market, particularly with existing and new customers in the consumer electronics
      and vehicle industries, by offering customized, reliable and cost effective
      solutions for customers with complex logistics requirements involving high-value
      products. In
      2005,
      we were awarded new logistics business that we expect to generate $37 million
      of
      annualized revenue. We recently expanded our business development and marketing
      teams and are more actively marketing our offerings to new and existing
      customers.





We
      intend
      to increase penetration of our existing Logistics Business customer base by
      broadening our offering of Logistics products and services and by marketing
      our
      core competencies as solutions to meet our customers’ needs.  Under our
“ One-Size-Fits-One ”
      philosophy, we will continue to leverage our broad range of services to target
      new customers that provide serialized products across a variety of industries
      and provide them with customized products and services to meet their specific
      needs instead of offering one standard suite of products and services. We also
      intend to leverage our core competencies in logistics and electronics
      refurbishment by working with our existing and new customers to identify
      products and services where we can add value in satisfaction of our customers’
specific needs. We intend to further expand our penetration of the market for
      logistics services and electronics repair through the addition of other wireless
      carriers to our customer base and through penetration into other vertical
      markets, including broadband/cable, electronics and computers, and medical
      equipment. We have also identified and targeted several new market segments,
      including additional classes of consumer electronics.





***Additional
      Corporate Initiatives***





*Leverage
      Operating Efficiency and Productivity Gains* .
      We
      regularly evaluate our operating efficiency and productivity in order to
      increase our profitability and cash flows. Over the last five years, we have
      completed numerous lean manufacturing, six sigma and continuous improvement
      projects that have resulted in significant cost savings and increased capacity
      utilization. Our “Lean and Continuous Improvement” program has helped us achieve
      margin improvements and further enhancement of quality. We believe there are
      additional opportunities to further improve our cost base and increase earnings.





*Selectively
      Pursue Acquisitions* .
      From
      time to time we evaluate potential acquisitions of complementary businesses
      that
      we believe will broaden our product offerings, diversify our customer base
      or
      provide us access to new markets. We have established criteria by which we
      evaluate potential acquisitions, which we use to identify and pursue only those
      that we believe will enhance long-term shareholder value. We have made various
      acquisitions in the past and, to the extent suitable acquisition candidates,
      acquisition terms and financing are available, we intend to pursue acquisitions
      in the future.











**Competition**





In
      our
      Drivetrain Business, we primarily compete in the market for remanufactured
      transmissions sold to the automotive aftermarket through the OEM dealer
      networks.  This market, narrowly defined, is one in which the majority of
      industry supply comes from a limited number of participants.  Competition
      is based primarily on product quality, service, delivery, technical support
      and
      price and tends to be split along customer lines.





In
      our
      Logistics Business, we primarily compete in a fragmented market as a niche
      participant offering a specialized value-added service requiring stringent
      service level requirements.  Based on our performance levels, we believe we
      are well positioned to compete in this market.  However, some of our
      competitors in this segment such as Caterpillar Logistics and UPS Logistics
      are
      larger and have greater financial and other resources.











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**Employees**





As
      of December
      31, 2005 ,
      we had
      approximately 3,300 full-time and temporary employees.  We believe our
      employee and labor relations are good.  We have not experienced any work
      stoppage to date and currently none of our employees is represented by a labor
      union.








**Environmental**





We
      are
      subject to various evolving federal, state, local and foreign environmental
      laws
      and regulations governing, among other things, emissions to air, discharge
      to
      waters and the generation, handling, storage, transportation, treatment and
      disposal of a variety of hazardous and non-hazardous substances and wastes.
      These laws and regulations provide for substantial fines and criminal sanctions
      for violations and impose liability for the costs of cleaning up, and damages
      resulting from, past spills, disposals or other releases of hazardous
      substances.





In
      connection with the acquisition of our subsidiaries, some of which have been
      subsequently divested or relocated, we conducted certain investigations of
      these
      companies’ facilities and their compliance with applicable environmental laws.
      The investigations, which included Phase I assessments by independent
      consultants of all manufacturing and various distribution facilities, found
      that
      a number of these facilities have had or may have had releases of hazardous
      materials that may require remediation and also may be subject to potential
      liabilities for contamination from off-site disposal of substances or
      wastes.  These assessments also found that reporting and other regulatory
      requirements, including waste management procedures, were not or may not have
      been satisfied. Although there can be no assurance, we believe that, based
      in
      part on the investigations conducted, in part on certain remediation completed
      prior to or since the acquisitions, and in part on the indemnification
      provisions of the agreements entered into in connection with our acquisitions,
      we will not incur any material liabilities relating to these
      matters.





In
      connection with the October 2000 sale of our Distribution Group, we agreed
      to indemnify the buyer against environmental liability at former Distribution
      Group facilities that had been closed prior to the Distribution Group sale,
      including former facilities in Azusa, California, Mexicali, Mexico and Dayton,
      Ohio. We also agreed to indemnify the buyer against any other environmental
      liability of the Distribution Group relating to periods prior to the closing
      of
      the Distribution Group sale. Our indemnification obligations to the buyer are
      subject to a $750,000 deductible and a $12.0 million cap, except with
      respect to the closed facilities. We also have an additional $100,000 deductible
      applicable to all Distribution Group claims for
      indemnification.


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**Segment
      Reporting**





We
      have
      two reportable segments: the Drivetrain Remanufacturing segment and the
      Logistics segment. Our independent aftermarket business is reflected as “Other”
and is not reportable for segment reporting purposes. See Item 8. “Consolidated
      Financial Statements and Supplementary Data-Note 20” for a discussion of our
      exit from the independent aftermarket business. Also See Item 8. “Consolidated
      Financial Statements and Supplementary Data” and Item 7. “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations.”








**Available
      Information**





Our
      internet website is www.goATC.com .
      We make
      available free of charge on our website our annual reports on Form 10-K,
      quarterly reports on Form 10-Q, current reports on Form 8-K and any other
      filings we make with the Securities and Exchange Commission as soon as
      reasonably practicable. This information may also be obtained by calling the
      Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
      Exchange Commission also maintains an internet website that contains reports,
      and other information regarding issuers like us that file electronically with
      the Securities and Exchange Commission at www.sec.gov .
      We will
      provide a copy of any of the foregoing documents to shareholders upon request.
      The contents of our website are not part of this annual report.











**ITEM
      1A.**  **RISK
      FACTORS**





We
      believe that the following are the material risks currently facing our business,
      but additional risks we are not presently aware of or that we currently believe
      are immaterial may also impair our business operations. Our financial condition,
      results of operations or stock price could be materially adversely affected
      by
      these risks. Readers should also refer to the other information included in
      this
      Annual Report, including our consolidated financial statements and related
      notes
      thereto.








**We
      rely on a few major customers for a significant majority of our business and
      the
      loss of any of those customers, significant changes in prices or other terms
      with any of our major customers, or changes to our customers’ warranty policies,
      could reduce our net income and operating results.**





A
      few
      customers account for a significant majority of our net sales each year. In
      2005, we had four customers that individually accounted for more than 10% of
      our
      net sales. Cingular (including sales to the former AT&T Wireless) accounted
      for 28.3%, 22.3% and 17.2% of our net sales during 2005, 2004 and 2003,
      respectively, Ford accounted for 23.1%, 29.6% and 38.6% of our net sales for
      2005, 2004 and 2003, respectively, Honda accounted for 18.3%, 19.4% and 7.5%
      of
      our net sales during 2005, 2004 and 2003, respectively, and DaimlerChrysler
      accounted for 14.6%, 14.7% and 20.6% of our net sales in 2005, 2004 and 2003,
      respectively. If we lose any of these customers, or if any of them reduces
      or
      cancels a significant order, our net sales and operating results could decrease
      significantly.





Our
      significant OEM customers generally require that their dealers using
      remanufactured products for warranty application use only products from approved
      suppliers. Although we are a factory approved supplier of our customers, they
      generally are not obligated to continue to purchase our products and may switch
      some or all of their business to other suppliers in the future and we may not
      be
      able to maintain or increase our sales to them. Most of our contracts or
      arrangements with our customers are terminable by the customer subject to a
      notice period that ranges from 90 days or less to 180 days. Pursuant to
      such an arrangement, in 2004 General Motors elected to resource all our
      remanufactured transmission production to one of our competitors. In addition,
      we periodically renegotiate the prices and other terms of our products with
      our
      customers. Because of the short termination periods and periodic price
      negotiations, we cannot give any assurances of the stability of the demand
      or
      prices for our products and, therefore, our revenue streams. Significant demand
      or price fluctuations could materially affect our business.


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Since
      Cingular's acquisition of AT&T Wireless, we have been working with
      Cingular as they rationalize their supply chain.  This resulted
      in the loss in 2004 of the accessory packaging services that we previously
      provided to AT&T Wireless but has also resulted in the expansion of our
      core logistics services with Cingular.  This process will continue and
      could result in further gains and/or losses of business with
      Cingular.





Loss
      of a
      significant customer could also result in us incurring asset impairment charges
      and exit costs associated with the closure of the plant that serviced that
      customer. In connection with the loss of the General Motors transmission
      business in 2004, we recorded goodwill and other asset impairment charges
      totaling $26.4 million and incurred $3.4 million of exit costs to close the
      Gastonia, North Carolina facility where we had produced units for General
      Motors.





Within
      the last five years the standard new vehicle warranty provided by our customers
      has varied and shorter warranty periods could be implemented in the future.
      Any
      shortening of warranty periods could reduce the amount of warranty work
      performed by dealers and reduce the demand for our products. Additionally,
      our
      customers may vary their policies that determine when their dealers may use
      remanufactured products for warranty applications, which could reduce the demand
      for our products. Our results, most recently in 2005, have been adversely
      affected by certain customers changing the policies that govern their dealer
      warranty repair-versus-replace decisions, which have resulted in dealers
      repairing more transmissions and consequently replacing fewer transmissions
      with
      remanufactured units.








**Interruptions
      or delays in obtaining transmission cores and component parts could impair
      our
      business.**





In
      our
      remanufacturing operations, we obtain used transmissions, engines and related
      components, commonly known as cores, which are sorted and either placed into
      immediate production or stored until needed. The majority of the cores we
      remanufacture are obtained from OEMs. Our ability to obtain cores of the types
      and in the quantities we require is critical to our ability to meet demand
      and
      expand production. With the increasing acceptance in the aftermarket of
      remanufactured assemblies, the demand for cores has increased. We have
      periodically experienced situations in which the inability to obtain sufficient
      cores has limited our ability to accept orders. We may experience core shortages
      in the future. In addition, from time to time, we experience shortages of
      components manufactured by our OEM customers that we require for our
      transmission remanufacturing process. If we experience such shortages for an
      extended period of time, it could have a material adverse effect on our business
      and negatively impact our competitive position.








**Our
      financial results are affected by transmission failure rates, which are outside
      our control.**





Our
      quarterly and annual operating results are affected by transmission failure
      rates, and a drop in these rates could adversely affect sales or profitability
      or lead to variability of our operating results. Generally, if transmissions
      last longer, there will be less demand for our remanufactured transmissions.
      Transmission failure rates could drop due to a number of factors outside our
      control, including:





•
            consumers
                retaining automobiles for shorter periods, which could occur in periods
                of
                economic growth or stability;





•
            transmission
                designs that result in greater reliability;





•
            consumers
                driving fewer miles per year due to high gasoline prices; and





•
            mild
                weather.








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**Our
      financial results are affected by our customers' policies, which are outside
      our
      control.**





Our
      financial results are also affected by the policies of our OEM customers.
      Changes to our key OEM customers’ policies that could materially affect our
      business include:





•
            guidelines
                that affect dealer decisions to rebuild units at the dealer rather
                than
                install remanufactured transmissions;





•
            shortened
                warranty periods that could reduce the demand for our products;





•
            reductions
                in the amount of inventory our OEM customers elect to retain;





•
            longer
                time periods before remanufactured transmissions are introduced for
                use
                with a particular automobile; and





•
            pricing
                strategies.








**Our
      Logistics Business is dependent on the strength of Cingular
      Wireless.**





Cingular
      Wireless, which accounted for 81.5% of our Logistics segment net sales for
      2005,
      operates in a highly competitive technology market. The number of cell phones
      sold by Cingular, whether to new subscribers or as replacement phones to
      existing subscribers, is dependent on its ability to keep pace with
      technological advancements and to provide service programs and prices that
      are
      attractive to current and potential customers. Our Logistics net sales to
      Cingular are substantially related to the number of phones sold by Cingular.
      Consequently, any material decrease in phones sold by Cingular will materially
      and adversely affect our Logistics net sales.








**We
      may incur material liabilities under various federal, state, local and foreign
      environmental laws.**





We
      are
      subject to various evolving federal, state, local and foreign environmental
      laws
      and regulations governing, among other things, emissions to air, discharge
      to
      waters and the generation, handling, storage, transportation, treatment and
      disposal of a variety of hazardous and non-hazardous substances and wastes.
      These laws and regulations provide for substantial fines and criminal sanctions
      for violations and impose liability for the costs of cleaning up, and the
      damages resulting from, past spills, disposals or other releases of hazardous
      substances. In connection with our acquisition activity, we have conducted
      certain investigations of facilities we have acquired and their compliance
      with
      applicable environmental laws. Similarly, in the course of lease terminations,
      we have generally conducted investigations into potential environmental impacts
      resulting from our operations. These investigations revealed various
      environmental matters and conditions that could expose us to liability or which
      have required us to undertake compliance-related improvements or remedial
      activities. Any liability we may have under environmental laws could materially
      affect our business.








**Substantial
      competition could reduce our market share and significantly harm our financial
      performance.**





While
      we
      believe that our business is well positioned to compete in our two primary
      market segments, transmission remanufacturing and logistics, our industry
      segments are highly competitive. We may not be successful in competing against
      other companies, some of which are larger than us and have greater financial
      and
      other resources available to them than we do. Increased competition could
      require us to reduce prices or take other actions that may have an adverse
      effect on our operating results.








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**Our
      stock price is volatile, and investors may not be able to recover their
      investment if our stock price declines.**





The
      trading price of our common stock has been volatile and can be expected to
      be
      affected by factors such as:





•
            quarterly
                variations in our results of operations, which may be impacted by,
                among
                other things, price renegotiations with, or loss of, our customers;





•
            quarterly
                variations in the results of operations or stock prices of comparable
                companies;





•
            announcements
                of new products or services offered by us or our competitors;





•
            changes
                in earnings estimates or buy/sell recommendations by financial analysts;





•
            the
                stock price performance of our customers; and





•
            general
                market conditions or market conditions specific to particular industries.








**Our
      future operating results may fluctuate significantly.**





We
      may
      experience significant variations in our future quarterly results of operations.
      These fluctuations may result from many factors, including the condition of
      our
      industry in general and shifts in demand and pricing for our products. Our
      operating results are also highly dependent on our level of gross profit as
      a
      percentage of net sales. Our gross profit percentage fluctuates due to numerous
      factors, some of which may be outside of our control. These factors include:





•
            pricing
                strategies;





•
            changes
                to our customers’ warranty policies;





•
            changes
                in product costs from vendors;





•
            the
                risk of some of the items in our inventory becoming obsolete;





•
            the
                availability and quality of cores;





•
            the
                relative mix of products sold during the period; and





•
            general
                market and competitive conditions.





Results
      of operations in any period, therefore, should not be considered indicative
      of
      the results to be expected for any future period.








**Our
      success depends on our ability to retain our senior management and to attract
      and retain key personnel.**





Our
      success depends to a significant extent on the efforts and abilities of our
      senior management team. We have various programs in place to motivate, reward
      and retain our management team, including bonus and stock incentive plans.
      However, the loss of one or more of these persons could have an adverse effect
      on our business. Our success and plans for future growth will also depend on
      our
      ability to hire, train and retain skilled workers in all areas of our business.
      We currently do not have key executive insurance relating to our senior
      management team.


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**We
      cannot predict the impact of unionization efforts or labor shortages on our
      business.**





From
      time
      to time, labor unions have indicated their interest in organizing a portion
      of
      our workforce. Given that our OEM customers are in the highly unionized
      automotive industry, our business is likely to continue to attract the attention
      of union organizers. While these efforts have not been successful to date except
      in the case of our former Mahwah, New Jersey facility (which we closed in
      December 2003), we cannot give any assurance that we will not experience
      additional union activity in the future. Any union organization activity, if
      successful, could result in increased labor costs and, even if unsuccessful,
      could result in a temporary disruption of our production capabilities and a
      distraction to our management.





Additionally,
      we need qualified managers and a number of skilled employees with technical
      experience in order to operate our business successfully. From time to time,
      there may be a shortage of skilled labor, which may make it more difficult
      and
      expensive for us to attract and retain qualified employees. If we are unable
      to
      attract and retain qualified individuals or our costs to do so increase
      significantly, our operations would be materially adversely affected.








**We
      are subject to risks associated with future acquisitions.**





An
      element of our growth strategy is the acquisition and integration of
      complementary businesses in order to broaden product offerings, capture market
      share and improve profitability. We will not be able to acquire other businesses
      if we cannot identify suitable acquisition opportunities, obtain financing
      on
      acceptable terms or reach mutually agreeable terms with acquisition candidates.
      The negotiation of potential acquisitions as well as the integration of an
      acquired business could require us to incur significant costs and cause
      diversion of our management's time and resources. Future acquisitions by us
      could result in:





•
            dilutive
                issuances of equity securities;





•
            reductions
                in our operating results;





•
            incurrence
                of debt and contingent liabilities;





•
            future
                impairment of goodwill and other intangibles; and





•
            other
                acquisition-related expenses.





Some
      or
      all of these items could have a material adverse effect on our business. The
      businesses we acquire in the future may not achieve sales and profitability
      that
      justify our investment. In addition, to the extent that consolidation becomes
      more prevalent in our industry, the prices for suitable acquisition candidates
      may increase to unacceptable levels and limit our growth.








**We
      may encounter problems in integrating the operations of companies that we
      acquire.**





We
      may
      encounter difficulties in integrating any businesses we acquire with our
      operations. The success of these transactions depends on our ability to:





•
            retain
                key management members and technical personnel of acquired companies;





•
            successfully
                merge corporate cultures and operational and financial systems; and





•
            realize
                sale and cost reduction synergies.


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Furthermore,
      we may not realize the benefits we anticipated when we entered into these
      transactions. In addition, after we have completed an acquisition, our
      management must be able to assume significantly greater responsibilities, and
      this in turn may cause them to divert their attention from our existing
      operations. Any of the foregoing could have a material adverse effect on our
      business and results of operations.








**Our
      level of indebtedness and the terms of our indebtedness could adversely affect
      our business and liquidity position.**





As
      of
      December 31, 2005, our outstanding indebtedness was $90.8 million, and we
      had cash and cash equivalents on hand of $45.5 million. We expect that our
      indebtedness may increase substantially from time to time in the future for
      various reasons, including fluctuations in operating results, capital
      expenditures and possible acquisitions. Our consolidated indebtedness level
      could materially affect our business because:





•
            a
                portion of our cash flow from operations must be dedicated to interest
                payments on our indebtedness and is not available for other purposes,
                which amount would increase if prevailing interest rates rise;





•
            it
                may materially limit or impair our ability to obtain financing in
                the
                future;





•
            it
                may reduce our flexibility to respond to changing business and economic
                conditions or take advantage of business opportunities that may arise;
                and





•
            our
                ability to pay dividends is limited.





In
      addition, our credit facility requires us to meet specified financial ratios
      and
      limits our ability to enter into various transactions. If we default on any
      of
      our indebtedness, or if we are unable to obtain necessary liquidity, our
      business could be adversely affected.








**Our
      certificate of incorporation contains provisions that may hinder or prevent
      a
      change in control of our company.**





Provisions
      of our certificate of incorporation could make it more difficult for a third
      party to obtain control of us, even if such a change in control would benefit
      our stockholders. Our Board of Directors can issue preferred stock without
      stockholder approval. The rights of common stockholders could be adversely
      affected by the rights of holders of preferred stock that we issue in the
      future. These provisions could discourage a third party from obtaining control
      of us. Such provisions may also impede a transaction in which our stockholders
      could receive a premium over then current market prices and our stockholders'
      ability to approve transactions that they consider in their best interests.











**ITEM
      1B.**  **UNRESOLVED
      STAFF
      COMMENTS**





None.


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**I****TEM
                2.**
            **PROPERTIES**





We
      conduct our business from the following facilities:





**Location**
              
              **Approx.**
                **Sq.
                  Feet**
              
              **Lease**
                **Expiration**
                **Date**
              
              **Products
                  Produced/Services Provided**Springfield,
                  MO
              
              280,800
              
              2008
              
              transmissions,
                  transfer cases and assorted components (1)Springfield,
                  MO
              
              200,000
              
              2006
              
              engines
                  and transmissions (2)Oklahoma
                  City, OK
              
              100,000
              
              2019
              
              transmissions,
                  transfer cases and assorted components (1)Oklahoma
                  City, OK
              
              200,000
              
              owned
              
              transmissions
                  and assorted components (1)Oklahoma
                  City, OK
              
              94,000
              
              2008
              
              returned
                  material reclamation and disposition, core management
                  (3)Carrollton
                  (Dallas), TX
              
              39,000
              
              2006
              
              radios,
                  telematics and instrument and display clusters (3)Ft.
                  Worth, TX
              
              221,000
              
              2008
              
              cellular
                  phone and accessory distribution (3)Ft.
                  Worth, TX
              
              264,000
              
              2010
              
              cellular
                  phone accessory packaging, returns processing, test and repair
                  (3)Grantham,
                  England
              
              120,000
              
              owned
              
              engines
                  and related components (1)


___________


(1)
            This
                facility is used by the Drivetrain Remanufacturing segment.


(2)
            This
                facility is used by our Independent Aftermarket business and will
                be
                closed during 2006 in connection with the discontinuation of that
                business.


(3)
            This
                facility is used by the Logistics
                segment.





We
      also
      lease assorted warehouses and space for our corporate offices and computer
      services centers. We believe that our current facilities are adequate for the
      current level of our activities. In the event we were to require additional
      facilities, we believe that we could procure acceptable facilities.








**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**





From
      time
      to time, we have been, and currently are, involved in various legal proceedings.
      Management believes that all of our litigation is routine in nature and
      incidental to the conduct of our business, and that none of our litigation,
      if
      determined to be adverse to us, would have a material adverse effect,
      individually or in the aggregate, on us.











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





No
      matters were submitted to a vote of the stockholders of the Company during
      the
      quarter ended December 31, 2005.


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**PART
      II**





**ITEM
                5.**
            **MARKET
                FOR REGISTRANT'S COMMON EQUITY****,
                RELATED STOCKHOLDER MATTERS****AND ISSUER PURCHASES OF EQUITY SECURITIES**





Our
      common stock has been traded on the Nasdaq National Market (which recently
      changed its name to the Nasdaq Global Market) under the symbol "ATAC" since
      our
      initial public offering in December 1996. As of February 10, 2006, there were
      69
      record holders of our common stock. The
      following table sets forth for the periods indicated the range of high and
      low
      sale prices of the common stock as reported by Nasdaq:





**High**
            
            **Low**2005First
                quarter
            
            $
            16.70
            
            $
            13.53Second
                quarter
            
            
            17.68
            
            
            13.80Third
                quarter
            
            
            18.84
            
            
            15.96Fourth
                quarter
            
            
            21.71
            
            
            16.152004First
                quarter
            
            $
            15.50
            
            $
            13.08Second
                quarter
            
            
            17.30
            
            
            13.98Third
                quarter
            
            
            16.75
            
            
            11.35Fourth
                quarter
            
            
            18.36
            
            
            12.01





On February
      10, 2006, the
      last
      sale price of our common stock, as reported by Nasdaq, was $20.24
      per share.





During November
      2005, certain employees of the Company delivered to us 2,014 shares of our
      outstanding common stock in payment of $40,924 of withholding tax obligations
      arising from the vesting of restricted stock previously awarded under our stock
      incentive plans. Per the stock incentive plans, the shares delivered to us
      were
      valued at $20.32 per share, the closing price of our common stock on the vesting
      date of the restricted stock.





Following
      is a summary of treasury stock acquisitions made pursuant to our stock incentive
      plans during the three month period ended December 31, 2005:




**Period**
            
            
            **Total
                number of Shares Purchased**
            
            
            **Price
                Paid per Share**
            
            
            **Total
                Number of Shares Purchased as Part of a Publicly Announced
                Plan**
            
            
            **Maximum
                Number of Shares that May Yet Be Purchased Under the
                Plan**October
                1-31, 2005
            
            
            -
            
            $
            −
            
            
            -
            
            
            -November
                1-30, 2005
            
            
            2,014
            
            $
            20.32
            
            
            2,014
            
            
            -December
                1-31, 2005
            
            
            -
            
            $
            −
            
            
            -
            
            
            -





On
      February 16, 2006,
      we
      announced our intention to commence a program for the repurchase of up to 2%
      of
      our outstanding common stock during the balance of 2006. It is our intent to
      repurchase shares, from time to time, to offset the potential dilutive impact
      of
      stock option exercises and restricted stock grants under our stock incentive
      plans.





We
      have
      never paid cash dividends on our common stock. Because we currently intend
      to
      retain any earnings to provide funds for the operation and expansion of our
      business and for the servicing and repayment of indebtedness, we do not intend
      to pay cash dividends on the common stock in the foreseeable future.
      Furthermore, as a holding company with no independent operations, the ability
      of
      Aftermarket Technology Corp. to pay cash dividends is dependent upon the receipt
      of dividends or other payments from our subsidiaries. The agreement for our
      bank
      credit facility contains certain covenants that, among other things, prohibit
      the payment of dividends. See Item 7. "Management's Discussion and Analysis
      of Financial Condition and Results of Operations - Liquidity and Capital
      Resources." Any determination to pay cash dividends on the common stock in
      the
      future will be at the sole discretion of our Board of
      Directors.


16
 Table
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**ITEM
                6.**
            **SELECTED
                FINANCIAL
                DATA**





The
      selected financial data presented below with respect to the statements of income
      data for the years ended December 31, 2005, 2004 and 2003 and the balance
      sheet data as of December 31, 2005 and 2004 are derived from the
      Consolidated Financial Statements of the Company that have been audited by
      Ernst & Young LLP, independent registered public accounting firm, and
      are included elsewhere herein, and are qualified by reference to such financial
      statements and notes related thereto. The selected financial data with respect
      to the statements of income data for the years ended December 31, 2002 and
      2001
      and the balance sheet data as of December 31, 2003, 2002 and 2001, are
      derived from the Consolidated Financial Statements of the Company that have
      been
      audited by Ernst & Young LLP, independent registered public accounting
      firm, but are not included herein. The data provided should be read in
      conjunction with the Consolidated Financial Statements and related notes,
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations and other financial information included in this Annual Report.





**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****(In
                thousands, except per share data)****Statements
                of Income Data:**Net
                sales
            
            $
            441,963
            
            $
            395,577
            
            $
            339,709
            
            $
            392,453
            
            $
            381,633Cost
                of sales
            
            
            335,286
            
            
            293,630
            
            
            244,997
            
            
            256,621
            
            
            248,362Exit,
                disposal, certain severance and other charges (1)
            
            
            −
            
            
            −
            
            
            200
            
            
            −
            
            
            216Gross
                profit
            
            
            106,677
            
            
            101,947
            
            
            94,512
            
            
            135,832
            
            
            133,055Selling,
                general and administrative expense
            
            
            53,385
            
            
            51,598
            
            
            50,987
            
            
            56,618
            
            
            57,315Amortization
                of intangible assets
            
            
            125
            
            
            125
            
            
            299
            
            
            333
            
            
            4,376Exit,
                disposal, certain severance and other charges (credits)
                (1)
            
            
            492
            
            
            4,031
            
            
            8,273
            
            
            (277
            )
            
            5,114Operating
                income
            
            
            52,675
            
            
            46,193
            
            
            34,953
            
            
            79,158
            
            
            66,250Interest
                income
            
            
            2,026
            
            
            2,658
            
            
            2,863
            
            
            2,769
            
            
            1,524Interest
                expense
            
            
            (7,696
            )
            
            (7,271
            )
            
            (8,169
            )
            
            (12,280
            )
            
            (22,377
            )Other
                income (expense), net
            
            
            585
            
            
            170
            
            
            371
            
            
            (491
            )
            
            747Redemption
                of senior notes
            
            
            −
            
            
            −
            
            
            −
            
            
            (3,022
            )
            
            −Termination
                of credit facility
            
            
            −
            
            
            −
            
            
            −
            
            
            (1,480
            )
            
            −Income
                tax expense
            
            
            (15,711
            )
            
            (14,955
            )
            
            (11,146
            )
            
            (22,174
            )
            
            (17,517
            )Income
                from continuing operations (2)
            
            $
            31,879
            
            $
            26,795
            
            $
            18,872
            
            $
            42,480
            
            $
            28,627Income
                from continuing operations per diluted share (3)
            
            $
            1.48
            
            $
            1.25
            
            $
            0.77
            
            $
            1.76
            
            $
            1.36Shares
                used in computation of income from continuing operations
              per
                diluted share
                (3)
            
            
            21,579
            
            
            21,411
            
            
            24,486
            
            
            24,119
            
            
            21,059**Other
                Data:**Capital
                expenditures
            
            $
            17,185
            
            $
            11,081
            
            $
            13,439
            
            $
            12,476
            
            $
            13,256


17
 Table
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**As
                of December 31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****(In
                thousands)****Balance
                Sheet Data:**Cash
                and cash equivalents
            
            $
            45,472
            
            $
            18,085
            
            $
            59,628
            
            $
            65,504
            
            $
            555Working
                capital, continuing operations
            
            
            123,283
            
            
            103,879
            
            
            119,062
            
            
            132,053
            
            
            50,527Property,
                plant and equipment, net
            
            
            55,015
            
            
            52,835
            
            
            55,022
            
            
            52,910
            
            
            51,211Total
                assets
            
            
            407,779
            
            
            389,995
            
            
            447,284
            
            
            448,085
            
            
            395,969Current
                and long-term debt outstanding
            
            
            90,779
            
            
            112,406
            
            
            127,351
            
            
            164,613
            
            
            197,789Long-term
                liabilities, less current portion
            
            
            107,098
            
            
            122,225
            
            
            134,545
            
            
            159,561
            
            
            181,694Total
                stockholders' equity
            
            
            221,230
            
            
            186,373
            
            
            229,251
            
            
            206,435
            
            
            109,335


_______________





(1)
            See
                Item 8. “Consolidated Financial Statements and Supplementary Data - Note
                18” for a description of exit, disposal, certain severance and other
                charges (credits).





(2)
            Income
                from continuing operations for the years ended December 31, 2005,
                2004, 2003, 2002 and 2001 excludes gain (loss) from discontinued
                operations, net of income taxes, of $(871), $(21,019), $1,639, $3,947
                and
                $(59), respectively.





(3)
            See
                Item 8. “Consolidated Financial Statements and Supplementary Data - Note
                13” for a description of the computation of earnings per
                share.


18
 Table
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**ITEM
                7.**
            **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                AND RESULTS OF
                OPERATIONS**





The
      following discussion should be read in conjunction with our consolidated
      financial statements and notes thereto included elsewhere in this Annual Report.
      See Item 8. “Consolidated Financial Statements and Supplementary
      Data.”





Readers
      are cautioned that the following discussion contains certain forward-looking
      statements and should be read in conjunction with the “Special Note Regarding
      Forward-Looking Statements” appearing at the beginning of this Annual
      Report.





**Overview**





*Operations* .
      We
      provide remanufacturing, third-party logistics and electronics repair services
      to the light vehicle and medium/heavy-duty aftermarket and consumer electronics
      industries. Through our Drivetrain Business, we provide customized
      remanufacturing services focused on complex light and medium/heavy duty vehicle
      drivetrain products, such as automatic transmissions and engines, that are
      primarily sold through the service, repair and parts organizations of our
      customers. Through our Logistics Business, we offer value-added supply-chain
      services to the consumer electronics and light vehicle aftermarket industries,
      including fulfillment, returns management, reverse logistics, repair and other
      related services. We generally provide our services under contractual
      relationships with customers that distribute high-value, complex products.





Demand
      for replacement or repair of drivetrain products is a function of numerous
      factors, such as the number of vehicles in operation, the average age of
      vehicles and the average number of miles driven per vehicle. Within this overall
      market, factors that influence demand for our remanufactured products, when
      compared to repair services, include product complexity, OEM warranty policies
      governing replace versus repair decisions made by their dealers, and the length
      of warranty periods. In addition, we believe demand for our remanufacturing
      services, when compared to repair services, is also increased by the relatively
      limited number of qualified repair technicians and repair test equipment, and
      the increase in customer service demands. The demand for our products is not
      tied to the cyclical nature of new light vehicle sales. However, our OEM
      customers periodically revise their policies governing warranty
      repair-versus-replace decisions that can impact, either positively or
      negatively, the demand for our remanufactured products as dealers utilize a
      greater or lesser number of remanufactured transmissions. Policy revisions
      that
      negatively impacted demand for our products occurred in late 2002 and early
      2003
      and again in late 2004. We believe that any material impact related to these
      policy decisions has been reflected in our results of operations for the year
      ended December 31, 2005. More recently, one of our domestic automotive OEM
      customers again modified their policies impacting warranty repair-versus-replace
      decisions in a modest manner that is expected to positively impact the demand
      for our remanufactured drivetrain products in 2006.





Our
      Drivetrain Business has been our primary business since our formation. For
      the
      year ended December 31, 2005, net sales from our Drivetrain Remanufacturing
      segment were
      $266.4 million, or 60.3% of our total net sales. In addition, we also sell
      remanufactured transmissions and engines directly to independent aftermarket
      customers domestically. For the year ended December 31, 2005, net sales
      from this portion of our business, which is not a reportable segment, was $22.3
      million, or 5.0% of our total net sales. However, on February 15, 2006 we
      decided to discontinue this part of our business. See Item 8. “Consolidated
      Financial Statements and Supplementary Data - Note 20” for a discussion of the
      exit from our independent aftermarket business.





Our
      Logistics Business provides a number of value-added services that generate
      operational efficiencies for our customers through the outsourcing of certain
      supply chain functions. Specifically, our Logistics Business provides
      value-added warehousing and distribution, reverse logistics, turnkey order
      fulfillment, electronic equipment testing, and refurbishment and repair
      services. We generally do not take ownership of inventory. As a result, we
      do
      not face the risk of inventory obsolescence and we face relatively less working
      capital needs than other logistics service providers who take ownership of
      inventory. Additionally, we do not make substantial capital investments in
      transportation equipment or facilities.





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Sales
      and
      growth in our Logistics segment have largely: (i) been related to services
      we
      provide for Cingular Wireless (including AT&T Wireless, which was acquired
      by Cingular in October 2004), (ii) been dependent on demand for cellular phones
      and services and Cingular’s share of cellular service volume and (iii) benefited
      from upgrades in cellular telephone technology through increased replacement
      demand for more advanced handsets, from any increases in the number of
      Cingular’s subscribers and from any expansion of our service offerings. In
      mid-2003, shifts in supply chain management strategy by AT&T Wireless
      resulted in their decision to consolidate their printing requirements and
      re-source the bulk fulfillment of their collateral (marketing) materials from
      us
      to the printer of those materials. Since Cingular’s acquisition of AT&T
      Wireless, we have launched additional business with Cingular, expanding on
      certain lines of service previously provided. These services have grown in
      2005
      but were partially offset by the loss of the accessory packaging services that
      we had previously provided to AT&T Wireless. In addition to new business
      from Cingular, we have signed agreements with a number of new logistics
      customers in 2004 and 2005 that have generated additional sales in 2005 and
      will
      generate incremental sales in 2006. We continue to believe our Logistics
      Business represents a key growth opportunity and we are actively pursuing
      customer diversification. For the year ended December 31, 2005, net sales
      from our Logistics Business were $153.2 million, or 34.7% of our total net
      sales, of which Cingular accounted for 81.5%.





*Financing.* During
      2005 we strengthened our balance sheet with cash flows from operations of $54.9
      million, lowered our total debt outstanding by $21.6 million and increased
      our
      cash balances by $27.4 million. As of December 31, 2005, we had cash and cash
      equivalents on hand of $45.5 million and $37.3 million available to borrow
      on
      our $40.0 million revolving credit facility. We are currently evaluating the
      establishment of a new credit facility that is expected to provide improved
      financing terms and less restrictive covenants and expect this new facility
      to
      be in place by March 31, 2006.








**Components
      of Income and Expense**





*Net
      Sales.* In our
      Drivetrain Remanufacturing segment and independent aftermarket business, we
      recognize sales, primarily from the sale of remanufactured transmissions and
      remanufactured engines, at the time of shipment to the customer and, to a lesser
      extent, upon the completion or performance of a service. In our Logistics
      segment, sales are primarily related to providing:





•
            value-added
                warehouse and distribution services;





•
            turnkey
                order fulfillment and information services;





•
            returned
                material reclamation, disposition, test and repair services;





•
            core
                management services; and





•
            automotive
                electronic components remanufacturing and distribution services,





and
      are
      recognized upon completion or performance of those services.





*Cost
      of Sales.* Cost of
      sales represents the actual cost of purchased components and other materials,
      direct labor, indirect labor and warehousing cost and manufacturing overhead
      costs, including depreciation, utilized directly in the production of products
      or performance of services for which sales have been recognized.





*Selling,
      General & Administrative Expense.* Selling,
      general and administrative (“SG&A”) expenses generally are those costs not
      directly related to the production process or the performance of a service
      generating sales and include all selling, marketing and customer service
      expenses as well as expenses related to general management, finance and
      accounting, information services, human resources, legal, and corporate overhead
      expense.





20
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*Amortization
      of Intangible Assets.* Expense
      for amortization of intangibles primarily relates to the amortization of
      definite lived intangible assets.





*Exit,
      Disposal, Certain Severance and Other Charges (Credits).* As part
      of our lean and continuous improvement philosophy, w e
      have
      periodically identified opportunities to right-size, rationalize and consolidate
      operations or manufacturing capacity, alter our processes in an effort to
      improve customer service, and fix or discontinue lower-margin product lines,
      the
      purpose of which is to improve profitability, reduce costs, streamline
      operations and improve efficiency. As a result of this process, we may incur
      certain costs, primarily associated with restructuring and other initiatives
      that include consolidation of operations or facilities, management
      reorganization and delayering, rationalization of certain products, product
      lines and services and asset impairments. In management’s opinion these costs
      are generally incremental to our ongoing operation and are separated on our
      statements of income in order to improve the clarity of our reported operations.





Examples
      of these costs include severance benefits for terminated employees, lease
      termination and other facility exit costs, moving and relocation costs, losses
      on the disposal of fixed assets and write down of inventories. The components
      of
      these charges are computed based on actual cash payouts, our estimate of the
      realizable value of the affected tangible and intangible assets and estimated
      exit costs including severance and other employee benefits.





These
      charges can vary significantly from period to period and as a result, we may
      experience fluctuations in our reported net income and earnings per share due
      to
      the timing of these actions. See Item 8. “Consolidated Financial Statements and
      Supplementary Data - Note 18”
for a further discussion of these costs.








**Critical
      Accounting Policies and Estimates**





Our
      financial statements are based on the selection and application of significant
      accounting policies, some of which require management to make estimates and
      assumptions. We believe that the following are some of the more critical
      judgmental areas in the application of our accounting policies that currently
      affect our financial condition and results of operations.





*Allowance
      for Doubtful Accounts.*   We
      maintain allowances for doubtful accounts for estimated losses resulting from
      the failure of our customers to make required payments. We evaluate the adequacy
      of our allowance for doubtful accounts and make judgments and estimates in
      determining the appropriate allowance at each reporting period based on
      historical experience, credit evaluations, specific customer collection issues
      and the length of time a receivable is past due.  Since
      our
      accounts receivable are often concentrated in a relatively few number of
      customers, a significant change in the liquidity or financial position of any
      one of these customers could have a material adverse impact on our financial
      statements. For the years ended December 31, 2005, 2004 and 2003, our write-offs
      were approximately $0.2 million, $1.3 million and $10 thousand, respectively.
      As
      of December 31, 2005, we had $75.3 million of accounts receivable, net of
      allowance for doubtful accounts of $1.2 million.





*Inventory
      Valuation.* We make
      adjustments to write down our inventories for estimated excess and obsolete
      inventory equal to the difference between the cost of the inventory and the
      estimated market value based on assumptions about market conditions, future
      demand and expected usage rates. Changes in economic conditions, customer
      demand, product introductions or pricing changes can affect the carrying value
      of our inventory. Demand for our products has fluctuated in the past and may
      do
      so in the future, which could result in an increase in excess quantities on
      hand. If actual market conditions are less favorable than those projected by
      management, causing usage rates to vary from those estimated, additional
      inventory write-downs may be required. Although no assurance can be given,
      these
      write-downs would not be expected to have a material adverse impact on our
      financial statements. For the years ended December 31, 2005, 2004 and 2003,
      we
      recorded charges for excess and obsolete inventory of approximately $1.5
      million, $2.0 million and $1.2 million, respectively. As of December 31, 2005,
      we had inventory of $65.2 million, net of a reserve for excess and obsolete
      inventory of $6.6 million.





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*Warranty
      Liability.* We
      provide an allowance for the estimated cost of product warranties at the time
      revenue is recognized. While we engage in extensive product quality programs
      and
      processes, including inspection and testing at various stages of the
      remanufacturing process and the testing of each finished assembly on equipment
      designed to simulate performance under operating conditions, our warranty
      obligation is affected by the number of products sold, historical and
      anticipated rates of warranty claims and costs per unit and actual product
      failure rates. Additionally, we participate in the tear-down and analysis of
      returned products with certain of our customers to assess responsibility for
      product failures. For the years ended December 31, 2005 and 2004, we (i)
      recorded charges for estimated warranty costs of approximately $3.8 million
      and
      $5.6 million, respectively and (ii) paid and/or settled warranty claims of
      approximately $4.2 million and $6.2 million, respectively. Should actual product
      failure rates differ from our estimates, revisions to the estimated warranty
      liability may be required. Although no assurance can be given, these revisions
      would not be expected to have a material adverse impact on our financial
      statements.





*Goodwill
      and Indefinite Lived Intangible Assets.* Effective
      with the adoption of SFAS No. 142, goodwill and indefinite lived intangible
      assets are no longer amortized, however they are tested annually, or more
      frequently if events or changes in circumstances indicate that goodwill may
      be
      impaired, and if the carrying value is greater than the fair value an impairment
      loss is recorded. Impairment is tested at a level of reporting referred to
      as a
      reporting unit, which generally is an operating segment or a component of an
      operating segment as defined in paragraph 10 of SFAS No. 131, *Disclosures
      about Segments of an Enterprise and Related Information* .
      In
      accordance with paragraph 30 of SFAS No. 142, certain components of an operating
      segment with similar economic characteristics are aggregated and deemed a single
      reporting unit. In estimating the fair value of our reporting units, we utilize
      a valuation technique based on multiples of projected cash flow, giving
      consideration to unusual items, cost reduction initiatives, new business
      initiatives and other factors that generally would be considered in determining
      value. Actual results may differ from these estimates under different
      assumptions or conditions. If we were to lose a key customer within a particular
      operating segment or its sales were to decrease materially, impairment
      adjustments that may be required could have a material adverse impact on our
      financial statements. As of December 31, 2005, we have recorded goodwill of
      approximately $147.6 million.





*Deferred
      Income Taxes and Valuation Allowances.* Tax
      law
      requires items to be included in the tax return at different times than when
      these items are reflected in the consolidated financial statements. As a result,
      our annual tax rate reflected in our consolidated financial statements is
      different than that reported in our tax return. Some of these differences are
      permanent, such as expenses that are not deductible in our tax return, and
      some
      differences reverse over time, such as depreciation expense. These timing
      differences create deferred tax assets and liabilities. Deferred tax assets
      and
      liabilities are determined based on temporary differences between the financial
      reporting and tax bases of assets and liabilities. The tax rates used to
      determine deferred tax assets or liabilities are the enacted tax rates in effect
      for the year in which the differences are expected to reverse. Based on the
      evaluation of all available information, we recognize future tax benefits,
      such
      as net operating loss carryforwards, to the extent that realizing these benefits
      is considered more likely than not.





We
      evaluate our ability to realize the tax benefits associated with deferred tax
      assets by analyzing our forecasted taxable income using both historical and
      projected future operating results, the reversal of existing temporary
      differences, taxable income in prior carry-back years (if permitted) and the
      availability of tax planning strategies. A valuation allowance is required
      to be
      established unless management determines that it is more likely than not that
      we
      will ultimately realize the tax benefit associated with a deferred tax
      asset.





**Segment
      Reporting**





We
      have
      two reportable segments: the Drivetrain Remanufacturing segment and the
      Logistics segment. Our Drivetrain Remanufacturing segment primarily sells
      remanufactured transmissions directly to Ford, Honda, DaimlerChrysler, Allison
      and certain other foreign OEMs, primarily for use as replacement parts by their
      domestic dealers during the warranty and post-warranty periods following the
      sale of a vehicle.





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In
      addition, the Drivetrain Remanufacturing segment sells select remanufactured
      engines primarily to certain European OEMs. Through our Logistics segment, we are:





•
            a
                provider of value-added warehouse, distribution and reverse logistics,
                test and repair services, turnkey order fulfillment and information
                services primarily for Cingular, and to a lesser extent, Nokia, LG,
                T-Mobile and certain other customers in the wireless electronics
                industry;





•
            a
                provider of logistics and reverse logistics services and automotive
                electronic components remanufacturing, primarily for General Motors,
                Delphi, Visteon and Thales; and





•
            a
                provider of returned material reclamation and disposition services
                and
                core management services to General Motors and, from time to time
                and to a
                lesser extent, certain other domestic and foreign OEMs.





The
      Company’s independent
      aftermarket business, which is not reportable for segment reporting purposes,
      remanufactures and distributes domestic and foreign engines and distributes
      domestic transmissions to independent aftermarket customers and is reported
      as
“Other.” See Item
      8. “Consolidated Financial Statements and Supplementary Data - Note 20”
for a discussion of our exit from the independent aftermarket
      business.





We
      evaluate the performance of each business based upon operating income. Our
      reportable segments and our independent aftermarket business are each managed
      and measured separately primarily due to the differing customers and
      distribution channels.











**Results
      of Operations**





The
      following table sets forth financial statement data expressed in millions of
      dollars and as a percentage of net sales.





**Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**Net
                  sales
              
              $
              442.0
              
              
              100.0
              %
              $
              395.6
              
              
              100.0
              %
              $
              339.7
              
              
              100.0
              %Gross
                  profit
              
              
              106.7
              
              
              24.1
              
              
              101.9
              
              
              25.8
              
              
              94.5
              
              
              27.8SG&A
                  expense
              
              
              53.4
              
              
              12.1
              
              
              51.6
              
              
              13.0
              
              
              51.0
              
              
              15.0Exit,
                  disposal, certain severance and other charges(1)
              
              
              0.5
              
              
              0.1
              
              
              4.0
              
              
              1.0
              
              
              8.5
              
              
              2.5Operating
                  income
              
              
              52.7
              
              
              11.9
              
              
              46.2
              
              
              11.7
              
              
              35.0
              
              
              10.3Interest
                  income
              
              
              2.0
              
              
              0.5
              
              
              2.7
              
              
              0.7
              
              
              2.9
              
              
              0.8Other
                  income, net
              
              
              0.6
              
              
              0.1
              
              
              −
              
              
              −
              
              
              0.1
              
              
              −Interest
                  expense
              
              
              (7.7
              )
              
              (1.7
              )
              
              (7.3
              )
              
              (1.9
              )
              
              (8.2
              )
              
              (2.4
              )Income
                  from continuing operations
              
              
              31.9
              
              
              7.2
              
              
              26.8
              
              
              6.8
              
              
              18.9
              
              
              5.6




(1)
            Includes
                $0.2 million of inventory write-downs classified as cost of sales
                in the
                statement of income for 2003.











23
 Table
            of Contents





***Year
      Ended December 31, 2005 Compared to the Year Ended December 31,
      2004***





Income
      from continuing operations increased $5.1 million, or 19.0%, to $31.9 million
      in
      2005 from $26.8 million in 2004. Income from continuing operations per diluted
      share was $1.48 in 2005 as compared to $1.25 in 2004. Our results for 2005
      included (i) a gain of $0.9 million (net of tax) related to $1.4 million of
      research and development tax credits, net of fees and related expenses of $0.5
      million, net of tax, (ii) a gain of $0.4 million (net of tax) from the early
      redemption of the note receivable from the Distribution Group, (iii) exit,
      disposal, certain severance and other charges of $0.3 million (net of tax)
      and
      (iv) a gain of $0.2 million (net of tax) related to an investment tax credit
      from the state of Oklahoma. For 2004, our results included (i) exit, disposal,
      certain severance and other charges of $2.5 million (net of tax) and (ii) an income
      tax benefit of $0.4 million related to the favorable resolution of an IRS audit
      of our 1999 tax year .
      Excluding these items, income from continuing operations increased primarily
      as
      a result of:




•
              benefits
                  from our on-going
                  lean and continuous improvement program and other cost reduction
                  initiatives;
 
 •
              new
                  business wins
                  in our Logistics segment, including our test and repair program
                  with
                  Cingular and, to a lesser extent, Nokia, LG and
                  T-Mobile;
 
 •
              an
                  increase in our
                  base logistics business with Cingular;
                  and
 
 •
              an
                  increase in
                  volume of Honda remanufactured transmissions as we realized the
                  full-year
                  benefit of that program, which did not fully ramp up until the
                  second
                  quarter
                of
                  2004,




partially
        offset by:
  •
              scheduled
                  price
                  reductions to certain customers in our Drivetrain Remanufacturing
                  and
                  Logistics segments pursuant to contracts entered into primarily
                  in
                  2003;
 
 •
              a
                  reduction in
                  volume of remanufactured engines for certain older European engine
                  programs;
 
 •
              an
                  increase in
                  costs related to new business and product development in our Drivetrain
                  Remanufacturing segment; and
 
 •
              a
                  reduction in
                  volume of Ford remanufactured transmissions that is believed to
                  result
                  from repair cost-cap adjustments on certain transmission
                  models.
  *Net
        Sales.* Net
        sales increased $46.4 million, or 11.7%, to $442.0 million for 2005 from
        $395.6
        million for 2004. This increase was primarily due to:
 
 •
                new
                    business wins
                    in our Logistics segment, including our test and repair program
                    and other
                    programs with Cingular and, to a lesser extent, Nokia, LG and
                    T-Mobile;
 
 •
                increases
                    in our
                    base logistics volume with
                    Cingular;
 
 •
                a
                    one-time sale of
                    $12.5 million of transmission components at cost in 2005, relating
                    to
                    end-of-life support for an OEM transmission program that ceased
                    production
                  in
                    late 2000 and
                    from which we do not expect any future sales;
                    and
 
 •
                an
                    increase in
                    volume of Honda remanufactured transmissions as we realized the
                    full-year
                    benefit of that program, which did not fully ramp up until the
                    second
                    quarter
                  of
                    2004,




24
 Table
            of Contents




pa rtially
      offset by:




•
              scheduled
                  price reductions to certain customers in our Drivetrain Remanufacturing
                  and Logistics segments pursuant to contracts entered into primarily
                  in
                  2003;•
              a
                  reduction in volume of remanufactured engines for certain older
                  European
                  engine programs;•
              a
                  reduction in volume of Ford remanufactured transmissions that is
                  believed
                  to result from repair cost-cap adjustments on certain transmission
                  models;
                  and•
              a
                  reduction in sales for certain remanufacturing-related services
                  and
                  certain other low volume remanufacturing
                  programs.


Of
        our net sales for 2005 and
        2004, Cingular accounted for 28.3% and 22.3%, Ford accounted for 23.1% and
        29.6%, Honda accounted for 18.3% and 19.4% and DaimlerChrysler accounted
        for
        14.6% and 14.7%, respectively.





*Gross
      Profit* .
      Gross
      profit increased $4.8 million, or 4.7%, to $106.7 million for 2005 from
      $101.9 million for
      2004 .
      The
      increase was primarily the result of benefits from our lean and continuous
      improvement program and other cost reduction initiatives, which were largely
      offset by the factors described above under “Net Sales.” Additionally, gross
      profit as a percentage of net sales decreased to 24.1% for 2005 from 25.8%
      for
      2004. This decrease in gross profit as a percentage of net sales was primarily
      due to (i) the scheduled price reductions, (ii) the change in mix of new
      business in our Logistics segment, and (iii) the unwinding of the end-of-life
      support for the out-of-production OEM transmission program, which resulted
      in a
      one-time sale of $12.5 million of transmissions components at cost in 2005,
      which reduced gross profit as a percentage of net sales for 2005 by 0.7%,
      partially offset by benefits from our on-going lean and continuous improvement
      program and other cost reduction initiatives. In
      the
      fourth quarter of 2005, we launched a remanufacturing program for
      medium/heavy-duty transmissions and expect to realize growth resulting from
      the
      ramp-up of that program. Unlike our light vehicle remanufacturing programs,
      the
      terms of this medium/heavy-duty remanufacturing contract require us to take
      title to the core. As a result, the core value is reflected in both revenue
      and
      cost of goods sold and is expected to reduce gross profit margins.




*SG&A
      Expense.* SG&A
      expense increased $1.8 million,
      or 3.5%, to
      $53.4
      million for 2005 from $51.6 million for 2004. The net increase is primarily
      the
      result of an increase in costs associated with revenue growth in our Logistics
      Segment as well as for new business and product development in our Drivetrain
      Remanufacturing segment, partially offset by benefits from our on-going lean
      and
      continuous improvement program and other cost reduction initiatives. As a
      percentage of net sales, SG&A expense decreased to 12.1% for 2005 from 13.0%
      for 2004. The one-time sale of transmission components at cost as described
      above under “Net Sales” reduced SG&A expense as a percentage of net sales
      for 2005 by 0.3%.





*Exit,
      Disposal, Certain Severance and Other Charges* .
      During
      2005, we recorded $0.5 million ($0.3 million net of tax) of e xit,
      disposal, certain severance and other charges primarily related to the closure of an old facility and the move to a new larger
      facility as part of our capacity expansion within the Logistics
      segment.





During
      2004, we recorded $4.0 million ($2.5 million net of tax) of these costs
      including (i) $3.3
      million of certain non-cash stock-based compensation costs related to modifications
      to unexercised stock options previously granted to our former Chief Executive
      Officer and former Chief Financial Officer, per the provisions of the Financial
      Accounting Standards Board’s Interpretation No. 44, *Accounting
      for Certain Transactions Involving Stock Compensation (an Interpretation of
      APB
      Opinion No. 25)* , (ii)
      $0.8
      million of facility exit and other costs, (iii) $0.5
      million of certain non-cash stock-based compensation costs related to the hiring
      of our current CEO, (iv) $0.3 million of severance and related costs associated
      with the reorganization and upgrade of certain management
      functions and other cost reduction initiatives, and
      (v)
      $0.3 million of relocation costs related to the hiring of our current CFO,
      partially offset by a gain of $1.2 million attributed to the reversal of a previously established provision related to
      the
      Drivetrain Remanufacturing segment for a potential non-income state tax
      liability upon the finalization of an audit by the state tax authorities.





25
 Table
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As
      the
      result of our decision to discontinue our
      independent aftermarket business we currently expect to record pre-tax non-cash
      charges primarily in the first quarter of 2006 of approximately $10.0 million,
      which includes (i) $7.1 million for the write-down of inventory to estimated
      net
      realizable value, (ii) $1.5 million for the write-down of fixed assets and
      accounts receivable and (iii) $1.4 million for the impairment of goodwill.
      In
      addition, we expect to incur pre-tax cash charges of approximately $1.1 million
      for severance, termination benefits and facility exit costs in the first and
      second quarters of 2006. We expect to reclassify the operations of this business
      from “Other” to discontinued operations upon its disposal. See Item 8.
“Consolidated Financial Statements and Supplementary Data - Note
      20.”





As
      an
      on-going part of our planning process, we continue to identify and evaluate
      areas where cost efficiencies can be achieved through consolidation of redundant
      facilities, outsourcing functions or changing processes or systems.
      Implementation of any of these could require us to incur additional costs of
      a
      nature described above, which would be offset over time by the projected cost
      savings.





*Operating
      Income.* Operating income increased $6.5 million, or 14.1%, to $52.7 million for 2005
      from $46.2 million for 2004. This increase is primarily the result of the
      factors described above under “Net Sales,” “Gross Profit” and “ Exit,
      Disposal, Certain Severance and Other Charges.” As a
      percentage of net sales, operating income increased to 11.9% from 11.7%. The
      one-time sale of transmission components at cost as described above under “Net
      Sales” adversely affected operating income as a percentage of net sales for 2005
      by 0.3%.





*Interest
      Income.* Interest
      income decreased $0.7 million, or 25.9%, to $2.0 million for
      2005 from
      $2.7
      million for
      2004 . This
      decrease was primarily due to the early redemption of the note receivable from
      the Distribution Group (see Item 8. “Consolidated Financial Statements and
      Supplementary Data - Note 2”), partially offset by higher cash balances
      invested in cash and equivalents during 2005 as compared to 2004 and a general
      increase in interest rates.





*Other
      Income, net.* Other
      income increased to $0.6 million for
      2005 from
      a
      gain of $24 thousand for
      2004 . This
      increase was due to a gain recorded from the early redemption of the note
      receivable from the Distribution Group. See Item 8. “Consolidated Financial
      Statements and Supplementary Data - Note 2.”





*Interest
      Expense.* Interest
      expense increased $0.4 million, or 5.5%, to $7.7 million for
      2005 from
      $7.3 million for
      2004 . This
      increase was primarily due to a general increase in interest rates in 2005
      as
      compared to 2004, partially offset by a reduction in total debt
      outstanding.





*Income
      Tax Expense.* Our
      effective income tax rate decreased to 33.0% in 2005 from 35.8% for
      2004.
      The 2005 rate reflects income tax benefits of (i) $1.4 million related to
      previously unclaimed research and development tax credits and (ii) $0.2 million
      related to an investment tax credit from the state of Oklahoma. During 2004
      we
      recorded an income
      tax benefit of $0.4 million related to the favorable resolution of an IRS audit
      of our 1999 tax year. Based on our current estimate of the distribution of
      taxable income by state, we expect an effective income tax rate of approximately
      36.5% for 2006.





*Discontinued
      Operations.*  The
      loss
      of $0.9 million (net of tax) for 2005, includes a $0.7 million loss primarily
      related to a revision
      to the impairment estimate made on December 31, 2004 for equipment from our
      closed Gastonia facility and a charge of $0.2 million for a valuation allowance
      related to the expected expiration of a capital loss carryforward from the
      sale
      of our former Distribution Group business, which we sold in October
      2000.





In
      2004,
      General Motors’ consolidated its vendor base and resourced its remanufactured
      transmission program from our facility located in Gastonia, North Carolina,
      in
      connection with which we closed this facility and discontinued this operation
      in
      accordance with SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* and
      recorded an after-tax loss of $20.2 million. On a pre-tax basis, this loss
      included (i) $22.1 million for the impairment of goodwill assigned to this
      reporting unit, (ii) $1.9 million of costs related to the exit from this
      facility and the termination of our contract with GM, (iii) $1.7 million of
      inventory write-downs, (iv) $1.5
      million of fixed asset impairment charges and (v) $1.5 million for
      severance and related costs.





26
 Table
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Also
      in
      2004 ,
      we
      recorded an additional loss of $0.8 million related to our former Distribution
      Group business, which included (i) a charge of $2.2 million for a valuation
      allowance related to the expected expiration of a capital loss carryforward,
      (ii) a non-cash tax benefit of $1.3 million based upon the resolution of prior
      year income tax issues with respect to the tax basis of the Distribution Group
      and (iii) income of $0.1 million (net of income taxes of $37,000) based upon
      updated information regarding obligations and other costs related to the sale
      of
      this business.








*Reportable
      Segments*





Drivetrain
      Remanufacturing Segment





The
      following table presents net sales and segment profit expressed in millions
      of
      dollars and as a percentage of net sales:





Year
                endedDecember 31,2005
            2004Net
                sales
            
            $
            266.4
            
            
            100.0
            %
            $
            271.2
            
            
            100.0
            %Segment
                profit
            
            $
            36.9
            
            
            13.9
            %
            $
            40.5
            
            
            14.9
            %





*Net
      Sales.* Net
      sales decreased $4.8 million, or 1.8%, to $266.4 million for 2005 from
      $271.2 million for 2004. The decrease was primarily due to:





·
            a
                reduction in volume of remanufactured engines for certain older European
                engine programs;





·
            scheduled
                price reductions to certain customers pursuant to contracts entered
                into
                primarily in 2003;





·
            a
                reduction in volume of Ford remanufactured transmissions that is
                believed
                to result from repair cost-cap adjustments on certain transmission
                models;
                and





·
            a
                reduction in sales for certain remanufacturing-related services and
                certain other low volume remanufacturing
                programs,





partially
      offset by (i) a one-time sale of $12.5 million of transmission components at
      cost in 2005, relating to end-of-life support for an OEM transmission program
      that ceased production in late 2000 and from which we do not expect any future
      sales, (ii) an
      increase in volume of Honda remanufactured transmissions as we realized the
      full-year benefit of that program, which did not fully ramp up until the second
      quarter of 2004 and
      (iii) the launch in the fourth quarter of 2005 of a medium/heavy duty
      transmission remanufacturing program for Allison.





Of
      our
      segment net sales for 2005 and 2004, Ford accounted for 38.2% and 42.9%, Honda
      accounted for 30.4% and 28.3% and DaimlerChrysler accounted for 24.3% and 21.5%,
      respectively.





*Exit,
      Disposal, Certain Severance and Other Charges* . During
      2004, we recorded a net credit of $0.7 million consisting of income of $1.2
      million due to
      the reversal of a previously established provision for a potential non-income
      state tax liability upon the finalization of an audit by the state tax
      authorities, partially offset by (i) $0.4 million of costs primarily related
      to
      the termination of an independent contractor agreement and (ii) $0.1
      million of severance and related costs primarily associated with the
      reorganization and upgrade of certain management
      functions and other cost reduction initiatives.There
      were no similar costs recorded in 2005.





27
 Table
            of Contents




*Segment
      Profit* .
      Segment
      profit decreased $3.6 million, or 8.9%, to $36.9 million (13.9% of segment
      net
      sales) for 2005 from $40.5 million (14.9% of segment net sales) for 2004.
      This decrease resulted primarily from (i) the factors described above under
“Net
      Sales”, (ii) the 2004 gain of $0.7 million described above under “Exit,
      Disposal, Certain
      Severance and Other Charges”, (iii) an increase in costs related to new business
      and product development, partially offset by benefits from our lean and continuous improvement program
      and other cost reductions. The “ Exit,
      Disposal, Certain Severance and Other Charges” positively affected segment
      profit as a percentage of net sales for 2004 by 0.2%. The one-time sale of
      transmission components at cost as described above under “Net Sales,” adversely
      affected segment profit as a percentage of net sales for 2005 by 0.6%.





In
      the
      fourth quarter of 2005, we launched a remanufacturing program for
      medium/heavy-duty transmissions and expect to realize growth resulting from
      the
      ramp-up of that program. Unlike our light vehicle remanufacturing programs,
      the
      terms of this medium/heavy-duty remanufacturing contract require us to take
      title to the core. As a result, the core value is reflected in both revenue
      and
      cost of goods sold and is expected to reduce segment margins. Furthermore,
      we
      expect the adoption of SFAS No. 123R to reduce segment margins. Including these
      two impacts, we expect segment margins to range from 13-14% in
      2006.








Logistics
      Segment





The
      following table presents net sales and segment profit expressed in millions
      of
      dollars and as a percentage of net sales:





Year
                endedDecember 31,2005
            2004Net
                sales
            
            $
            153.2
            
            
            100.0
            %
            $
            104.4
            
            
            100.0
            %Segment
                profit
            
            $
            18.2
            
            
            11.9
            %
            $
            15.7
            
            
            15.0
            %





*Net
      Sales.* Net
      sales increased $48.8 million, or 46.7%, to $153.2 million for 2005
      from $104.4 million for 2004. This increase was primarily attributable to
      new business programs, including our test and repair, kitting and other programs
      with Cingular and, to a lesser extent, Nokia, LG and T-Mobile, combined with
      an
      increase in our base fulfillment business with Cingular, partially offset by
      scheduled price reductions to a customer pursuant to a contract entered into
      in
      2003. Of our segment net sales for 2005 and 2004, Cingular accounted for 81.5%
      and 84.5%, respectively.





*Exit
      and Certain Severance Charges* . During
      2005, we recorded $0.5 million of these costs primarily related to the
      closure of an old facility and the move to a new larger facility as part of
      our
      capacity expansion. During 2004, we recorded $0.1
      million of facility exit costs and $0.1 million of severance and related costs
      associated with co st
      reduction initiatives.





*Segment
      Profit* .
      Segment
      profit increased $2.5 million, or 15.9%, to $18.2 million (11.9% of
      segment net sales) for 2005 from $15.7 million (15.0% of segment net sales)
      for 2004. The increase was primarily the result of the factors described above
      under “Net Sales,” combined with the benefits of our lean and continuous
      improvement program and other cost reductions, partially offset by costs and
      other start-up inefficiencies associated with our capacity expansion efforts.
      W e
      expect
      the adoption of SFAS No. 123R to reduce segment margins. Including this impact,
      we expect segment margins to range from 13-15% in 2006.











28
 Table
            of Contents





Other





The
      following table presents net sales and segment loss expressed in millions of
      dollars and as a percentage of net sales:





Year
                endedDecember 31,2005
            2004Net
                sales
            
            $
            22.3
            
            
            100.0
            %
            $
            20.0
            
            
            100.0
            %Segment
                loss
            
            $
            (2.5
            )
            
            −
            
            $
            (5.7
            )
            
            −





*Net
      Sales.* Net
      sales increased $2.3 million, or 11.5%, to $22.3 million for 2005 from
      $20.0 million for 2004. This increase was primarily attributable to our
      2005 initiative to penetrate the independent aftermarket for remanufactured
      transmissions and engines.





*Exit
      Charges* . During
      2004, we recorded $0.3
      million of facility exit costs in order to streamline certain
      operations .





*Segment
      Loss.* ** Segment
      loss decreased $3.2 million, or 56.1%, to a loss of $2.5 million for 2005
      from a loss of $5.7 million for 2004. The reduced loss resulted primarily
      from the increase in net sales coupled with benefits resulting from our lean
      and
      continuous improvement program and other cost reduction
      initiatives.





On
      February 15, 2006, we decided to discontinue this part of our business. We
      currently expect to record pre-tax non-cash charges of approximately $10.0
      million and pre-tax cash charges of approximately $1.1 million, primarily during
      the first quarter of 2006, related to the exit from our independent aftermarket
      business. We expect to reclassify the operations of this business from “Other”
to discontinued operations upon its disposal. See Item 8. “Consolidated
      Financial Statements and Supplementary Data - Note 20” for a discussion of the
      exit from our independent aftermarket business.








***Year
      Ended December 31, 2004 Compared to the Year Ended December 31,
      2003***





Income
      from continuing operations increased $7.9 million, or 41.8%, to $26.8 million
      in
      2004 from $18.9 million in 2003. Income from continuing operations per diluted
      share was $1.25 in 2004 as compared to $0.77 in 2003. Our results for 2004
      included (i) exit, disposal, certain severance and other charges of $2.5 million
      (net of tax) and (ii) an income
      tax benefit of $0.4 million related to the favorable resolution of an IRS audit
      of our 1999 tax year .
      For
      2003, our results included exit, disposal, certain severance and other charges
      of $5.4 million (net of tax). Excluding these items, income from continuing
      operations increased primarily as a result of:





·
            the
                ramp-up of our Honda transmission remanufacturing program, growth
                in the
                logistics services we provided to AT&T Wireless, and other new
                business initiatives;





·
            benefits
                from our on-going lean and continuous improvement program and other
                cost
                reduction initiatives; and





·
            an
                increase in our base logistics volume with AT&T Wireless,




partially
      offset by:




·
            price
                concessions provided in 2003 to certain customers in our Drivetrain
                Remanufacturing and Logistics segments in order to extend certain
                agreements;





29
 Table
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·
            a
                reduction in volume due to the run-out of certain programs in our
                Drivetrain Remanufacturing and Logistics segments, including the
                bulk
                collateral fulfillment program for AT&T Wireless (substantially
                completed during the third quarter of 2003), the Kia transmission
                remanufacturing program (substantially completed during the second
                quarter
                of 2003), the material recovery and core qualification programs for
                Ford
                (substantially completed during the second and third quarters of
                2003,
                respectively), and an OnStar telematics modification program for
                Delphi
                and General Motors;





·
            volume
                declines in our Drivetrain Remanufacturing segment due to the
                implementation in 2003 by certain of our OEM customersof
                new policies governing repair-versus-replace decisions made by their
                dealers in warranty applications, which resulted in dealers replacing
                fewer transmissions with remanufactured units;





·
            a
                reduction in volume of DaimlerChrysler remanufactured transmissions
                resulting from DaimlerChrysler’s decision not to launch new model years
                into the remanufacturing program;
                and





·
            inventory
                reductions at certain of our
                customers.





*Net
      Sales.* Net
      sales increased $55.9 million, or 16.5%, to $395.6 million for 2004 from $339.7
      million for 2003. This increase was primarily due to the ramp-up of our Honda
      transmission remanufacturing program, AT&T Wireless test and repair program
      and other new business initiatives, increases in our base logistics volume
      with
      AT&T Wireless and increases in sales of remanufactured transmissions in the
      independent aftermarket, partially offset by:





·
            a
                reduction in volume due to the run-out of certain programs in our
                Drivetrain Remanufacturing and Logistics segments, including the
                bulk
                collateral fulfillment program for AT&T Wireless, the Kia transmission
                remanufacturing program, the material recovery and core qualification
                programs for Ford, and an OnStar telematics modification program
                for
                Delphi and General Motors;





·
            volume
                declines in our Drivetrain Remanufacturing segment due to the
                implementation in 2003 by certain of our OEM customersof
                new policies governing repair-versus-replace decisions made by their
                dealers in warranty applications, which resulted in dealers replacing
                fewer transmissions with remanufactured units;





·
            a
                reduction in volume ofDaimlerChrysler
                remanufactured transmissions resulting fromDaimlerChrysler’s
                decision not to launch new model years into the remanufacturing
                program;and





·
            price
                concessions provided in 2003 to certain customers in our Drivetrain
                Remanufacturing and Logistics segments in order to extend certain
                agreements.





Of
      our
      net sales for 2004 and 2003, Ford accounted for 29.6% and 38.6%, AT&T
      Wireless accounted for 21.1% and 17.1% (22.3% and 17.2% for Cingular/AT&T
      Wireless combined), Honda accounted for 19.4% and 7.5% and DaimlerChrysler
      accounted for 14.7% and 20.6%.





*Gross
      Profit* .
      Gross
      profit increased $7.4 million, or 7.8%, to $101.9 million for 2004 from
      $94.5 million for
      2003 . The
      increase was primarily the result of the factors described above under “Net
      Sales” combined with benefits from our on-going lean and continuous improvement
      program and other cost reduction initiatives. Primarily as a result of price
      concessions coupled with the mix of new business in our Logistics segment,
      gross
      profit as a percentage of net sales decreased to 25.8% for 2004 from 27.8%
      for
      2003.





*SG&A
      Expense.* SG&A
      expense increased $0.6 million,
      or 1.2%, to
      $51.6
      million for 2004 from $51.0 million for 2003. The increase was primarily the
      result of compensation expense related to our management incentive compensation
      program (which was zero in 2003), growth support costs in our Drivetrain
      Remanufacturing segment and independent aftermarket business and an increase
      in
      compliance costs associated with Section 404 of the Sarbanes-Oxley Act,
      partially offset by benefits from our on-going lean and continuous improvement
      program and other cost reduction initiatives. As a percentage of net sales,
      SG&A expense decreased to 13.0% for 2004 from 15.0% for 2003.





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*Exit,
      Disposal, Certain Severance and Other Charges* .
      During
      2004, we recorded $4.0 million ($2.5 million net of tax) of e xit,
      disposal, certain severance and other charges including (i) $3.3
      million of certain non-cash stock-based compensation costs related to modifications
      to unexercised stock options previously granted to our former Chief Executive
      Officer and Chief Financial Officer, per the provisions of the Financial
      Accounting Standards Board’s Interpretation No. 44, *Accounting
      for Certain Transactions Involving Stock Compensation (an Interpretation of
      APB
      Opinion No. 25)* , (ii)
      $0.8
      million of facility exit and other costs, (iii) $0.5
      million of certain non-cash stock-based compensation costs related to the hiring
      of our current CEO, (iv) $0.3 million of severance and related costs associated
      with the reorganization and upgrade of certain management
      functions and other cost reduction initiatives, and
      (v)
      $0.3 million of relocation costs related to the hiring of our current CFO,
      partially offset by a gain of $1.2 million attributed to the reversal of a previously established provision related to
      the
      Drivetrain Remanufacturing segment for a potential non-income state tax
      liability upon the finalization of an audit by the state tax authorities.





During
      2003, we recorded $8.5 million ($5.4 million net of tax) of these costs
      including (i) $3.6 million for our Drivetrain Remanufacturing segment related
      to the
      closure of our Mahwah, New Jersey facility, consisting of $2.1 million of exit
      and other costs primarily associated with the relocation to a facility in
      Oklahoma City, $1.2 million for severance and related costs, $0.6 million
      related to the write-off of certain fixed assets and $0.2 million of inventory
      write-downs (classified as cost of sales), partially offset by income of $0.5
      million related to the reversal of an accrual established during 2001 for
      expected idle capacity costs at this plant, (ii) $3.1 million consisting of
      $2.6
      million of compensation costs payable to our former CEO and CFO and $0.5 million
      of costs related to the hiring of our current CEO and CFO, (iii) $1.3 million
      primarily related to severance and related costs associated with the
      streamlining of certain operations and the reorganization and de-layering of
      certain management functions, and (iv) $0.5 million primarily related to the
      write-down of certain customized software reflected as fixed assets within
      the
      Logistics segment.





*Income
      from Operations.* Income
      from operations increased $11.2 million, or 32.0%, to $46.2 million for 2004
      from $35.0 million for 2003. This increase was primarily the result of the
      combination of factors described above under “Gross
      Profit” and “ Exit,
      Disposal, Certain Severance and Other Charges.”





*Interest
      Income.* Interest
      income decreased $0.2 million, or 6.9%, to $2.7 million for
      2004 from
      $2.9 million for
      2003 . This
      decrease was primarily due to our lower cash balances invested in cash and
      cash
      equivalents during 2004 as compared to 2003, as a result of the stock
      repurchases we made during 2004.





*Interest
      Expense.* Interest
      expense decreased $0.9 million, or 11.0%, to $7.3 million for
      2004 from
      $8.2 million for
      2003 . This
      decrease was primarily due to a reduction in debt outstanding.





*Income
      Tax Expense.* Our
      effective income tax rate decreased to 35.8% in 2004 from 37.1% for
      2003.
      The decrease was primarily due to an income
      tax benefit of $0.4 million recorded in 2004 related to the favorable resolution
      of an IRS audit of our 1999 tax year. Based on our current estimate of the
      distribution of taxable income by state, we expect an effective income tax
      rate
      of approximately 39% for 2005.





*Discontinued
      Operations.* In
      2004,
      General Motors’ consolidated its vendor base and resourced its remanufactured
      transmission program from our facility located in Gastonia, North Carolina,
      in
      connection with which we closed this facility and discontinued this operation
      in
      accordance with SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* and
      recorded an after tax loss of $20.2 million. On a pre-tax basis, this loss
      included (i) $22.1 million for the impairment of goodwill assigned to this
      reporting unit, (ii) $1.9 million of costs related to the exit from this
      facility and the termination of our contract with GM, (iii) $1.7 million of
      inventory write-downs, (iv) $1.5 million of fixed asset impairment charges
      and (v) $1.5 million for severance and related costs.





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Also
      in
      2004 ,
      we
      recorded an additional loss of $0.8 million related to our former Distribution
      Group business, which included (i) a charge of $2.2 million for a valuation
      allowance related to the expected expiration of a capital loss carryforward,
      (ii) a non-cash tax benefit of $1.3 million based upon the resolution of prior
      year income tax issues with respect to the tax basis of the Distribution Group
      and (iii) income of $0.1 million (net of income taxes of $37,000) based upon
      updated information regarding obligations and other costs related to the sale
      of
      this business.





During
      2003, we recorded a gain from discontinued operations of $1.6 million (net
      of
      $0.5 million of income taxes) from the reclassified results of our drivetrain
      remanufacturing business with General Motors.





*Reportable
      Segments*





Drivetrain
      Remanufacturing Segment





The
      following table presents net sales and segment profit expressed in millions
      of
      dollars and as a percentage of net sales:





Year
                endedDecember 31,2004
            2003Net
                sales
            
            $
            271.2
            
            
            100.0
            %
            $
            241.0
            
            
            100.0
            %Segment
                profit
            
            $
            40.5
            
            
            14.9
            %
            $
            22.9
            
            
            9.5
            %





*Net
      Sales.* Net
      sales increased $30.2 million, or 12.5%, to $271.2 million for 2004 from
      $241.0 million for 2003. The increase was primarily due to a $51.1 million
      increase in sales to Honda ($76.7
      million for 2004 from $25.6 million for 2003) resulting
      from growth in the transmission remanufacturing program we launched in late
      2002, partially offset by:





·
            a
                reduction in volume of remanufactured transmissions sold to
                DaimlerChrysler and Ford due to the implementation in 2003 of new
                policies
                governing repair-versus-replace decisions made by their dealers in
                warranty applications, which resulted in dealers replacing fewer
                transmissions with remanufactured
                units;





·
            a
                reduction in volume ofDaimlerChrysler
                remanufactured transmissions resulting fromDaimlerChrysler’s
                decision not to launch new model years into the remanufacturing
                program;





·
            the
                run out of the Kia transmission remanufacturing program (which was
                substantially completed in the second quarter of 2003);
                and





·
            price
                concessions provided in 2003 to certain customers in order to extend
                certain agreements.





Of
      our
      segment net sales for 2004 and 2003, Ford accounted for 42.9% and 52.0%, Honda
      accounted for 28.3% and 10.6% and DaimlerChrysler accounted for 21.5% and 29.0%,
      respectively.





*Exit,
      Disposal, Certain Severance and Other Charges* . During
      2004, we recorded a net credit of $0.7 million consisting of income of $1.2
      million due to
      the reversal of a previously established provision for a potential non-income
      state tax liability upon the finalization of an audit by the state tax
      authorities, partially offset by (i) $0.4 million of costs primarily related
      to
      the termination of an independent contractor agreement and (ii) $0.1
      million of severance and related costs primarily associated with the
      reorganization and upgrade of certain management
      functions and other cost reduction initiatives.





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During
      2003, we recorded $4.2 million of costs including (i) $3.6
      million related to the
      closure of our transmission remanufacturing facility located in Mahwah, New
      Jersey, consisting of (a) $2.1 million of exit and other costs primarily
      associated with the relocation to a facility in Oklahoma City, Oklahoma,
      (b) $1.2 million of severance and related costs, (c) $0.6 million
      related to the write-off of certain fixed assets and (d) $0.2 million of
      inventory write-downs, partially offset by income of $0.5 million related to
      the
      reversal of a special charge accrual established during 2001 for expected idle
      capacity costs at the New Jersey plant, and (ii) $0.6 million primarily related
      to severance and related costs associated with the streamlining of certain
      operations and the reorganization and de-layering of certain management
      functions within the segment.





*Segment
      Profit* .
      Segment
      profit increased $17.6 million, or 76.9%, to $40.5 million (14.9% of segment
      net
      sales) for 2004 from $22.9 million (9.5% of segment net sales) for 2003.
      Segment profit reflects the previously discussed net credit of $0.7 million
      and
      costs of $4.2 million recorded during 2004 and 2003, respectively. The increase
      in segment profit resulted primarily from the factors described above under
“Net
      Sales” and under “Exit, Disposal, Certain Severance and Other Charges,” combined
      with the benefits resulting from our lean and continuous improvement program
      and
      other cost reductions.








Logistics
      Segment





The
      following table presents net sales and segment profit expressed in millions
      of
      dollars and as a percentage of net sales:




Year
                endedDecember 31,2004
            2003Net
                sales
            
            $
            104.4
            
            
            100.0
            %
            $
            81.7
            
            
            100.0
            %Segment
                profit
            
            $
            15.7
            
            
            15.0
            %
            $
            22.0
            
            
            26.9
            %





*Net
      Sales.* Net
      sales increased $22.7 million, or 27.8%, to $104.4 million for 2004
      from $81.7 million for 2003. This increase was primarily attributable to
      new business programs, including our test and repair program and other programs
      with AT&T Wireless and our direct fulfillment and exchange programs with
      Cingular, combined with an increase in our base fulfillment business with
      AT&T Wireless, partially offset by (i) a
      reduction in volume due to the run-out of the bulk collateral fulfillment
      program for AT&T Wireless (substantially completed during the third quarter
      of 2003), the material recovery and core qualification programs for Ford
      (substantially completed during the second and third quarters of 2003,
      respectively, and an OnStar telematics modification program for Delphi and
      General Motors and (ii) a
      price
      reduction granted to AT&T Wireless in exchange for extending our agreement
      through July, 2006. Of our segment net sales for 2004 and 2003, AT&T
      Wireless accounted for 79.8% and 71.1%, respectively (84.5% and 71.5% for
      Cingular/AT&T Wireless combined).





*Exit
      and Certain Severance Charges* . During
      2004, we recorded $0.1
      million of facility exit costs and $0.1 of severance and related costs
      associated with co st
      reduction initiatives.





During
      2003, we recorded costs of $0.9 million consisting of (i) $0.5 million primarily
      related to the write-down of certain customized software reflected as fixed
      assets and (ii) $0.4 million of severance and related costs associated with
      the
      streamlining of certain operations and the reorganization and de-layering of
      certain management functions within the segment.





*Segment
      Profit* .
      Segment
      profit decreased $6.3 million, or 28.6%, to $15.7 million (15.0% of
      segment net sales) for 2004 from $22.0 million (26.9% of segment net sales)
      for 2003. Segment profit reflects the previously discussed costs of $0.2 million
      and $0.9 million recorded during 2004 and 2003, respectively. The decrease
      in
      segment profit was primarily the result of the factors described above under
      “Net Sales,” partially offset by the benefits of our lean and continuous
      improvement program and other cost reductions.





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*Other*





The
      following table presents net sales and segment loss expressed in millions of
      dollars and as a percentage of net sales:





Year
                endedDecember 31,2004
            2003Net
                sales
            
            $
            20.0
            
            
            100.0
            %
            $
            17.1
            
            
            100.0
            %Segment
                loss
            
            $
            (5.7
            )
            
            −
            
            $
            (6.6
            )
            
            −





*Net
      Sales.* Net
      sales increased $2.9 million, or 17.0%, to $20.0 million for 2004 from
      $17.1 million for 2003. This increase was primarily attributable to an
      increase in sales of remanufactured transmissions resulting from our initiative
      to penetrate the independent aftermarket, partially offset by a decrease in
      sales of remanufactured engines.





*Exit
      Charges* . During
      2004, we recorded $0.3
      million of facility exit costs in order to streamline certain
      operations .





Segment
      Loss. Segment loss decreased $0.9 million, or 13.6%, to a loss of
      $5.7 million for 2004 from a loss of $6.6 million for 2003. The
      reduced loss was primarily the result of an increase in sales of remanufactured
      transmissions coupled with benefits from our lean and continuous improvement
      program and other cost reduction initiatives, partially offset by an increase
      in
      SG&A expense associated with our initiative to penetrate the independent
      aftermarket for remanufactured transmissions.








**Liquidity
      and Capital Resources**





***Cash
      Flow & Capital Expenditures***





We
      had
      total cash and cash equivalents on hand of $45.5 million at December 31, 2005.
      Net cash provided by operating activities from continuing operations was $54.9
      million in 2005. During the period, we used $2.5 million of cash from our
      working capital accounts, which included the use of $25.0 million for accounts
      receivable primarily as the result of increased sales volumes to our Logistics
      customers and changes in payment practices by certain of our customers to
      discontinue the use of discounts and other early payment programs, partially
      offset by an increase in cash of:





·
            $14.9
                million from inventories;





·
            $2.8
                million from prepaid and other assets, including $3.2 million of
                accrued
                interest and unamortized discount from the redemption of the note
                receivable from the Distribution Group;
                and





·
            $4.9
                million from accounts payable and accrued
                expenses.





Net
      cash
      used in investing activities of $9.1 million for the period, included capital
      spending of $17.2 million primarily related to leasehold improvements and
      machinery and equipment for capacity expansion efforts in our Logistics segment,
      largely offset by $8.4 million in proceeds from the redemption of the note
      receivable representing part of the proceeds from the sale of the Distribution
      Group in 2000 (see Item 8. “Consolidated Financial Statements and Supplementary
      Data - Note 2”). Net cash used in financing activities of $17.7 million
      included net payments of $19.2 million made on our credit facility and $2.6
      million in payment of consideration related to previous acquisitions, partially
      offset by $4.3 million of proceeds from the exercise of stock options by our
      employees and directors.





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For
      2006,
      we have planned approximately $16 million for capital expenditures,
      consisting of approximately $8 million in support of new business initiatives
      in
      our Logistics and Drivetrain Remanufacturing segments and $8 million in support
      of capacity maintenance and cost reduction initiatives.








***Financing***





Our
      credit facility provides for (i) a $75.0 million term loan payable in quarterly
      installments in increasing amounts through the maturity in March 2007 ($10.3
      million outstanding at December 31, 2005), (ii) a $95.0 million two-tranche
      term loan payable in quarterly installments ($80.4 million outstanding at
      December 31, 2005 with approximately 99% of the outstanding balance payable
      during the final year of the term maturing in March 2008) with an annual excess
      cash flow sweep payable as defined in the credit agreement and (iii) a $40.0
      million revolving credit facility available through March 2007. Our credit
      facility also provides for the addition of one or more optional term loans
      of up
      to $100.0 million in the aggregate, subject to certain conditions (including
      the
      receipt from one or more lenders of the additional commitments that may be
      requested) and achievement of certain financial ratios.





At
      our
      election, amounts advanced under the credit facility will bear interest at
      either (i) the Alternate Base Rate plus a specified margin or (ii) the
      Eurodollar Rate plus a specified margin. The Alternate Base Rate is equal to
      the
      highest of (a) the lender’s prime rate, (b) the lender’s base CD rate plus 1.00%
      or (c) the federal funds effective rate plus 0.50%. The applicable margins
      for
      both Alternate Base Rate and Eurodollar Rate loans are subject to quarterly
      adjustments based on our leverage ratio as of the end of the four fiscal
      quarters then completed. As of December 31, 2005, the margins for the $75.0
      million term loan and the $40.0 million revolving facility were 1.00% for
      Alternate Base Rate loans and 2.00% for Eurodollar Rate loans. For the $95.0
      million term loan, the margins were 1.75% for Alternate Base Rate loans and
      2.75% for Eurodollar Rate loans as of December 31, 2005.





On
      May 19, 2005, we used the proceeds from the early redemption of the note
      receivable from the Distribution Group to make optional prepayments on the
      $75.0
      million term loan and the $95.0 million term loan of $9.8 million and $1.7
      million, respectively.





Under
      the
      terms of our credit facility and based on the results of operations for the
      year
      ended December 31, 2005, a mandatory prepayment of approximately $4.7 million
      for excess cash flow for the year ended December 31, 2005 was paid in February
      2006.





We
      were
      in compliance with all the credit facility’s debt covenants as of December 31,
      2005.





As
      of
      December 31, 2005, our borrowing capacity under the revolving portion of the
      credit facility was $37.3 million, net of $2.7 million for outstanding letters
      of credit. In addition, we had cash and cash equivalents on hand of $45.5
      million at December 31, 2005.





We
      are
      currently evaluating the establishment of a new credit facility that is expected
      to provide improved financing terms and less restrictive covenants and expect
      this new facility to be in place by March 31, 2006. At the time of establishment
      of a new credit facility, we would expect to record a pre-tax charge of
      approximately $1.7 million related to the write-off of previously capitalized
      debt issuance costs in connection with the termination of our current credit
      facility.





As
      part
      of an earn-out related to the 1997 acquisition of ATS Remanufacturing, we made
      a
      final payment of $2.4 million to the seller in January 2005. See Item 8.
“Consolidated Financial Statements and Supplementary Data - Note 16” for a
      discussion of payments related to our ATS Remanufacturing acquisition and
      information regarding other contingencies.





Our
      revolving credit agreement with HSBC Bank Plc provides for £0.5 million, or
      approximately $0.9 million in U.S. dollars, to finance the working capital
      requirements of our U.K. subsidiary. Amounts advanced
      are secured by substantially all the assets of our U.K. subsidiary. Interest
      accrues at the HSBC Bank prime lending rate plus 1.50% and is payable monthly.
      HSBC Bank may at any time demand repayment of all sums owing. As of December
      31,
      2005, there were no amounts outstanding under this line of
      credit.





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We
      believe that cash on hand,
      cash flow from operations and existing borrowing capacity will be sufficient
      to
      fund ongoing operations and budgeted capital expenditures. In pursuing future
      acquisitions, we will continue to consider the effect any such acquisition
      costs
      may have on liquidity. In order to consummate such acquisitions, we may need
      to
      seek funds through additional borrowings or equity financing.








***Other***





During
      the first quarter of 2005, partnerships controlled by Aurora Capital Group,
      which partnerships were previously among our largest stockholders, sold all
      of
      their shares of our common stock as part of a public offering, for which we
      received no proceeds. As the result of this sale, our federal and certain of
      our
      state loss carryforwards available as an offset to future taxable income, which
      approximated $20.0 million and $7.3 million, respectively, as of December 31,
      2005, are subject to certain statutory provisions in the U.S. Internal Revenue
      Code which limit the timing and usage of such loss carryforwards. Based upon
      our
      current tax situation, the aggregate amount of these loss carryforwards has
      not
      been affected; however, the federal statute limits the amount we can use in
      a
      particular year, thereby extending our expected usage of these loss
      carryforwards into 2007. For 2005, we have reached our current limitation of
      federal taxable income which can be offset with net operating loss
      carryforwards. As a result, we made a federal tax payment in the fourth quarter
      of 2005 of $3.2 million. Also during 2005, we completed a study of research
      and
      development credits and recorded a tax benefit of $1.4 million available to
      offset federal tax payable in future years. We expect to receive the cash
      benefits of these carryforwards and tax credits prior to their respective
      expiration.





On October
      8, 2005, our customer, Delphi Corporation filed a voluntary petition for
      business reorganization under Chapter 11 of the US Bankruptcy Code.  Our
      pre-bankruptcy net receivable from Delphi is less than $0.3 million, of which
      $0.1 million has been currently reserved.  We cannot estimate the
      impact of the Delphi bankruptcy on our future business or on the collectibility
      of our receivables but we expect that its effect will not be material to
      our business or financial position.





On
      February 16, 2006, we announced our intention to commence a program for the
      repurchase of up to 2% of our outstanding common stock during the balance of
      2006. It is our intent to repurchase shares, from time to time, to offset the
      potential dilutive impact of stock option exercises and restricted stock grants
      under our stock incentive plans.






***Off-Balance
      Sheet Arrangements***





We
      are
      not engaged in any off-balance sheet arrangements that have a material current
      effect or are reasonably likely to have a material future effect on our
      financial condition or results of operations. However, we are subject to various
      other commitments and contingencies as disclosed in Item 8. "Consolidated
      Financial Statements and Supplementary Data - Note 16."











36
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***Contractual
      Obligations***





The
      following table summarizes our contractual obligations expressed in millions
      of
      dollars as of December 31, 2005:





Total
            
            Less
                than
              1
                year
            
            1
                -
                3 years
            
            3
                -
                5 years
            
            More
                than
              5
                yearsDebt
                Obligations:Principal
                balance on credit
                facility
            
            $
            90.7
            
            $
            10.1
            
            $
            80.6
            
            $
            −
            
            $
            −Interest
                on credit facility(1)
            
            
            13.0
            
            
            6.6
            
            
            6.4
            
            
            -
            
            
            -Amount
                due to sellers of acquired companies
            
            
            0.1
            
            
            0.1
            
            
            −
            
            
            −
            
            
            −Total
                debt obligations
            
            
            103.8
            
            
            16.8
            
            
            87.0
            
            
            -
            
            
            -Operating
                lease obligations
            
            
            28.6
            
            
            8.0
            
            
            11.4
            
            
            4.3
            
            
            4.9Purchase
                obligations
            
            
            0.7
            
            
            0.5
            
            
            0.2
            
            
            −
            
            
            −Executive
                compensation agreements(2)
            
            
            1.1
            
            
            0.5
            
            
            0.5
            
            
            0.1
            
            
            −Deferred
                compensation(3)
            
            
            0.7
            
            
            0.1
            
            
            0.3
            
            
            0.2
            
            
            0.1Total
            
            $
            134.9
            
            $
            25.9
            
            $
            99.4
            
            $
            4.6
            
            $
            5.0





(1)
            Amount
                represents estimated interest expense obligations on borrowings
                outstanding under our credit facility as of December 31, 2005. Interest
                is
                determined assuming mandatory principal payments are made as required.
                Interest on floating rate debt is estimated using interest rates
                in effect
                as of February 9, 2006.





(2)
            Represents
                amounts payable to our former CEO and former CFO.





(3)
            Relates
                to the 1997 acquisition of ATS, which requires us to make certain
                payments
                to key employees of the seller on various dates subsequent to the
                closing
                date. Through December 31, 2005, we had made $2.9 million of these
                payments (including $0.1 million paid in 2005).





**Impact
      of New Accounting Standards**





In
      November 2004, the Financial Accounting Standards Board issued SFAS No.
      151, *Inventory Costs - An Amendment of ARB No. 43, Chapter 4.* SFAS No.
      151 clarifies that abnormal amounts of idle facility expense, freight, handling
      costs, and wasted materials (spoilage) should be recognized as current-period
      charges. In addition, this Statement requires that allocation of fixed
      production overheads to the costs of conversion be based on the normal capacity
      of the production facilities. As allowed under SFAS No. 151, we will adopt
      the
      provisions of this standard for inventory costs incurred after December 31,
      2005. The initial adoption of SFAS No. 151 is not expected to have a material
      effect on our results of operations or financial position.





In
      December 2004, the Financial Accounting Standards Board issued SFAS No.
      123R, *Share-Based Payment.* SFAS No.
      123R requires a public entity to measure the cost of employee services received
      in exchange for an award of equity instruments based on the grant-date fair
      value of the award and recognize this cost in the statements of income over
      the
      period during which the employee is required to provide such services. On April
      14, 2005, the Securities and Exchange Commission adopted a rule that amended
      the
      compliance dates of SFAS No. 123R, extending the effective date from the first
      interim period after June 15, 2005 to fiscal years beginning after June 15,
      2005. As a result, we will apply the modified prospective application of this
      statement with an effective date of January 1, 2006. Under the modified
      prospective application, SFAS No. 123R, which provides certain changes to the
      method for valuing stock-based compensation among other changes, applies to
      new
      awards and to awards that are outstanding on the effective date and are
      subsequently modified or cancelled. Compensation expense for outstanding awards
      for which the requisite service has not been rendered as of the effective date,
      will be recognized over the remaining service





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 Table
            of Contents





period
      using the compensation cost calculated for pro forma disclosure purposes under
      SFAS No. 123, *Accounting for Stock-Based Compensation* .
      For
      stock options granted as of December 31, 2005, the Company expects to record,
      on
      a pre-tax basis, approximately $0.7 million of compensation expense during
      2006.
      We are in the process of finalizing how the new method of valuing stock-based
      compensation as prescribed in SFAS No. 123R will be applied to valuing
      stock-based awards granted after the effective date, however, we currently
      expect to record an additional expense of approximately $0.8 million, on a
      pre-tax basis, for stock options we expect to grant during 2006.





In
      March
      2005, the U.S. Securities and Exchange Commission released Staff Accounting
      Bulletin No. 107, *Share-Based
      Payments* .
      The
      interpretations in SAB No. 107 express views of the SEC staff regarding the
      interaction between SFAS No. 123R and certain SEC rules and regulations, and
      provides the staff’s views regarding the valuation of share-based payment
      arrangements for public companies. This staff accounting bulletin provides
      guidance to assist with the initial implementation of SFAS No. 123R and includes
      interpretative guidance related to valuation methods (including assumptions
      such
      as expected volatility and expected term), the classification of compensation
      expense, non-GAAP financial measures, first-time adoption of SFAS No. 123R
      in an
      interim period, capitalization of compensation cost related to share-based
      payment arrangements, the accounting for income tax effects of share-based
      payment arrangements upon adoption of SFAS No. 123R, the modification of
      employee share options prior to adoption of SFAS No. 123R and disclosures in
      Management’s Discussion and Analysis subsequent to adoption of SFAS No. 123R.
      SAB No. 107 requires that stock-based compensation be classified in the same
      expense lines as cash compensation is reported for the same employee. The
      Company will apply the principles of SAB No. 107 in conjunction with its
      adoption of SFAS No. 123R.





In
      May
      2005, the Financial Accounting Standards Board issued SFAS No. 154, *Accounting
      Changes and Error Corrections* ,
      effective with fiscal years beginning after December 15, 2005. This statement
      replaces Accounting Principles Board Opinion No. 20, *Accounting
      Changes* and SFAS
      No. 3, *Reporting
      Accounting Changes in Interim Financial Statements* ,
      and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. Under this pronouncement, changes in accounting principle
      are required to be retrospectively applied to prior financial statements, unless
      it is impracticable to determine either the period-specific effects or the
      cumulative effect of the change to all prior periods presented. The statement
      defines retrospective application as the application of a different accounting
      principle to prior accounting periods as if that principle had always been
      used
      or as the adjustment of previously issued financial statements to reflect a
      change in the reporting entity. This statement addresses restatement of
      previously issued financial statements to reflect the correction of an error.
      This statement requires that the retrospective application of a change of
      accounting principle be limited to the direct effects of the change. This
      statement also requires that a change in depreciation, amortization, or
      depletion method for long-lived, non-financial assets be accounted for as a
      change in accounting estimate affected by a change in accounting principle.
      The
      Company does not believe that adoption of SFAS No. 154 will have a material
      effect on its results of operations or its financial position.








**Inflation;
      Lack of Seasonality**





Although
      we are subject to the effects of changing prices, the impact of inflation has
      not been a significant factor in results of operations for the periods
      presented. In some circumstances, market conditions or customer expectations
      may
      prevent us from increasing the prices of our products to offset the inflationary
      pressures that may increase our costs in the future. Historically, there has
      been little aggregate seasonal fluctuation in our business.








**Environmental
      Matters**





See
      Item
      1. "Business-Environmental" for a discussion of environmental matters relating
      to us.








38
 Table
            of Contents





**ITEM
                7A.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT
                MARKET RISK**





*Derivative
      Financial Instruments.* We do
      not hold or issue derivative financial instruments for trading purposes. We
      have
      used derivative financial instruments to manage our exposure to fluctuations
      in
      interest rates. Neither the aggregate value of these derivative financial
      instruments nor the market risk posed by them has been material to our business.
      As of December 31, 2005, we are not using any derivative financial instruments.





*Interest
      Rate Exposure.* Based on
      our overall interest rate exposure during the year ended December 31, 2005
      and assuming similar interest rate volatility in the future, a near-term
      (12 months) change in interest rates would not materially affect our
      consolidated financial position, results of operation or cash flows. As of
      December 31, 2005, interest rate movements of 100 basis points would result
      in
      an approximate $0.9 million increase or decrease in interest expense over a
      one-year period.





*Foreign
      Exchange Exposure.* Our
      revenue, expense and capital purchasing activities are primarily transacted
      in
      U.S. dollars. We have one foreign operation that exposes us to translation
      risk
      when the local currency financial statements are translated to U.S. dollars.
      Since changes in translation risk are reported as adjustments to stockholders'
      equity, a 10% change in the foreign exchange rate would not have a material
      effect on our financial position, results of operation or cash flows. For the
      year ended December 31, 2005, a 10% change in the foreign exchange rate would
      increase or decrease our consolidated net income by approximately
      $0.1 million.





39
 Table
            of Contents







**ITEM
      8.**  **CONSOLIDATED
      FINANCIAL STATEMENTS****AND SUPPLEMENTARY DATA**






**Contents**





Management’s
      Report on Internal Control
      Over Financial Reporting


Report
      ofIndependent
      Registered Public Accounting Firm


Report
      ofIndependent
      Registered Public Accounting Firm on Internal Control Over Financial
      Reporting


Consolidated
      Balance Sheets as of December 31, 2005 and
      2004


Consolidated
      Statements of Income for the years
      ended December 31, 2005, 2004 and 2003


Consolidated
      Statements of Stockholders'
      Equity for the years ended December 31, 2005, 2004 and 2003


Consolidated
      Statements of Cash Flows for the years
      ended December 31, 2005, 2004 and 2003


Notes
      to Consolidated Financial
      Statements





40
 Table
            of Contents








**Management’s
      Report on Internal Control Over Financial Reporting**





Management
      of Aftermarket
      Technology Corp. is
      responsible for establishing and maintaining adequate internal control over
      financial reporting, as such term is defined in the Securities Exchange Act
      of
      1934 Rule 13a-15(f). Under the supervision and with the participation of our
      management, including our principal executive officer and principal financial
      officer, we conducted an evaluation of the effectiveness of the Company’s
      internal control over financial reporting as of December 31, 2005 as required
      by
      the Securities Exchange Act of 1934 Rule 13a-15(c). In making this assessment,
      we used the criteria set forth in the framework in *Internal
      Control-Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission. Based
      on
      our evaluation under the framework in *Internal
      Control-Integrated Framework* ,
      our
      management concluded that our internal control over financial reporting was
      effective as of December 31, 2005.




Our
      management’s assessment of the effectiveness of our internal control over
      financial reporting as of December 31, 2005 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as stated in their
      report which appears on page 43.








Aftermarket
      Technology Corp.





Downers
      Grove, Illinois


February
      24, 2006








41
 Table
            of Contents





**Report
      of Independent Registered Public Accounting
      Firm**





To
      the
      Stockholders and Board of Directors


Aftermarket
      Technology Corp.





We
      have
      audited the accompanying consolidated balance sheets of Aftermarket Technology
      Corp. and subsidiaries (the Company) as of December 31, 2005 and 2004, and
      the related consolidated statements of income, stockholders' equity, and cash
      flows for each of the three years in the period ended
      December 31, 2005. Our audits also included the financial statement
      schedule listed in the Index of Item 15 (a). These financial statements and
      schedule are the responsibility of the Company's management. Our responsibility
      is to express an opinion on these financial statements and schedule based on
      our
      audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the 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 consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Aftermarket
      Technology Corp. and subsidiaries at December 31, 2005 and 2004, and the
      consolidated results of their operations and their cash flows for each of the
      three years in the period ended December 31, 2005, in conformity with U.S.
      generally accepted accounting principles. Also, in our opinion, the related
      financial statement schedule, when considered in relation to the basic financial
      statements taken as a whole, presents fairly, in all material respects, the
      information set forth therein.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Aftermarket Technology
      Corp.’s internal control over financial reporting as of December 31, 2005, based
      on criteria established in Internal Control—Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission and our report
      dated February 24, 2006 expressed an unqualified opinion thereon.





ERNST &
      YOUNG LLP





Chicago,
      Illinois


February
      24, 2006








42
 Table
            of Contents





**Report
      of Independent Registered Public
      Accounting Firm on Internal Control Over Financial
      Reporting**





To
      the
      Stockholders and Board of Directors


Aftermarket
      Technology Corp.





We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control Over Financial Reporting, that Aftermarket
      Technology Corp. maintained
      effective internal control over financial reporting as of December 31, 2005,
      based on criteria established in Internal Control-Integrated Framework issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
      criteria). Aftermarket Technology Corp.’s management is responsible for
      maintaining effective internal control over financial reporting and for its
      assessment of the effectiveness of internal control over financial reporting.
      Our responsibility is to express an opinion on management’s assessment and an
      opinion on the effectiveness of the company’s internal control over financial
      reporting based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, management’s assessment that Aftermarket Technology Corp. maintained
      effective internal control over financial reporting as of December 31, 2005,
      is
      fairly stated, in all material respects, based on the COSO criteria. Also,
      in
      our opinion, Aftermarket Technology Corp. maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2005,
      based on the COSO criteria.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated
      balance sheets of Aftermarket Technology Corp. as
      of
      December 31, 2005 and 2004, and the related consolidated
      statements of income, stockholders’ equity, and cash flows for
      each
      of the three years in the period ended December 31, 2005, and our report dated
      February 24, 2006 expressed an unqualified opinion thereon.








ERNST
      & YOUNG LLP





Chicago,
      Illinois


February
      24, 2006






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 Table
          of Contents


**AFTERMARKET
                  TECHNOLOGY CORP.****CONSOLIDATED
                  BALANCE
                  SHEETS****(In
                  thousands, except share and per share data)**December
                  31,2005
              
              2004**Assets**Current
                  Assets:Cash
                  and cash equivalents
              
              $
              45,472
              
              $
              18,085Accounts
                  receivable, net
              
              
              75,294
              
              
              51,257Inventories
              
              
              65,151
              
              
              80,635Notes
                  receivable
              
              
              -
              
              
              10,622Prepaid
                  and other assets
              
              
              4,451
              
              
              3,401Refundable
                  income taxes
              
              
              689
              
              
              808Deferred
                  income taxes
              
              
              11,446
              
              
              19,587Total
                  current assets
              
              
              202,503
              
              
              184,395Property,
                  plant and equipment, net
              
              
              55,015
              
              
              52,835Debt
                  issuance costs, net
              
              
              1,981
              
              
              3,353Goodwill
              
              
              147,561
              
              
              148,589Intangible
                  assets, net
              
              
              292
              
              
              406Other
                  assets
              
              
              427
              
              
              417Total
                  assets
              
              $
              407,779
              
              $
              389,995**Liabilities
                  and Stockholders' Equity**Current
                  Liabilities:Accounts
                  payable
              
              $
              42,850
              
              $
              39,588Accrued
                  expenses
              
              
              26,099
              
              
              27,723Credit
                  facility
              
              
              10,062
              
              
              10,629Amounts
                  due to sellers of acquired companies
              
              
              73
              
              
              2,461Deferred
                  compensation
              
              
              136
              
              
              115Liabilities
                  of discontinued operations, net
              
              
              231
              
              
              881Total
                  current liabilities
              
              
              79,451
              
              
              81,397Amount
                  drawn on credit facility, less current portion
              
              
              80,623
              
              
              99,244Amounts
                  due to sellers of acquired companies, less current portion
              
              
              21
              
              
              72Deferred
                  compensation, less current portion
              
              
              847
              
              
              621Other
                  long-term liabilities
              
              
              2,200
              
              
              -Deferred
                  income taxes
              
              
              23,407
              
              
              22,288Stockholders'
                  Equity:Preferred
                  stock, $.01 par value; shares authorized - 2,000,000; none
                  issued
              
              
              -
              
              
              -Common
                  stock, $.01 par value; shares authorized - 30,000,000;Issued
                  (including shares held in treasury) - 26,539,926 and 26,023,419as
                  of December 31, 2005 and 2004, respectively
              
              
              265
              
              
              260Additional
                  paid-in capital
              
              
              212,678
              
              
              205,747Retained
                  earnings
              
              
              77,890
              
              
              46,882Accumulated
                  other comprehensive income
              
              
              1,186
              
              
              3,542Unearned
                  compensation
              
              
              (1,160
              )
              
              (749
              )Common
                  stock held in treasury, at cost - 4,774,374 and 4,754,704
                  sharesas
                  of December 31, 2005 and 2004, respectively
              
              
              (69,629
              )
              
              (69,309
              )Total
                  stockholders' equity
              
              
              221,230
              
              
              186,373Total
                  liabilities and stockholders' equity
              
              $
              407,779
              
              $
              389,995*See
                  accompanying notes.*


44
 Table
          of Contents


**AFTERMARKET
                  TECHNOLOGY CORP.****CONSOLIDATED
                  STATEMENTS OF
                  INCOME****(In
                  thousands, except per share data)**For
                  the years ended December 31,2005
              
              2004
              
              2003Net
                  sales:Products
              
              $
              288,743
              
              $
              291,192
              
              $
              258,009Services
              
              
              153,220
              
              
              104,385
              
              
              81,700Total
                  net sales
              
              
              441,963
              
              
              395,577
              
              
              339,709Cost
                  of sales:Products
              
              
              220,267
              
              
              220,810
              
              
              201,652Products
                  - disposal costs
              
              
              -
              
              
              -
              
              
              200Services
              
              
              115,019
              
              
              72,820
              
              
              43,345Total
                  cost of sales
              
              
              335,286
              
              
              293,630
              
              
              245,197Gross
                  profit
              
              
              106,677
              
              
              101,947
              
              
              94,512Selling,
                  general and administrative expense
              
              
              53,385
              
              
              51,598
              
              
              50,987Amortization
                  of intangible assets
              
              
              125
              
              
              125
              
              
              299Exit,
                  disposal, certain severance and other charges
              
              
              492
              
              
              4,031
              
              
              8,273Operating
                  income
              
              
              52,675
              
              
              46,193
              
              
              34,953Interest
                  income
              
              
              2,026
              
              
              2,658
              
              
              2,863Other
                  income, net
              
              
              585
              
              
              24
              
              
              94Equity
                  in income of investee
              
              
              -
              
              
              146
              
              
              277Interest
                  expense
              
              
              (7,696
              )
              
              (7,271
              )
              
              (8,169
              )Income
                  from continuing operations before income taxes
              
              
              47,590
              
              
              41,750
              
              
              30,018Income
                  tax expense
              
              
              15,711
              
              
              14,955
              
              
              11,146Income
                  from continuing operations
              
              
              31,879
              
              
              26,795
              
              
              18,872Gain
                  (loss) from discontinued operations,net
                  of income taxes
              
              
              (871
              )
              
              (21,019
              )
              
              1,639Net
                  income
              
              $
              31,008
              
              $
              5,776
              
              $
              20,511Per
                  common share - basic:Income
                  from continuing operations
              
              $
              1.49
              
              $
              1.27
              
              $
              0.78Gain
                  (loss) from discontinued operations
              
              
              (0.04
              )
              
              (1.00
              )
              
              0.07Net
                  income
              
              $
              1.45
              
              $
              0.27
              
              $
              0.85Per
                  common share - diluted:Income
                  from continuing operations
              
              $
              1.48
              
              $
              1.25
              
              $
              0.77Gain
                  (loss) from discontinued operations
              
              
              (0.04
              )
              
              (0.98
              )
              
              0.07Net
                  income
              
              $
              1.44
              
              $
              0.27
              
              $
              0.84*See
                  accompanying notes.*




45
 Table
            of Contents
 **AFTERMARKET
                    TECHNOLOGY CORP.****CONSOLIDATED
                    STATEMENTS OF STOCKHOLDERS'
                    EQUITY****(In
                    thousands, except share data)**AccumulatedOther
                
                
                
                CommonPreferred
                
                Common
                
                Additional
                
                Retained
                
                Comprehensive
                
                Unearned
                
                Stock
                    inStock
                
                Stock
                
                Paid-In
                    Capital
                
                Earnings
                
                (Loss)
                    Income
                
                Compensation
                
                Treasury
                
                TotalBalance
                    at January 1, 2003
                
                $
                -
                
                $
                251
                
                $
                193,869
                
                $
                20,595
                
                $
                (309
                )
                $
                -
                
                $
                (7,971
                )
                $
                206,435Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                20,511
                
                
                -
                
                
                -
                
                
                -
                
                
                20,511Derivative
                    financial instruments, net ofincome
                    taxes
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                237
                
                
                -
                
                
                -
                
                
                237Translation
                    adjustments
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,963
                
                
                -
                
                
                -
                
                
                1,963Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                22,711Issuance
                    of 20,000 shares of common stockfrom
                    incentive stock awards
                
                
                -
                
                
                1
                
                
                243
                
                
                -
                
                
                -
                
                
                (244
                )
                
                -
                
                
                -Issuance
                    of 8,333 shares of common stockfrom
                    exercise of stock options
                
                
                -
                
                
                -
                
                
                81
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                81Tax
                    benefit from stock-based award transactions
                
                
                -
                
                
                -
                
                
                11
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                11Amortization
                    of unearned compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                13
                
                
                -
                
                
                13Balance
                    at December 31, 2003
                
                
                -
                
                
                252
                
                
                194,204
                
                
                41,106
                
                
                1,891
                
                
                (231
                )
                
                (7,971
                )
                
                229,251Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                5,776
                
                
                -
                
                
                -
                
                
                -
                
                
                5,776Translation
                    adjustments
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,651
                
                
                -
                
                
                -
                
                
                1,651Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,427Issuance
                    of 141,500 shares of commonstock
                    from incentive stock awards
                
                
                -
                
                
                1
                
                
                2,039
                
                
                -
                
                
                -
                
                
                (2,040
                )
                
                -
                
                
                -Issuance
                    of 708,063 shares of commonstock
                    from exercise of stock options
                
                
                -
                
                
                7
                
                
                5,753
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                5,760Tax
                    benefit from stock-based award transactions
                
                
                -
                
                
                -
                
                
                428
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                428Stock-based
                    compensation expense frommodification
                    of stock options
                
                
                -
                
                
                -
                
                
                3,323
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                3,323Amortization
                    of unearned compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,522
                
                
                -
                
                
                1,522Repurchase
                    of 3,820,967 shares of commonstock
                    for treasury
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (61,338
                )
                
                (61,338
                )Balance
                    at December 31, 2004
                
                
                -
                
                
                260
                
                
                205,747
                
                
                46,882
                
                
                3,542
                
                
                (749
                )
                
                (69,309
                )
                
                186,373Net
                    income
                
                
                -
                
                
                -
                
                
                -
                
                
                31,008
                
                
                -
                
                
                -
                
                
                -
                
                
                31,008Translation
                    adjustments
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,356
                )
                
                -
                
                
                -
                
                
                (2,356
                )Comprehensive
                    income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                28,652Issuance
                    of 93,125 shares of common stockfrom
                    incentive stock awards
                
                
                -
                
                
                1
                
                
                1,475
                
                
                -
                
                
                -
                
                
                (1,476
                )
                
                -
                
                
                -Issuance
                    of 423,382 shares of commonstock
                    from exercise of stock options
                
                
                -
                
                
                4
                
                
                4,266
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                4,270Tax
                    benefit from stock-based award transactions
                
                
                -
                
                
                -
                
                
                1,190
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,190Amortization
                    of unearned compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,065
                
                
                -
                
                
                1,065Repurchase
                    of 19,670 shares of common stockfor
                    treasury
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (320
                )
                
                (320
                )Balance
                    at December 31, 2005
                
                $
                -
                
                $
                265
                
                $
                212,678
                
                $
                77,890
                
                $
                1,186
                
                $
                (1,160
                )
                $
                (69,629
                )
                $
                221,230*See
                  accompanying notes.*
  46
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            of Contents
 **AFTERMARKET
                    TECHNOLOGY CORP.****CONSOLIDATED
                    STATEMENTS OF CASH
                    FLOWS****(In
                    thousands)**For
                    the years ended December 31,2005
                
                2004
                
                2003**Operating
                    Activities:**Net
                    income
                
                $
                31,008
                
                $
                5,776
                
                $
                20,511Adjustments
                    to reconcile net income to net cash provided byoperating
                    activities - continuing operations:Net
                    loss (gain) from discontinued operations
                
                
                871
                
                
                21,019
                
                
                (1,639
                )Depreciation
                    and amortization
                
                
                13,505
                
                
                12,117
                
                
                11,225Noncash
                    stock-based compensation
                
                
                1,065
                
                
                4,845
                
                
                13Amortization
                    of debt issuance costs
                
                
                1,254
                
                
                1,323
                
                
                1,134Adjustments
                    to provision for losses on accounts receivable
                
                
                369
                
                
                633
                
                
                (9
                )Loss
                    on sale of equipment
                
                
                14
                
                
                15
                
                
                34Deferred
                    income taxes
                
                
                9,311
                
                
                3,891
                
                
                12,470Changes
                    in operating assets and liabilities,net
                    of businesses discontinued/sold:Accounts
                    receivable
                
                
                (25,014
                )
                
                (9,797
                )
                
                6,962Inventories
                
                
                14,853
                
                
                (3,736
                )
                
                (10,001
                )Prepaid
                    and other assets
                
                
                2,768
                
                
                (323
                )
                
                (806
                )Accounts
                    payable and accrued expenses
                
                
                4,902
                
                
                (4,850
                )
                
                12,126Net
                    cash provided by operating activities - continuing
                    operations
                
                
                54,906
                
                
                30,913
                
                
                52,020Net
                    cash (used in) provided by operating activities - discontinued
                    operations
                
                
                (650
                )
                
                6,322
                
                
                (3,617
                )**Investing
                    Activities:**Purchases
                    of property, plant and equipment
                
                
                (17,185
                )
                
                (11,081
                )
                
                (13,439
                )Proceeds
                    from redemption of note receivable from sale of business
                
                
                8,365
                
                
                -
                
                
                -Acquisition
                    of company, net of cash received
                
                
                -
                
                
                -
                
                
                (1,095
                )Proceeds
                    from sale of property, plant and equipment
                
                
                90
                
                
                3,887
                
                
                81Other,
                    net
                
                
                (343
                )
                
                -
                
                
                -Net
                    cash used in investing activities - continuing operations
                
                
                (9,073
                )
                
                (7,194
                )
                
                (14,453
                )Net
                    cash used in investing activities - discontinued
                    operations
                
                
                -
                
                
                (1,438
                )
                
                (1,117
                )**Financing
                    Activities:**Payments
                    on credit facility, net
                
                
                (19,188
                )
                
                (10,018
                )
                
                (35,025
                )Obligation
                    for debt issuance costs
                
                
                118
                
                
                -
                
                
                (658
                )Payments
                    on capital lease obligation
                
                
                -
                
                
                (351
                )
                
                (706
                )Proceeds
                    from exercise of stock options
                
                
                4,270
                
                
                5,760
                
                
                81Repurchases
                    of common stock for treasury
                
                
                (320
                )
                
                (61,338
                )
                
                -Payments
                    on amounts due to sellers of acquired companies
                
                
                (2,450
                )
                
                (4,067
                )
                
                (2,233
                )Payments
                    of deferred compensation related to acquired company
                
                
                (142
                )
                
                (148
                )
                
                (292
                )Net
                    cash used in financing activities
                
                
                (17,712
                )
                
                (70,162
                )
                
                (38,833
                )Effect
                    of exchange rate changes on cash and cash equivalents
                
                
                (84
                )
                
                16
                
                
                124Increase
                    (decrease) in cash and cash equivalents
                
                
                27,387
                
                
                (41,543
                )
                
                (5,876
                )Cash
                    and cash equivalents at beginning of year
                
                
                18,085
                
                
                59,628
                
                
                65,504Cash
                    and cash equivalents at end of year
                
                $
                45,472
                
                $
                18,085
                
                $
                59,628Cash
                    paid during the year for:Interest
                
                $
                6,733
                
                $
                5,300
                
                $
                7,703Income
                    taxes, net
                
                
                4,821
                
                
                1,828
                
                
                162*See
                    accompanying notes.*
  47
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**AFTERMARKET
      TECHNOLOGY CORP.**





**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS**


**(In
      thousands, except share and per share data)**










**Note
      1.**  **The
      Company**





The
      Company has two reportable segments: the Drivetrain Remanufacturing segment
      and
      the Logistics segment. The Drivetrain Remanufacturing segment primarily sells
      remanufactured transmissions directly to Ford, Honda, DaimlerChrysler, Allison
      and certain other foreign Original Equipment Manufacturers (“OEMs”), primarily
      for use as replacement parts by their domestic dealers during the warranty
      and
      post-warranty periods following the sale of a vehicle. In addition, the
      Drivetrain Remanufacturing segment sells select remanufactured engines primarily
      to certain European OEMs. The Company’s Logistics segment provides the
      following: (i) value-added warehouse, distribution and reverse logistics, test
      and repair, turnkey order fulfillment and information services for Cingular,
      and
      to a lesser extent, certain other customers in the wireless electronics industry
      including Nokia, T-Mobile and LG; (ii) logistics and reverse logistics services
      and automotive electronic components remanufacturing, primarily for General
      Motors, Delphi, Visteon and Thales; and (iii) returned material reclamation
      and
      disposition services and core management services primarily to General Motors.
      The Company’s independent aftermarket business, which is not reportable for
      segment reporting purposes, remanufactures and distributes domestic and foreign
      engines and domestic transmissions to independent aftermarket customers and
      is
      reported as “Other” (see
      Note 20 - Subsequent Event).  Established
      in 1994, the Company maintains manufacturing facilities and logistics operations
      in the United States and a manufacturing facility in the United
      Kingdom.







**Note
      2.**  **Summary
      of Significant Accounting Policies**





*Principles
      of Consolidation*





The
      accompanying consolidated financial statements include the accounts of the
      Company and its subsidiaries. All significant intercompany balances and
      transactions have been eliminated.








*Use
      of Estimates*





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








*Cash
      and Cash Equivalents*





The
      Company considers all highly liquid investments with original effective
      maturities of three months or less to be cash equivalents.








*Inventories*





Inventories
      are stated at the lower of cost (first-in, first-out method) or market and
      consist primarily of new and used transmission parts, cores and finished goods.
      Consideration is given to deterioration, obsolescence and other factors in
      evaluating the estimated market value of inventory based upon management’s
      judgment and available information which includes assumptions
      about market conditions, future demand and expected usage rates which may vary
      from those estimated .





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*Property,
      Plant and Equipment*





Property,
      plant and equipment, including amounts capitalized under capital leases, are
      stated at cost less accumulated depreciation. Depreciation
      is computed using straight-line methods over the estimated useful lives of
      the
      assets for financial reporting purposes, as follows: three to ten years for
      machinery and equipment, three to seven years for autos and trucks, four to
      seven years for furniture and fixtures, one to fifteen years for leasehold
      improvements and up to 39 years for buildings. Depreciation expense was $13,380,
      $11,992 and $10,926 for the years ended December 31, 2005, 2004 and 2003,
      respectively.








*Internal
      Use Computer Software*





The
      Company accounts for these costs in accordance with the provisions of Statement
      of Position (“SOP”) 98-1, *Accounting
      for the Costs of Computer Software Developed or Obtained for Internal
      Use.* Accordingly, the Company expenses costs incurred in the preliminary stage and,
      thereafter, capitalizes costs incurred in developing or obtaining internal
      use
      software and Web site development. Such capitalized costs are included in
      property, plant and equipment and are amortized over a period of not more than
      five years.








*Foreign
      Currency Translation*





The
      functional currency for the Company’s foreign operations is the applicable local
      currency. Accordingly, all balance sheet accounts have been translated using
      the
      exchange rates in effect at the balance sheet date, and income statement amounts
      have been translated using the average exchange rates for the year. The
      translation adjustments resulting from the changes in exchange rates have been
      reported separately as a component of stockholders' equity. The effects of
      transaction gains and losses, which were reported in income, were not material
      for the periods presented.








*Debt
      Issuance Costs*





Debt
      issuance costs incurred in connection with the Credit Facility (see Note 9
      -
      Credit Facility) are being amortized over the life of the respective debt using
      a method which approximates the interest method. As of December 31, 2005 and
      2004, debt issuance costs of
      $1,981 and $3,353 are reflected net of accumulated amortization of $4,644 and
      $3,404, respectively.








*Goodwill
      and Other Intangible Assets*





In
      accordance with the provisions of Statement of Financial Accounting Standards
      (“SFAS”) No. 142, *Goodwill
      and Other Intangible Assets,* the
      Company tests its goodwill for impairment annually as of September
      30th of each
      year unless events or circumstances would require an immediate review.
      Impairment is tested at a level of reporting referred to as a reporting unit,
      which generally is an operating segment or a component of an operating segment
      as defined in paragraph 10 of SFAS No. 131, *Disclosures
      about Segments of an Enterprise and Related Information* and
      paragraph 30 of SFAS No. 142. In accordance with paragraph 30 of SFAS No. 142,
      certain components of an operating segment with similar economic characteristics
      are aggregated and deemed a single reporting unit. In estimating the fair value
      of its reporting units, the Company utilizes a valuation technique based on
      multiples of projected cash flow, giving consideration to unusual items, cost
      reduction initiatives, new business initiatives and other factors that generally
      would be considered in determining value. Impairments are recorded (i) if the
      fair value is less than the carrying value or (ii) when an individual reporting
      unit is disposed of. Goodwill amounts are generally allocated to the reporting
      units based upon the amounts allocated at the time of their respective
      acquisition, adjusted for significant transfers of business between reporting
      units. The annual impairment tests made by the Company as of September 30,
      2005
      resulted in no adjustment to the carrying value of its goodwill from continuing
      operations. Per the provisions of SFAS No. 142, the Company’s definite lived
      intangible assets, consisting primarily of non-compete agreements, are amortized
      over their useful lives. (See Note 6 - Goodwill and Intangible Assets.)





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            of Contents





*Promissory
      Note Receivable*





As
      part
      of the proceeds from the 2000 sale of ATC
      Distribution Group, Inc. (“Distribution Group”) (see
      Note 15 - Discontinued Operations), the Company received from the
      buyer a senior
      subordinated promissory note, as amended, at a stated rate of 18%, with a
      principal amount of $10,050 and a discounted value of $8,365 at the date of
      issuance (“18% Buyer Note”). The 18% Buyer Note, which was scheduled to mature
      on October 28, 2005, accrued interest at (i) 15% per annum compounded
      semi-annually due and payable in arrears semi-annually on April 27 and October
      27 of each year or until the principal amount was paid in full and (ii) 3%
      per
      annum compounded semi-annually due and payable in full at the earlier of the
      maturity date or the date on which the principal amount was paid in full. On
      May
      12, 2005, the buyer of the Distribution Group elected to redeem the 18% Buyer
      Note and paid the Company $11,568 consisting of (i) the $8,365 discounted value
      of the note, (ii) $2,565 of accrued interest and (iii) $638 of unamortized
      discount which was recorded as a net gain from the early redemption. The $11,568
      is reflected in the statement of cash flows as $8,365 of proceeds from
      redemption of a note receivable within investing activities with the remaining
      $3,203 included in cash provided by operating activities - continuing
      operations. See Note 9 − Credit Facility for a discussion of the use of these
      proceeds. During the years ended December 31, 2005, 2004 and 2003, $1,062,
      $2,581 and $2,156 of interest income was recorded on the 18% Buyer Note,
      respectively.








*Impairment
      of Long-Lived and Intangible Assets*





Long-lived
      assets and identifiable intangibles are reviewed for impairment whenever events
      or changes in circumstances indicate that the carrying amount of the related
      asset may not be recoverable. Recoverability of assets to be held and used
      is
      measured by a comparison of the carrying amount of the asset to future
      undiscounted cash flows expected to be generated by the asset. If the asset
      is
      determined to be impaired, the impairment recognized is measured by the amount
      by which the carrying value of the asset exceeds its fair value. For a
      discussion of impairments to property, plant and equipment recorded by the
      Company, see Note 15 − Discontinued Operations and Note 18 − Exit, Disposal,
      Certain Severance and Other Charges.








*Concentration
      of Credit Risk*





Financial
      instruments that potentially subject the Company to a significant concentration
      of credit risk consist of accounts receivable from its customers including
      Cingular, Ford, Honda and DaimlerChrysler, which are located throughout the
      United States and, to a lesser extent, the United Kingdom. The estimated fair
      value of these financial instruments approximate their carrying values as of
      their respective balance sheet dates. The
      Company performs ongoing credit evaluation of its customers and maintains
      sufficient allowances for potential credit losses. The company evaluates the
      collectibility of its accounts receivable based on the length of time the
      receivable is past due and the anticipated future write-off based on historic
      experience. Accounts receivable balances are written off against allowance
      for
      doubtful accounts after a final determination of uncollectibility has been
      made. The
      credit risk associated with the Company's accounts receivable is mitigated
      by
      its credit evaluation process, although collateral is not required. The Company
      grants credit to certain customers who meet pre-established credit requirements.





Accounts
      receivable is recorded at the time of revenue recognition and is
      reflected net of an allowance for doubtful accounts of $1,208 and $839 at
      December 31, 2005 and 2004, respectively.








*Revenue
      Recognition*





The
      Company recognizes revenues when all of the following conditions are satisfied:
      (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or
      determinable; (iii) collectibility is reasonably assured; and (iv) delivery
      has
      occurred or services have been rendered. In
      addition, the Company includes the reimbursement of certain costs by its
      customers separately as revenue and expense in its Consolidated Statements
      of
      Income.





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*Warranty
      Cost Recognition*





The
      Company accrues for estimated warranty costs as sales are made.








*Costs
      Associated with Exit or Disposal Activities*





In
      accordance with the provisions of SFAS No. 146, *Accounting
      for Costs Associated with Exit or Disposal Activities,* the
      Company recognizes a liability for costs associated with exit or disposal
      activities in the period in which the liability is incurred. The Company
      classifies the costs associated with exit or disposal activities as a part
      of
      Exit, Disposal, Certain Severance and Other Charges (Credits) on its
      Consolidated Statements of Income. (See Note 18 - Exit,
      Disposal, Certain Severance and Other Charges.)








*Stock-
      Based Compensation*





The
      Company applied the intrinsic value method under the provisions of Accounting
      Principles Board (“APB”) Opinion No. 25 , *Accounting
      for Stock Issued to Employees* , and
      related interpretations in accounting for the stock options granted to its
      employees and directors for all periods presented. Accordingly,
      employee and director compensation expense is recognized only for those options
      whose exercise price is less than the market value of the Company’s common stock
      at the measurement date.





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model assuming no expected dividends and the
      following weighted-average assumptions:





For
                the years ended December 31,2005
            
            
            2004
            
            
            2003Expected
                volatility
            
            
            39.39
            %
            
            65.71
            %
            
            78.77
            %Risk-free
                interest rates
            
            
            3.69
            %
            
            3.05
            %
            
            2.95
            %Expected
                lives
            
            
            2.5
                years
            
            
            3.7
                years
            
            
            4.3
                years





The
      Company also grants restricted stock awards of shares of its common stock to
      certain directors and employees in the form of unvested stock. These awards
      are
      recorded at the market value of the Company’s common stock on the date of
      issuance as unearned compensation and amortized ratably as expense over the
      applicable vesting period. During the years ended December 31, 2005, 2004 and
      2003, the Company recognized compensation expense of $1,065 ($670 net of income
      taxes), $1,522 ($937 net of income taxes) and $13 ($8 net of income taxes),
      respectively, related to the amortization of unearned compensation related
      to
      incentive stock awards.





During
      2005, the Company granted 406,125 stock options to certain directors and
      employees at an exercise price equal to the market price of the Company’s common
      stock on the grant date. These options became fully exercisable after a six
      month vesting period. During 2005, the Company recognized pro forma compensation
      expense related to this grant of $1,128, net of tax. Also during 2005, the
      Company accelerated the vesting of 74,672 stock options whose exercise prices
      were above the Company’s closing stock price on the date the vesting of the
      options was accelerated. As a result, included in pro forma compensation expense
      for 2005, is a charge of $376, net of tax, resulting from the accelerated
      vesting of such options. The accelerated vesting of these stock options is
      intended to eliminate a possible compensation expense associated with these
      options in future periods due to the adoption of SFAS No. 123R, *Share-Based Payment.*





During
      2004, in accordance with APB No. 25 and related interpretations, the Company
      recorded compensation expense of $3,323 ($2,044 net of income taxes) from the
      effective modification of stock options held by the Company’s former Chief
      Executive Officer and former Chief Financial Officer.





51
 Table
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Had
      compensation cost for the Company’s Plans (see Note 11 - Stock - Based
      Awards) been determined in accordance with SFAS No. 123, *Accounting
      for Stock-Based Compensation* and
      recognized as compensation expense on a ratable basis over the applicable
      vesting period, the Company’s reported income from continuing operations and
      earnings per share would have been adjusted to the pro forma amounts indicated
      below:


For
                the years ended December 31,2005
            
            
            2004
            
            
            2003Income
                from continuing operations as reported
            
            $
            31,879
            
            $
            26,795
            
            $
            18,872Stock-based
                employee compensation costs included in the determination of income
                from
                continuing operations as reported, net of income taxes
            
            
            670
            
            
            2,981
            
            
            8Stock-based
                employee compensation costs that would have been included in the
                determination of income from continuing operations if the fair value
                based
                method had been applied to all awards, net of income taxes
            
            
            (3,392
            )
            
            (4,459
            )
            
            (1,469
            )Pro
                forma income from continuing operations as if the fair value based
                method
                had been applied to all awards
            
            $
            29,157
            
            $
            25,317
            
            $
            17,411Per
                common share-basic:Income
                from continuing operations as reported
            
            $
            1.49
            
            $
            1.27
            
            $
            0.78Pro
                forma as if the fair value based method had been applied to all
                awards
            
            $
            1.37
            
            $
            1.20
            
            $
            0.72Per
                common share-diluted:Income
                from continuing operations as reported
            
            $
            1.48
            
            $
            1.25
            
            $
            0.77Pro
                forma as if the fair value based method had been applied to all
                awards
            
            $
            1.35
            
            $
            1.18
            
            $
            0.71








*New
      Accounting Standards*





In
      November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      151, *Inventory Costs - An Amendment of ARB No. 43, Chapter 4.* SFAS No.
      151 clarifies that abnormal amounts of idle facility expense, freight, handling
      costs, and wasted materials (spoilage) should be recognized as current-period
      charges. In addition, this Statement requires that allocation of fixed
      production overheads to the costs of conversion be based on the normal capacity
      of the production facilities. As allowed under SFAS No. 151, the Company will
      adopt the provisions of this standard for inventory costs incurred after
      December 31, 2005. The initial adoption of SFAS No. 151 is not expected to
      have
      a material effect on the Company’s results of operations or its financial
      position.





In
      December 2004, the FASB issued SFAS No. 123R, *Share-Based Payment.* SFAS No.
      123R requires a public entity to measure the cost of employee services received
      in exchange for an award of equity instruments based on the grant-date fair
      value of the award and recognize this cost in the statements of income over
      the
      period during which the employee is required to provide such services. On April
      14, 2005, the U.S. Securities and Exchange Commission (“SEC”) adopted a rule
      that amended the compliance dates of SFAS No. 123R, extending the effective
      date
      from the first interim period after June 15, 2005 to fiscal years beginning
      after June 15, 2005. As a result, the Company will apply the modified
      prospective application of this statement with an effective date of January
      1,
      2006. Under the modified prospective application, SFAS No. 123R, which provides
      certain changes to the method for valuing stock-based compensation among other
      changes, applies to new awards and to awards that are outstanding on the
      effective date and are subsequently modified or cancelled. Compensation expense
      for outstanding awards for which the requisite service has not been rendered
      as
      of the effective date, will be recognized over the remaining service period
      using the compensation cost calculated for pro forma disclosure purposes under
      SFAS No. 123, *Accounting for Stock-Based Compensation* .
      For
      stock options granted as of December 31, 2005, the Company expects to record,
      on
      a pre-tax basis, approximately $700 of compensation expense during 2006. The
      Company is in the process of finalizing how the





52
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new
      method of valuing stock-based compensation as prescribed in SFAS No. 123R will
      be applied to valuing stock-based awards granted after the effective date,
      however the Company expects to record an additional expense of approximately
      $800, on a pre-tax basis, for stock options it expects to grant during 2006.





In
      March
      2005, the SEC released Staff Accounting Bulletin (“SAB”) No. 107, *Share-Based
      Payment* .
      The
      interpretations in SAB No. 107 express views of the SEC staff regarding the
      interaction between SFAS No. 123R and certain SEC rules and regulations, and
      provides the staff’s views regarding the valuation of share-based payment
      arrangements for public companies. This SAB provides guidance to assist with
      the
      initial implementation of SFAS No. 123R and includes interpretive guidance
      related to valuation methods (including assumptions such as expected volatility
      and expected term), the classification of compensation expense, non-GAAP
      financial measures, first-time adoption of SFAS No. 123R in an interim period,
      capitalization of compensation cost related to share-based payment arrangements,
      the accounting for income tax effects of share-based payment arrangements upon
      adoption of SFAS No. 123R, the modification of employee share options prior
      to
      adoption of SFAS No. 123R and disclosures in Management’s Discussion and
      Analysis subsequent to its adoption. SAB No. 107 requires that stock-based
      compensation be classified in the same expense lines as cash compensation is
      reported for the same employee. The Company will apply the principles of SAB
      No.
      107 in conjunction with its adoption of SFAS No. 123R.





In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections* ,
      effective with fiscal years beginning after December 15, 2005. This statement
      replaces APB Opinion No. 20, *Accounting
      Changes* and SFAS
      No. 3, *Reporting
      Accounting Changes in Interim Financial Statements* ,
      and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. Under this pronouncement, changes in accounting principle
      are required to be retrospectively applied to prior financial statements, unless
      it is impracticable to determine either the period-specific effects or the
      cumulative effect of the change to all prior periods presented. The statement
      defines retrospective application as the application of a different accounting
      principle to prior accounting periods as if that principle had always been
      used
      or as the adjustment of previously issued financial statements to reflect a
      change in the reporting entity. This statement addresses restatement of
      previously issued financial statements to reflect the correction of an error.
      This statement requires that the retrospective application of a change in
      accounting principle be limited to the direct effects of the change. This
      statement also requires that a change in depreciation, amortization, or
      depletion method for long-lived, non-financial assets be accounted for as a
      change in accounting estimate affected by a change in accounting principle.
      The
      Company does not believe that adoption of SFAS No. 154 will have a material
      effect on its results of operations or its financial position.








*Reclassifications*




Certain
      prior-year amounts have been reclassified to conform to the 2005
      presentation.








**Note
      3.**  **Related-Party
      Transactions**





During March
      2005, partnerships controlled by Aurora Capital Group (“Aurora Capital”), which
      partnerships were among the Company’s largest stockholders, sold all of their
      shares of the Company’s common stock as part of a public offering pursuant to a
      shelf registration statement previously filed by the Company. The Company
      received no proceeds from the sale of the shares. As a result of the sale,
      the
      management services agreement between the Company and Aurora Capital terminated
      and as such, the Company will no longer be obligated to pay management fees
      to
      Aurora Capital. During 2005, 2004 and 2003 the Company paid management fees
      to
      Aurora Capital of $32, $348 and $302, respectively. The Company also reimbursed
      Aurora Capital for out-of-pocket expenses incurred in connection with providing
      management services. Aurora Capital was also entitled to various additional
      fees
      depending on the Company's profitability or certain significant corporate
      transactions. During 2003, the Company was charged $28 in fees for investment
      banking services provided in connection with the acquisition of A-T.A.T., Inc.
      No such amounts were charged to the Company in 2005 or 2004.





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**Note
      4.**  **Inventories**





Inventories
      consist of the following:





December 31,2005
            
            
            2004Raw
                materials, including core inventories
            
            $
            51,907
            
            $
            67,999Work-in-process
            
            
            1,594
            
            
            1,139Finished
                goods
            
            
            11,650
            
            
            11,497$
            65,151
            
            $
            80,635








**Note
      5.**  **Property,
      Plant and Equipment**





Property,
      plant and equipment are summarized as follows:





December 31,2005
            
            
            2004Land
            
            $
            2,433
            
            $
            2,508Buildings
            
            
            12,684
            
            
            12,794Machinery
                and equipment
            
            
            91,849
            
            
            83,388Autos
                and trucks
            
            
            2,112
            
            
            1,928Furniture
                and fixtures
            
            
            2,555
            
            
            2,454Leasehold
                improvements
            
            
            14,396
            
            
            10,183Construction
                in process
            
            
            1,108
            
            
            1,545127,137
            
            
            114,800Less:
                Accumulated depreciation and amortization
            
            
            (72,122
            )
            
            (61,965
            )$
            55,015
            
            $
            52,835








**Note
      6.**  **Goodwill
      and Intangible Assets**





T he
      change
      in the carrying amount of goodwill by reportable segment is summarized as
      follows:





Drivetrain
                Remanufacturing
            
            
            Logistics
            
            
            Other
                /
              Unallocated
            
            
            ConsolidatedBalance
                at December 31, 2003
            
            $
            127,357
            
            $
            18,973
            
            $
            1,520
            
            $
            147,850Effect
                of exchange rate changes from the translation of U.K.
                subsidiary
            
            
            739
            
            
            −
            
            
            −
            
            
            739Balance
                at December 31, 2004
            
            
            128,096
            
            
            18,973
            
            
            1,520
            
            
            148,589Effect
                of exchange rate changes from the translation of U.K.
                subsidiary
            
            
            (1,028
            )
            
            −
            
            
            −
            
            
            (1,028
            )Balance
                at December 31, 2005
            
            $
            127,068
            
            $
            18,973
            
            $
            1,520
            
            $
            147,561





The
      Company’s intangible assets primarily consisting of non-compete agreements being
      amortized over their estimated useful lives are summarized as follows:





December 31,2005
            
            2004Intangible
                assets
            
            $
            1,261
            
            $
            1,260Less:
                Accumulated amortization
            
            
            (969
            )
            
            (854
            )$
            292
            
            $
            406








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Estimated
      amortization expense for the five succeeding fiscal years is as
      follows:





Estimated
              Amortization
              Expense2006
            
            $
            1252007
            
            
            1252008
            
            
            222009
            
            
            12010
            
            
            1$
            274








**Note
      7.** **Accrued
      Expenses**





Accrued
      expenses are summarized as follows:





December 31,2005
            
            2004Payroll,
                employee benefits and related costs
            
            $
            14,576
            
            $
            10,913Customer
                related allowances, discounts and other credits
            
            
            1,003
            
            
            4,459Warranty
            
            
            3,289
            
            
            3,848Exit,
                disposal, certain severance and other charges
            
            
            343
            
            
            2,301Interest
                payable
            
            
            840
            
            
            1,202Other
            
            
            6,048
            
            
            5,000$
            26,099
            
            $
            27,723








**Note
      8.**  **Warranty
      Liability**





The
      Company offers various product warranties for (i) transmissions and engines
      sold
      to its customers in the Drivetrain Remanufacturing segment and (ii) engines
      and
      transmissions sold to its independent aftermarket customers. The specific terms
      and conditions of the warranties vary depending upon the customer and the
      product sold. Factors that affect the Company’s warranty liability include
      number of products sold, historical and anticipated rates of warranty claims
      and
      cost per claim. The Company accrues for estimated warranty costs as sales are
      made and periodically assesses the adequacy of its recorded warranty liability,
      included in accrued expenses, and adjusts the amount as necessary.





Changes
      to the Company’s warranty liability of continuing operations during the years
      ended December 31, 2004 and 2005 are summarized as follows:





Balance
                at December 31, 2003
            
            $
            4,622Warranties
                issued
            
            
            5,575Claims
                paid / settlements
            
            
            (6,213
            )Changes
                in liability for pre-existing warranties
            
            
            (136
            )Balance
                at December 31, 2004
            
            
            3,848Warranties
                issued
            
            
            3,764Claims
                paid / settlements
            
            
            (4,193
            )Changes
                in liability for pre-existing warranties
            
            
            (130
            )Balance
                at December 31, 2005
            
            $
            3,289








55
 Table
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**Note
      9.** **Credit
      Facility**





On
      February 8, 2002, the Company executed a credit agreement and a related
      security agreement (the “Credit Facility”). The Credit Facility provides for (i)
      a $75,000, five year term loan (the “A-Loan”), with principal payable in
      quarterly installments in increasing amounts over the five-year period, (ii)
      a
      $95,000, six year, two-tranche term loan (the “B-Loans”), with principal payable
      in quarterly installments over the six-year period, with 99% of the outstanding
      balance payable in the sixth year and an annual excess cash flow sweep payable
      as defined in the credit agreement, and (iii) a $50,000 five year revolving
      credit facility ($40,000 as amended in 2003) (the “Revolver”). The Credit
      Facility also provides for the addition of one or more optional term loans
      of up
      to $100,000 in the aggregate (the “C-Loans”), subject to certain conditions
      (including the receipt from one or more lenders of the additional commitments
      that may be requested) and achievement of certain financial ratios.





At
      the
      Company’s election, amounts advanced under the Credit Facility will bear
      interest at either (i) the Alternate Base Rate (“ABR”) plus a specified margin
      or (ii) the Eurodollar Rate plus a specified margin. The ABR is equal to the
      highest of (a) the lender’s prime rate, (b) the lender’s base CD rate plus 1.00%
      or (c) the federal funds effective rate plus 0.50%. The applicable margins
      for
      both ABR and Eurodollar Rate loans are subject to quarterly adjustments based
      on
      the Company’s leverage ratio as of the end of the four fiscal quarters then
      completed. As of December 31, 2005, the margins for the A-Loan and Revolver
      were
      1.00% for ABR loans and 2.00% for Eurodollar Rate loans. For the B-Loans, the
      margins were 1.75% for ABR loans and 2.75% for Eurodollar Rate loans as of
      December 31, 2005. The interest rates for the optional C-Loans will be
      determined at the time such loans are provided. Additionally, the Company is
      required to pay quarterly in arrears a commitment fee equal to 0.50% per annum
      of the average daily unused portion of the Credit Facility during such quarter.
      The Company must also reimburse the lenders for certain legal and other costs
      of
      the lenders, and pay fees on outstanding letters of credit at a rate per annum
      equal to the applicable margin then in effect for advances bearing interest
      at
      the Eurodollar Rate. The average interest rate on the Credit Facility for the
      years ended December 31, 2005, 2004 and 2003 was 6.37%, 4.72% and 4.48%,
      respectively.





Amounts
      advanced under the Credit Facility are guaranteed by all of the Company’s
      domestic subsidiaries and secured by substantially all of the Company’s assets
      and its subsidiaries' assets. The Credit Facility contains several covenants,
      including ones that require the Company to maintain specified levels of net
      worth, leverage and interest coverage and others that limit its ability to
      incur
      indebtedness, make capital expenditures, create liens, engage in mergers and
      consolidations, make restricted payments (including dividends), sell assets,
      make investments, enter new businesses and engage in transactions with the
      Company’s affiliates and affiliates of its subsidiaries. The Company is in
      compliance with all debt covenants at December 31, 2005.





During
      2005, the Company received proceeds of $11,568 from the early redemption of
      the
      18% Buyer Note (see Note 2 - Summary of Significant Accounting Policies -
      Promissory Note Receivable). The Company used these proceeds primarily to make
      optional prepayments on the A-Loan and B-Loan of $9,762 and $1,738,
      respectively.





The
      following table summarizes the balances outstanding under the Credit
      Facility:





December
                31, 2005
            
            December
                31, 2004A-Loan
            
            $
            10,273
            
            $
            26,883B-Loans
            
            
            80,412
            
            
            82,990Revolver
            
            
            −
            
            
            −90,685
            
            
            109,873Less
                current portion of credit facility
            
            
            (10,062
            )
            
            (10,629
            )Total
                long-term portion of credit facility
            
            $
            80,623
            
            $
            99,244








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In
      addition, the Company had outstanding letters of credit issued against the
      Credit Facility totaling $2,665 and $3,485 as of December 31, 2005 and 2004,
      respectively. As of December 31, 2005, the Company’s borrowing capacity under
      the Revolver was $37,335.





Annual
      maturities of the Credit Facility are as follows as of December 31,
      2005:





2006
            
            $
            10,0622007
            
            
            60,7812008
            
            
            19,842$
            90,685





As
      of
      December 31, 2005 and 2004, the carrying amount of the Company’s long-term debt,
      including the current portion, approximates its fair value.








**Note
      10.** **Income
      Taxes**





Income
      tax expense (benefit) from continuing operations consists of the
      following:





For
                the years endedDecember
                31,2005
            
            
            2004
            
            
            2003Current:Federal
            
            $
            6,367
            
            $
            5,200
            
            $
            (594
            )State
            
            
            434
            
            
            (57
            )
            
            2Foreign
            
            
            206
            
            
            519
            
            
            210Total
                current
            
            
            7,007
            
            
            5,662
            
            
            (382
            )Deferred:Federal
            
            
            8,737
            
            
            7,835
            
            
            9,976State
            
            
            121
            
            
            1,297
            
            
            1,041Foreign
            
            
            (154
            )
            
            161
            
            
            511Total
                deferred
            
            
            8,704
            
            
            9,293
            
            
            11,528$
            15,711
            
            $
            14,955
            
            $
            11,146








Income
      from continuing operations before income taxes is summarized as
      follows:





For
                the years endedDecember
                31,2005
            
            
            2004
            
            
            2003Domestic
            
            $
            47,586
            
            $
            39,631
            
            $
            27,344Foreign
            
            
            4
            
            
            2,119
            
            
            2,674Total
            
            $
            47,590
            
            $
            41,750
            
            $
            30,018








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 Table
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The
      reconciliation of income tax expense computed at the U.S. federal statutory
      tax
      rates to income tax expense from continuing operations is as
      follows:





For
                the years ended December 31,2005
            
            2004
            
            2003Amount
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentTax
                at U.S. statutory rates
            
            $
            16,657
            
            
            35.0
            %
            $
            14,612
            
            
            35.0
            %
            $
            10,506
            
            
            35.0
            %State
                income taxes, net of federal tax benefit
            
            
            578
            
            
            1.2
            
            
            921
            
            
            2.2
            
            
            70
            
            
            0.2Foreign
                income taxes
            
            
            −
            
            
            −
            
            
            (106
            )
            
            (0.3
            )
            
            (134
            )
            
            (0.5
            )Increase
                (decrease) in valuation allowance
            
            
            −
            
            
            −
            
            
            (8
            )
            
            −
            
            
            893
            
            
            3.0Nondeductible
                expenses
            
            
            95
            
            
            0.2
            
            
            104
            
            
            0.3
            
            
            93
            
            
            0.3Federal
                and state credits
            
            
            (1,558
            )
            
            (3.3
            )
            
            −
            
            
            −
            
            
            −
            
            
            −Federal
                and state impact of IRS audit resolution
            
            
            −
            
            
            −
            
            
            (441
            )
            
            (1.1
            )
            
            −
            
            
            −Other
            
            
            (61
            )
            
            (0.1
            )
            
            (127
            )
            
            (0.3
            )
            
            (282
            )
            
            (0.9
            )$
            15,711
            
            
            33.0
            %
            $
            14,955
            
            
            35.8
            %
            $
            11,146
            
            
            37.1
            %








Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of the
      Company's deferred tax assets and liabilities are as follows:





December
                31,2005
            
            
            2004Deferred
                tax assets:Inventory
                obsolescence reserve
            
            $
            2,358
            
            $
            2,362Product
                warranty accruals
            
            
            1,114
            
            
            1,379Exit,
                disposal, certain severance and other charges accruals
            
            
            187
            
            
            1,281Other
                nondeductible accruals
            
            
            2,155
            
            
            2,437Credit
                carryforwards
            
            
            2,431
            
            
            1,059Net
                operating loss carryforwards
            
            
            18,871
            
            
            24,021Other
                deferred items
            
            
            −
            
            
            4,065Total
                deferred tax assets
            
            
            27,116
            
            
            36,604Deferred
                tax liabilities:Amortization
                of intangible assets
            
            
            23,926
            
            
            20,734Property,
                plant and equipment
            
            
            3,103
            
            
            4,690Other
                deferred items
            
            
            289
            
            
            −Total
                deferred tax liabilities
            
            
            27,318
            
            
            25,424Valuation
                allowance
            
            
            (11,759
            )
            
            (13,881
            )Net
                deferred tax (liability) asset
            
            $
            (11,961
            )
            $
            (2,701
            )





As
      of
      December 31, 2005, the Company had federal operating loss carryforwards of
      approximately $20,001 ($16,431 expiring in 2020 with the remainder expiring
      in
      2024) and state loss carryforwards attributable to states in which the Company’s
      primary operations are located of approximately $7,251 (expiring in varying
      amounts from 2009 to 2025). These loss carryforwards are available as an offset
      to the future taxable income of the Company and its subsidiaries. In addition,
      the Company has state loss carryforwards attributable to states in which the
      Company no longer conducts business that are subject to a full valuation
      allowance.





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The
      Company also has Alternative Minimum Tax (“AMT”) credit carryforwards of
      approximately $630 available to offset regular income tax payable in future
      years. During 2005, the Company completed a study of research and development
      credits and recorded a tax benefit of $1,365 available to offset federal tax
      payable in future years. Also during 2005, the Company recorded a tax benefit
      of
      $193 related to an increase in state investment credits. The Company, through
      its subsidiary in the U.K., has surplus Advance Corporate Tax (“ACT”) of
      approximately $384 available as a direct offset to future U.K. tax liability.
      The Company’s AMT credit and surplus ACT can be carried over
      indefinitely.





A
      valuation allowance has been established for certain federal tax benefits due
      to
      limitations in the carryforward period. Also, a valuation allowance has been
      established for the tax benefits associated with certain state loss
      carryforwards as realization is not deemed likely due to limitations imposed
      by
      certain states on the Company’s ability to utilize these benefits. A valuation
      allowance has also been established for certain foreign tax benefits due to
      similar limitations imposed by the foreign tax jurisdiction. The Company
      believes that, consistent with accounting principles generally accepted in
      the
      United States, it is more likely than not that the tax benefits associated
      with
      the balance of loss carryforwards and other deferred tax assets will be realized
      through future taxable earnings or alternative tax strategies.





During
      2005, the Company’s income tax valuation allowance decreased by $2,122 to
      $11,759 from $13,881 due to (i) the removal of a valuation allowance and the
      related deferred tax asset of $2,218 on its capital loss carryforward which
      expired unused on December 31, 2005, (ii) an additional valuation allowance
      of
      $144 placed on state net operating loss carryforwards due to a change in
      business structure which left losses in states in which the Company no longer
      conducts business and (iii) a reduction of $48 to reflect changes to the
      valuation of foreign carryovers due to exchange rate fluctuation .





As
      of
      December 31, 2005, there are approximately $3,765 of accumulated unremitted
      earnings from the Company’s U.K. subsidiary with respect to which deferred tax
      has not been provided as the undistributed earnings of the U.K. subsidiary
      are
      indefinitely reinvested. On October 22, 2004, the American Jobs Creation Act
      (P.L. No. 108-357) was enacted, including a new provision under §965 allowing
      for a one-time 85% dividends received deduction on repatriated earnings
      Consistent with its assertions under APB Opinion No. 23, *Accounting
      for Income Taxes - Special Areas* ,
      management has elected not to repatriate earnings under this provision.








**Note
      11.** **Stock-Based
      Awards**





The
      Company provides stock options and other incentive stock awards (“Stock Awards”)
      to employees, non-employee directors and independent contractors under its
      2004
      Stock Incentive Plan (the “2004 Plan”), its 2002 Stock Incentive Plan (the “2002
      Plan”), its 2000 Stock Incentive Plan (the “2000 Plan”), its 1998 Stock
      Incentive Plan (the “1998 Plan”) and its 1996 Stock Incentive Plan, which
      expired on July 29, 2004, (the “1996 Plan”) (collectively the “Plans”). The
      Plans provide for granting of non-qualified and incentive stock option awards.
      Stock options under the Plans are generally granted with an exercise price
      equal
      to the market price of the Company’s common stock on the date of grant and
      typically vest over a three- to five-year period of time, as determined by
      the
      Board of Directors or the Compensation and Nominating Committee of the Board
      of
      Directors (see Note 2 - Summary of Significant Accounting
      Policies-Stock-Based Compensation for a discussion of stock options granted
      during 2005 with a six month vesting period). Options under the Plans expire
      10
      years from the date of grant. The 2004, 2002, 2000 and 1998 plans authorize
      the
      issuance of 1,000,000, 1,000,000, 750,000 and 1,200,000 shares of the Company’s
      common stock, respectively. Shares available for grant under the Plans in the
      aggregate were 346,559, 746,248 and 300,799 as of December 31, 2005, 2004
      and 2003, respectively.








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 Table
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A
      summary
      of the Plans stock option activities are presented below:





2005
            
            2004
            
            2003Shares
            
            
            Shares
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Shares
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Shares
            
            
            Weighted-
              Average
              Exercise
              PriceOutstanding
                at beginning of year
            
            
            1,882,895
            
            $
            16.95
            
            
            2,182,454
            
            $
            14.34
            
            
            2,011,281
            
            $
            14.97Granted
                at market price
            
            
            418,125
            
            $
            15.90
            
            
            637,000
            
            $
            14.96
            
            
            300,000
            
            $
            9.85Exercised
            
            
            (423,382
            )
            $
            10.09
            
            
            (708,063
            )
            $
            8.14
            
            
            (8,333
            )
            $
            9.67Forfeited/expired
            
            
            (79,499
            )
            $
            14.47
            
            
            (228,496
            )
            $
            13.78
            
            
            (120,494
            )
            $
            13.93Outstanding
                at end of year
            
            
            1,798,139
            
            $
            18.43
            
            
            1,882,895
            
            $
            16.95
            
            
            2,182,454
            
            $
            14.34Exercisable
                at end of year
            
            
            1,372,838
            
            $
            19.92
            
            
            939,876
            
            $
            19.27
            
            
            1,311,295
            
            $
            16.01Weighted-average
                fair value of options granted during the year
            
            
            
            
            $
            4.50
            
            
            
            
            $
            7.49
            
            
            
            
            $
            6.02





The
      following summarizes information about options outstanding as of December 31,
      2005:





Options
                Outstanding
            
            Options
                ExercisableRange
                ofExercisePrices
            
            Shares
            
            Average
              Remaining
              Contractual
              Life
            
            Weighted-
              Average
              Exercise
              Prices
            
            Shares
            
            Weighted-
              Average
              Exercise
              Prices$4.56-$7.00
            
            
            59,497
            
            
            5.3
                years
            
            $
            5.04
            
            
            36,499
            
            $
            5.10$7.01-$12.00
            
            
            149,330
            
            
            5.8
                years
            
            $
            9.94
            
            
            103,664
            
            $
            10.04$12.01-$15.00
            
            
            527,321
            
            
            8.1
                years
            
            $
            14.57
            
            
            179,684
            
            $
            14.51$15.01-$20.00
            
            
            484,991
            
            
            8.7
                years
            
            $
            16.45
            
            
            475,991
            
            $
            16.42$20.01-$30.00
            
            
            577,000
            
            
            5.8
                years
            
            $
            27.21
            
            
            577,000
            
            $
            27.211,798,139
            
            
            7.3
                years
            
            $
            18.43
            
            
            1,372,838
            
            $
            19.92





During
      the years ended December 31, 2005, 2004 and 2003, the Company issued 93,125
      shares of restricted stock at a fair value of $15.85 per share, 141,500 shares
      of restricted stock at a weighted average fair value of $14.41 per share and
      20,000 shares of restricted stock at a fair value of $12.20 per share,
      respectively, under the Plans as compensation for future services. Unearned
      compensation of $1,476, $2,040 and $244 was recorded for these awards during
      the
      years ended December 31, 2005, 2004 and 2003, respectively, based upon the
      market price of the Company’s stock on the date of grant. These shares vest over
      a period of up to three years from the date of grant.








**Note
      12.** **Repurchases
      of Common Stock**





During
      2005, certain officers and employees of the Company delivered to the Company
      an
      aggregate of 19,670
      shares of the Company’s common stock in payment of $320 of withholding tax
      obligations arising from the vesting of restricted stock awards. Per the stock
      incentive plans under which the stock awards were granted, (i) the withholding
      tax obligation was based upon the fair market value of the Company’s common
      stock on the vesting date and (ii) the shares returned to the Company in
      satisfaction of the withholding tax obligation are returned to their respective
      plan and available for future grant.











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**Note
      13.** **Earnings
      Per Share**





The
      following table sets forth the computation of basic and diluted earnings per
      share from continuing operations:





For
                the years endedDecember
                31,2005
            
            2004
            
            2003Numerator:Income
                from continuing operations
            
            $
            31,879
            
            $
            26,795
            
            $
            18,872Denominator:Weighted-average
                common shares outstanding
            
            
            21,351,829
            
            
            21,096,921
            
            
            24,213,185Common
                stock equivalents
            
            
            227,251
            
            
            314,341
            
            
            272,451Denominator
                for diluted earnings per common share
            
            
            21,579,080
            
            
            21,411,262
            
            
            24,485,636Per
                common share-basic
            
            $
            1.49
            
            $
            1.27
            
            $
            0.78Per
                common share-diluted
            
            $
            1.48
            
            $
            1.25
            
            $
            0.77








**Note
      14.** **Employee
      Retirement Plans**





The
      Company’s defined contribution plan provides substantially all U.S. salaried and
      hourly employees of the Company an opportunity to accumulate personal funds
      for
      their retirement, subject to minimum duration of employment requirements. As
      determined by the provision of the plan, contributions are made on a before-tax
      basis and the Company matches a portion of the employees' basic voluntary
      contributions. Company matching contributions to defined contribution plans
      were
      approximately $1,190, $1,158 and $1,202 for the years ended December 31, 2005,
      2004, and 2003, respectively.





During
      2005, the Company adopted a nonqualified deferred compensation plan for certain
      employees and directors. Under the terms of this plan, funds are withheld from
      the participant’s pre-tax earnings, a portion of which are matched by the
      Company, and are placed into a trust whereby
      the use of the trust assets by the Company is restricted to future distributions
      to plan participants. The assets of the trust primarily consist of cash and
      equivalents and debt and equity securities and are available to satisfy claims
      of the Company’s general creditors in the event of its bankruptcy. At December
      31, 2005, the trust’s assets, included in other assets were $347 and the
      corresponding compensation liability, included in the long term portion of
      deferred compensation was $346.





In
      addition, the Company’s subsidiary located in the U.K. provides a voluntary
      retirement benefits plan for its employees. Company matching contributions
      to
      this plan were approximately $287, $318 and $249 for the years ended December
      31, 2005, 2004 and 2003, respectively.








**Note
      15.** **Discontinued
      Operations**





During
      2004, General Motors resourced its remanufactured transmission program from
      the
      Company’s facility located in Gastonia, North Carolina, and correspondingly, the
      Company closed this facility. Upon the closure of the facility in the fourth
      quarter of 2004, the operations of this operating unit within the Company’s
      Drivetrain Remanufacturing segment were reclassified as discontinued operations.
      In connection with the Gastonia facility closure, the Company recorded a pre-tax
      charge of $28,379 during the third quarter of 2004 and an additional charge
      of
      $394 during the fourth quarter of 2004. In addition, at the end of 2004, the
      Company transferred property, plant and equipment with an estimated book value
      of $1,896 from its Gastonia facility to other Drivetrain Remanufacturing segment
      facilities located in the United States. During 2005, the Company (i) completed
      its review and assessment of the equipment transferred from its Gastonia
      facility and revised its impairment estimate made on December 31, 2004 and
      recorded an additional charge of $1,012 and (ii) recorded an additional charge
      of $131 primarily related to workers compensation claims from this discontinued
      operation.





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In
      October 2000, the Company sold the Distribution Group (a distributor of
      remanufactured transmissions and related drivetrain components to independent
      aftermarket customers now known as Axiom Automotive Technologies), classified
      the results of this business as part of discontinued operations and recorded
      a
      pre-tax loss of $141,429 from the sale of this business. During 2004, the
      Company recorded a loss of $794 related to the Distribution Group including
      (i)
      a charge of $2,218 for a valuation allowance related to the expected expiration
      of a capital loss carryforward, (ii) a non-cash tax benefit of $1,368 based
      upon
      the resolution of prior year income tax issues with respect to the tax basis
      of
      the Distribution Group and (iii) income of $56 (net of income taxes of $37)
      based upon updated information regarding obligations and other costs related
      to
      the sale of the Distribution Group. During 2005, the Company recorded a charge
      of $144 for an adjustment to the valuation allowance related to the expected
      expiration of a capital loss carryforward.





Details
      of the gain (loss) recorded from discontinued operations are as
      follows:





For
                the years ended December 31,2005
            
            2004
            
            2003Disposal
                of Gastonia Operations:Sales
            
            $
            −
            
            $
            19,992
            
            $
            27,355Impairment
                of goodwill
            
            
            −
            
            
            22,114
            
            
            −Exit,
                disposal, certain severance and other charges
            
            
            1,012
            
            
            6,906
            
            
            154Other
                costs and expenses
            
            
            131
            
            
            21,788
            
            
            25,065Income
                (loss) before income taxes
            
            
            (1,143
            )
            
            (30,816
            )
            
            2,136Income
                tax expense (benefit)
            
            
            (416
            )
            
            (10,591
            )
            
            497(727
            )
            
            (20,225
            )
            
            1,639Sale
                of Distribution Group:Estimated
                gain (loss) from sale
            
            
            −
            
            
            93
            
            
            −Income
                tax (expense) benefit
            
            
            −
            
            
            (37
            )
            
            −Adjustment
                to valuation allowance on capital losses
            
            
            (144
            )
            
            (2,218
            )
            
            −Adjustment
                to income tax benefit
            
            
            −
            
            
            1,368
            
            
            −(144
            )
            
            (794
            )
            
            −Gain
                (loss) from discontinued operations, net of income taxes
            
            $
            (871
            )
            $
            (21,019
            )
            $
            1,639







Details
      of assets and liabilities of discontinued operations are as
      follows:


December 31,2005
            
            2004Disposal
                of Gastonia Operations:Current
                assets
            
            $
            −
            
            $
            282Current
                liabilities
            
            
            (105
            )
            
            (1,026
            )(105
            )
            
            (744
            )Sale
                of Distribution Group:Obligations
                from the sale of the distribution group(1)
            
            
            (126
            )
            
            (137
            )Liabilities
                of discontinued operations, net
            
            $
            (231
            )
            $
            (881
            )





(1)
            Represents
                the Company’s current estimate of the remaining obligations and other
                costs related to the sale of the Distribution Group. (See Note 16
                -
                Commitments and Contingencies.)











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**Note
      16.** **Commitments
      and Contingencies**





The
      Company leases certain facilities and equipment under various operating lease
      agreements, which expire on various dates through 2019. Facility leases that
      expire generally are expected to be renewed or replaced by other leases. Future
      minimum rental commitments under non-cancelable operating leases with terms
      in
      excess of one year are as follows:





For
                the years ended December 31,
            
            
            Operating
              Leases2006
            
            $
            8,0282007
            
            
            6,5442008
            
            
            4,8172009
            
            
            2,9152010
            
            
            1,4112011
                and thereafter
            
            
            4,850Total
                minimum lease payments
            
            $
            28,565





Rent
      expense for all operating leases approximated $9,046, $9,272 and $9,942 for
      the
      years ended December 31, 2005, 2004 and 2003, respectively.





During
      2005, the Company resolved all contingencies related to payments of additional
      purchase price payable to the seller of ATS Remanufacturing (“ATS”), acquired in
      1997. The ATS acquisition requires the Company to make subsequent payments
      to
      the seller and certain other key individuals of ATS on each of the first 14
      anniversaries of the closing date. As of December 31, 2005, the Company had
      made
      aggregate payments of $16,530 of additional purchase price related to the ATS
      acquisition.





From
      time
      to time, the Company has been, and currently is, involved in various legal
      claims arising in connection with its business. While the results of these
      claims cannot be predicted with certainty, as of December 31, 2005, there were
      no asserted claims against the Company that, in the opinion of management,
      if
      adversely decided, would have a material effect on the Company’s financial
      position, results of operations and cash flows.





The
      Company is subject to various evolving federal, state, local and foreign
      environmental laws and regulations governing, among other things, emissions
      to
      air, discharge to waters and the generation, handling, storage, transportation,
      treatment and disposal of a variety of hazardous and non-hazardous substances
      and wastes. These laws and regulations provide for substantial fines and
      criminal sanctions for violations and impose liability for the costs of cleaning
      up, and damages resulting from, past spills, disposals or other releases of
      hazardous substances.





In
      connection with the acquisition of certain subsidiaries, some of which have
      been
      subsequently divested or relocated, the Company conducted certain investigations
      of these companies' facilities and their compliance with applicable
      environmental laws. The investigations, which included Phase I assessments
      by independent consultants of all manufacturing and various distribution
      facilities, found that a number of these facilities have had or may have had
      releases of hazardous materials that may require remediation and also may be
      subject to potential liabilities for contamination from off-site disposal of
      substances or wastes. These assessments also found that reporting and other
      regulatory requirements, including waste management procedures, were not or
      may
      not have been satisfied. Although there can be no assurance, the Company
      believes that, based in part on the investigations conducted, in part on certain
      remediation completed prior to or since the acquisitions, and in part on the
      indemnification provisions of the agreements entered into in connection with
      the
      Company's acquisitions, the Company will not incur any material liabilities
      relating to these matters.








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In
      connection with the sale of the Distribution Group, a former segment of the
      Company’s business discontinued and sold during 2000 (the "DG Sale"), the
      Company agreed to certain matters with the buyer that could result in contingent
      liability to the Company in the future. These include the Company's
      indemnification of the buyer against (i) environmental liability at former
      Distribution Group facilities that had been closed prior to the DG Sale,
      including former manufacturing facilities in Azusa, California, Mexicali, Mexico
      and Dayton, Ohio, (ii) any other environmental liability of the
      Distribution Group relating to periods prior to the DG Sale, in most cases
      subject to a $750 deductible and a $12,000 cap except with respect to closed
      facilities and (iii) any tax liability of the Distribution Group relating
      to periods prior to the DG Sale. During 2002, the Company negotiated an
      additional $100 deductible applicable to all Distribution Group claims for
      indemnification. In addition, prior to the DG Sale several of the Distribution
      Group's real estate and equipment leases with terms ending on various dates
      through 2007, were guaranteed by the Company. These guarantees, which originated
      prior to the time of the DG Sale, remain in effect after the DG Sale so the
      Company continues to be liable for the Distribution Group's obligations under
      such leases in the event that the Distribution Group does not honor those
      obligations. As of December 31, 2005, minimum lease obligations related to
      these
      leases totaled $987 for which the Company has no liability recognition
      requirement. The Distribution Group has indemnified the Company against any
      damages relating to the Company’s guarantees, however the Company holds no
      assets as collateral against these obligations.








**Note
      17.** **Segment
      Information**





Within
      the Company, financial performance is measured by lines of business. The Company
      aggregates certain of its operating units to form two reportable segments:
      the
      Drivetrain Remanufacturing segment and the Logistics segment. The
      Drivetrain Remanufacturing segment primarily sells remanufactured transmissions
      directly to Ford, Honda, DaimlerChrysler, Allison and certain other foreign
      OEMs, primarily for use as replacement parts by their domestic dealers during
      the warranty and post-warranty periods following the sale of a vehicle. In
      addition, the Drivetrain Remanufacturing segment sells select remanufactured
      engines to primarily to certain European OEMs. The Company’s Logistics segment
      provides the following: (i) value-added warehouse, distribution and reverse
      logistics, test and repair, turnkey order fulfillment and information services
      for Cingular, and to a lesser extent, certain other customers in the wireless
      electronics industry including Nokia, T-Mobile and LG; (ii) logistics and
      reverse logistics services and automotive electronic components remanufacturing,
      primarily for General Motors, Delphi, Visteon and Thales; and (iii) returned
      material reclamation and disposition services and core management services
      primarily to General Motors. The Company’s independent
      aftermarket business, which is not reportable for segment reporting purposes,
      remanufactures and distributes domestic and foreign engines and distributes
      domestic transmissions to independent aftermarket customers and is reported
      as
“Other.” (See
      Note
      20 - Subsequent Event.) The reportable segments and the “Other” business unit
      are each managed and measured separately primarily due to the differing
      customers and distribution channels.





The
      Company evaluates performance based upon operating income. The reportable
      segments’ and the “Other” business unit’s accounting policies are the same as
      those described in the summary of significant accounting policies (see Note
      2 - Summary of Significant Accounting Policies). The Company fully allocates
      (i)
      corporate overhead generally based upon budgeted full year profit before tax
      and
      (ii) internal information systems costs based upon usage estimates.








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Financial
      information relating to the Company’s segments and a reconciliation to the
      consolidated financial statements are as follows as of and for the years ended
      December 31:





Drivetrain
              Remanufacturing
            
            Logistics
            
            Other
            
            Corporate
                /Unallocated
            
            Discontinued
              Assets
            
            Consolidated2005:Net
                sales from external customers
            
            $
            266,398
            
            $
            153,220
            
            $
            22,345
            
            $
            −
            
            $
            −
            
            $
            441,963Depreciation
                and amortization expense
            
            
            8,040
            
            
            5,022
            
            
            443
            
            
            −
            
            
            −
            
            
            13,505Exit,
                disposal, certain severance and other charges (credits)
            
            
            (20
            )
            
            543
            
            
            (31
            )
            
            −
            
            
            −
            
            
            492Operating
                income (loss)
            
            
            36,915
            
            
            18,238
            
            
            (2,478
            )
            
            −
            
            
            −
            
            
            52,675Total
                assets
            
            
            256,405
            
            
            76,289
            
            
            21,927
            
            
            53,158
            
            
            −
            
            
            407,779Goodwill
            
            
            127,068
            
            
            18,973
            
            
            1,385
            
            
            135
            
            
            −
            
            
            147,561Expenditures
                (transfers) of long-lived assets, net
            
            
            5,758
            
            
            11,053
            
            
            (107
            )
            
            481
            
            
            −
            
            
            17,1852004:Net
                sales from external customers
            
            $
            271,215
            
            $
            104,385
            
            $
            19,977
            
            $
            −
            
            $
            −
            
            $
            395,577Depreciation
                and amortization expense
            
            
            7,786
            
            
            3,895
            
            
            436
            
            
            −
            
            
            −
            
            
            12,117Exit,
                disposal, certain severance and other charges (credits)
            
            
            (705
            )
            
            156
            
            
            265
            
            
            4,315
            
            
            −
            
            
            4,031Operating
                income (loss)
            
            
            40,524
            
            
            15,679
            
            
            (5,695
            )
            
            (4,315
            )
            
            −
            
            
            46,193Total
                assets
            
            
            272,006
            
            
            48,352
            
            
            25,002
            
            
            44,635
            
            
            −
            
            
            389,995Goodwill
            
            
            128,096
            
            
            18,973
            
            
            1,385
            
            
            135
            
            
            −
            
            
            148,589Expenditures
                of long-lived assets
            
            
            8,051
            
            
            2,253
            
            
            261
            
            
            516
            
            
            −
            
            
            11,0812003:Net
                sales from external customers
            
            $
            240,957
            
            $
            81,700
            
            $
            17,052
            
            $
            −
            
            $
            −
            
            $
            339,709Depreciation
                and amortization expense
            
            
            6,851
            
            
            3,921
            
            
            453
            
            
            −
            
            
            −
            
            
            11,225Exit,
                disposal, certain severance and other charges
            
            
            4,212
            
            
            922
            
            
            −
            
            
            3,339
            
            
            −
            
            
            8,473Operating
                income (loss)
            
            
            22,939
            
            
            21,994
            
            
            (6,641
            )
            
            (3,339
            )
            
            −
            
            
            34,953Total
                assets
            
            
            271,423
            
            
            40,261
            
            
            22,432
            
            
            86,493
            
            
            26,675
            
            
            447,284Goodwill
            
            
            127,357
            
            
            18,973
            
            
            1,385
            
            
            135
            
            
            −
            
            
            147,850Expenditures
                of long-lived assets
            
            
            10,578
            
            
            2,077
            
            
            512
            
            
            272
            
            
            −
            
            
            13,439








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Geographic
      information for revenues, determined by destination of sale and long-lived
      assets, determined by the location of the Company’s facilities is as
      follows:





As
                of and for theYears
                ended December 31,2005
            
            2004
            
            2003Net
                sales:United
                States
            
            $
            411,112
            
            $
            362,395
            
            $
            306,036Europe
                and Canada
            
            
            30,851
            
            
            33,182
            
            
            33,673Consolidated
                net sales
            
            $
            441,963
            
            $
            395,577
            
            $
            339,709Long-lived
                assets:United
                States
            
            $
            188,501
            
            $
            185,059
            
            $
            196,900Europe
            
            
            14,794
            
            
            17,188
            
            
            16,483Assets
                of discontinued operations
            
            
            −
            
            
            −
            
            
            25,074Consolidated
                long-lived assets
            
            $
            203,295
            
            $
            202,247
            
            $
            238,457





During
      the year ended December 31, 200 5,
      net
      sales from four customers amounted to 10 percent or more of the Company’s net
      sales. For the years ended December 31, 2005, 2004 and 2003, sales to Cingular
      (Logistics segment) accounted for $124,878, $88,233 and $58,384, Ford
      (Drivetrain Remanufacturing and Logistics segments) accounted for $102,281,
      $117,083 and $131,106, Honda (Drivetrain Remanufacturing segment) accounted
      for
      $81,049, $76,671 and $25,643, and DaimlerChrysler (Drivetrain Remanufacturing
      segment) accounted for $64,609, $58,220 and $69,875, respectively.








**Note
      18.** **Exit,
      Disposal, Certain Severance and Other Charges**





The
      Company has periodically
      incurred certain costs, primarily associated with restructuring and other
      initiatives that include consolidation of operations or facilities, management
      reorganization and delayering, rationalization of certain products, product
      lines and services and asset impairments. Examples of these costs include
      severance benefits for terminated employees, lease termination and other
      facility exit costs, moving and relocation costs, losses on impairments of
      fixed
      assets and write-down of inventories.





Facilities
      Consolidation Costs - Drivetrain Remanufacturing Segment





On
      June
      23, 2003, the Company announced its decision to consolidate one of its transmission
      remanufacturing operations from a leased facility located in Mahwah, New Jersey
      into a Company-owned idle facility in Oklahoma City, Oklahoma. This decision
      was
      primarily driven by an expectation of lower operating costs (primarily labor
      and
      facility related). The relocation from the Mahwah facility to the Oklahoma
      City
      facility was completed during November 2003 and the Mahwah lease expired on
      December 31, 2003. The Company terminated a total of 163 employees, consisting
      of manufacturing and management personnel, as part of the Mahwah facility
      closure. For the year ended December 31, 2003, $4,081 of costs were incurred
      related to the Mahwah plant closure including (i) $1,317 of moving and travel
      costs to relocate equipment and certain management employees from the Mahwah
      facility to the facility in Oklahoma City, (ii) $1,210 of severance and related
      costs, (iii) $617 primarily related to the write-off of previously capitalized
      leasehold improvement costs at the Mahwah facility, (iv) $459 of other exit
      costs primarily related to idle plant capacity at the Mahwah facility, (v)
      $278
      of insurance costs related to certain workers compensation claims incurred
      for
      the terminated employees and (vi) $200 for the write-down of raw materials
      inventory no longer required (classified as Cost of Sales - Products). During 2004, the Company recorded a net credit of $13 for the Mahwah
      facility closure, primarily related to adjustments to liability
      estimates.








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Following
      is an analysis of the costs associated with the facilities consolidation within
      the Drivetrain Remanufacturing segment:





Termination
                Benefits
            
            
            Exit/Other
              Costs
            
            
            Loss
                on
              Write-Down
              of
                Assets
            
            
            
            
            TotalTotal
                amount expected to be incurred
            
            $
            1,186
            
            $
            2,065
            
            $
            817
            
            
            
            $
            4,068Total
                amount incurred through December 31, 2004
            
            $
            1,186
            
            $
            2,065
            
            $
            817
            
            
            
            $
            4,068Reserve
                as of December 31, 2002
            
            $
            −
            
            $
            −
            
            $
            −
            
            
            
            $
            −Provision
                2003
            
            
            1,210
            
            
            2,054
            
            
            817
            (
            1
            )
            
            4,081Payments
                - 2003
            
            
            (639
            )
            
            (1,655
            )
            
            −
            
            
            
            
            (2,294
            )Asset
                write-offs 2003
            
            
            −
            
            
            −
            
            
            (617
            )
            
            
            
            (617
            )Reserve
                as of December 31, 2003
            
            
            571
            
            
            399
            
            
            200
            
            
            
            
            1,170Provision
                2004
            
            
            (24
            )
            
            11
            
            
            −
            
            
            
            
            (13
            )Payments
                - 2004
            
            
            (547
            )
            
            (99
            )
            
            −
            
            
            
            
            (646
            )Reserve
                as of December 31, 2004
            
            
            −
            
            
            311
            
            
            200
            
            
            
            
            511Payments
                - 2005
            
            
            −
            
            
            (228
            )
            
            −
            
            
            
            
            (228
            )Reserve
                as of December 31, 2005
            
            $
            −
            
            $
            83
            
            $
            200
            
            
            
            $
            283





(1)
            Includes
                $200 of inventory write-downs classified as cost of sales in the
                accompanying statements of income.





Other
      Activities Relating to Exit, Disposal, Certain Severance and Other
      Charges:





In
      2003,
      the Company recorded costs of $4,392 consisting of (i) compensation costs
      payable to the Company’s former CEO and former CFO of $1,953 and $685,
      respectively, related to their conversion from full time to part time
      employment, (ii) $1,260 of severance and related costs for 30 management and
      operational support personnel primarily associated with the reorganization
      and
      de-layering of certain management functions and the streamlining of certain
      operations, (iii) $492 of relocation and other costs related to the hiring
      of
      the Company’s current CEO and current CFO, (iv) $405 related to the write-down
      of certain customized software recorded as a fixed asset due to the loss of
      the
      business this software had supported, and (v) $59 of other costs, partially offset by an income item of $462 related to the reversal of a special
      charge accrual established during 2001 for expected idle capacity costs at
      the
      Mahwah facility that was no longer needed due to the exit from this
      plant.





In
      2004,
      the Company recorded a net charge of $4,044 consisting of (i) $3,323 of non-cash
      compensation expense related to modifications to unexercised stock options
      previously granted to the Company’s former CEO and former CFO, (ii) $795 of exit
      and other costs primarily related to the termination of an independent
      contractor agreement and costs related to the closure of two facilities, (iii)
      $525 of
      certain stock-based compensation costs related to the hiring of the
      Company’s current
      CEO ,
      (iv)
      $292 of s everance
      and related costs for 10 management and operational support personnel associated
      with the reorganization and upgrade of certain management
      functions and other cost reduction initiatives and (v) $260 of
      relocation costs primarily related to the hiring of the
      Company’s current
      CFO ,
      partially offset by a gain of $1,151 related to the reversal of a previously
      established provision related to the Drivetrain Remanufacturing segment for
      a
      potential non-income state tax liability that has been reduced through the
      finalization of an audit by the state tax authorities .





In
      2005,
      in order to accommodate increased service volumes within its Logistics segment,
      the Company expanded its capacity by moving certain of its operations to a
      larger facility and recorded a charge of $543 consisting of (i) $282 related
      to
      the write-down of certain fixed assets and (ii) $261 of exit and other costs
      related to the move. During 2005, the Company has completed this facilities
      transition and expects no further costs associated with this activity. In
      addition, the Company recorded a gain of $51 during 2005 primarily due to the
      adjustment of estimated exit costs.





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            of Contents





Following
      is an analysis of the reserves relating to these activities:





Termination
              Benefits
            
            Exit/Other
              Costs
            
            Loss
                on
              Write-Down
              Of
                Assets
            
            TotalReserve
                as of December 31, 2002
            
            $
            134
            
            $
            1,797
            
            $
            −
            
            $
            1,931Provision
                2003
            
            
            3,898
            
            
            89
            
            
            405
            
            
            4,392Payments
                2003
            
            
            (342
            )
            
            (302
            )
            
            −
            
            
            (644
            )Asset
                write-offs 2003
            
            
            −
            
            
            −
            
            
            (405
            )
            
            (405
            )Reserve
                as of December 31, 2003
            
            
            3,690
            
            
            1,584
            
            
            −
            
            
            5,274Provision
                2004
            
            
            3,615
            
            
            429
            
            
            −
            
            
            4,044Payments
                2004
            
            
            (2,166
            )
            
            (1,314
            )
            
            −
            
            
            (3,480
            )Non-cash
                stock-based compensation write-offs 2004
            
            
            (3,323
            )
            
            (525
            )
            
            −
            
            
            (3,848
            )Reserve
                as of December 31, 2004
            
            
            1,816
            
            
            174
            
            
            −
            
            
            1,990Provision
                2005
            
            
            8
            
            
            202
            
            
            282
            
            
            492Payments
                2005
            
            
            (1,564
            )
            
            (376
            )
            
            −
            
            
            (1,940
            )Asset
                write-offs 2005
            
            
            −
            
            
            −
            
            
            (282
            )
            
            (282
            )Reserve
                as of December 31, 2005
            
            $
            260
            
            $
            −
            
            $
            −
            
            $
            260








**Note
      19.** **Selected
      Quarterly Financial Data (Unaudited)**





QuarterFirst
            
            Second
            
            Third
            
            Fourth2005Net
                sales
            
            $
            93,961
            
            $
            105,120
            
            $
            123,183
            
            $
            119,699Gross
                profit
            
            
            22,607
            
            
            26,088
            
            
            28,000
            
            
            29,982Exit,
                disposal, certain severance and other charges (credits)
            
            
            111
            
            
            348
            
            
            89
            
            
            (56
            )Income
                from continuing operations
            
            
            5,434
            
            
            7,454
            
            
            8,610
            
            
            10,381Net
                income
            
            
            5,350
            
            
            7,454
            
            
            7,967
            
            
            10,237Earnings
                per common share(1)
            
            $
            0.26
            
            $
            0.35
            
            $
            0.40
            
            $
            0.48Earnings
                per common share-assuming dilution(1)
            
            $
            0.25
            
            $
            0.35
            
            $
            0.40
            
            $
            0.482004Net
                sales
            
            $
            85,025
            
            $
            98,109
            
            $
            107,601
            
            $
            104,842Gross
                profit
            
            
            20,693
            
            
            26,783
            
            
            28,218
            
            
            26,253Exit,
                disposal, certain severance and other charges
            
            
            791
            
            
            2,685
            
            
            488
            
            
            67Income
                from continuing operations
            
            
            3,807
            
            
            6,205
            
            
            8,438
            
            
            8,345Net
                income (loss)
            
            
            3,913
            
            
            6,431
            
            
            (9,067
            )
            
            4,499Earnings
                per common share(1)
            
            $
            0.17
            
            $
            0.30
            
            $
            0.41
            
            $
            0.39Earnings
                per common share-assuming dilution(1)
            
            $
            0.17
            
            $
            0.30
            
            $
            0.40
            
            $
            0.39





(1)
            Earnings
                per share data is presented before discontinued operations.





During
      the fourth quarter of 2004, the Company disposed of an operating unit from
      its
      Drivetrain Remanufacturing segment which remanufactured transmissions for
      General Motors. The results of this operating unit are presented as discontinued
      operations for all interim periods presented in the table above. Income from
      continuing operations for the first, second, third and fourth quarters of 2004
      exclude gain (loss) from discontinued operations related to the disposal of
      this
      operating unit of $106, $(1,161), $(17,505) and $(1,665),
      respectively.





During
      the fourth quarter of 2005, the Company recorded income on an after-tax basis
      of
      $874 (tax benefits of $1,365 offset by fees and related expenses of $491, net
      of
      tax) related primarily to previously unclaimed research and development tax
      credits.





68
 Table
            of Contents





**Note
      20.** **Subsequent
      Event**





On
      February 15, 2006, the Company made the decision to exit its Independent
      Aftermarket PROFormance-branded transmission business, and is currently
      evaluating strategic alternatives for its Independent Aftermarket
      PROFormance-branded engine business, which could include a sale or liquidation
      of the engine business. These businesses currently represent the independent
      aftermarket business, which is not reportable for segment reporting purposes
      and
      is reported as “Other” in the segment information presented above (see Note 17 -
      Segment Information).





The
      Company expects to reclassify the operations of this business to discontinued
      operations upon its disposal.





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**ITEM
                  9.**
              **CHANGE
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON****ACCOUNTING AND FINANCIAL
                  DISCLOSURE**
 
 None.
 
 
 **ITEM
                  9A.**
              **CONTROLS
                  AND
                  PROCEDURES**
 
 **(i)Disclosure
        Controls and
        Procedures.**
 
 Our
        Chief
        Executive Officer and Chief Financial Officer conducted an evaluation of
        the
        effectiveness of our disclosure controls and procedures. Based on that
        evaluation, the Chief Executive Officer and Chief Financial Officer concluded
        that our disclosure controls and procedures were effective as of December
        31,
        2005.
 
 **(ii)Internal
        Control Over Financial
        Reporting.**
 
 **(a) Management’s
        annual
        report on internal control over financial reporting.**
 
 Our
        management report on internal control over financial reporting is set forth
        in
        Item 8 "Consolidated
        Financial Statements and Supplementary Data" on page 41 of this Annual
        Report .
 
 **(b) Attestation
        report of the
        registered public accounting firm.**
 
 The
        attestation report of Ernst & Young LLP, our independent registered public
        accounting firm, on management’s assessment of the effectiveness of our internal
        control over financial reporting and the effectiveness of our internal control
        over financial reporting is set forth in Item 8 "Consolidated
        Financial Statements and Supplementary Data" on page 43 of this Annual
        Report .
 
 **(c) Changes
        in internal
        control over financial reporting.**
 
 There
        was
        no change in our internal control over financial reporting during our fiscal
        quarter ended December 31, 2005 that has materially affected, or is reasonably
        likely to materially affect, our internal control over financial
        reporting.
 
 **ITEM
                  9B.**
              **OTHER
                  INFORMATION**
 
 None.
  70
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            of Contents
  **PART
        III**
 
 **ITEM
                  10.**
              **DIRECTORS
                  AND EXECUTIVE OFFICERS OF THE
                  REGISTRANT**
 
 **Directors
        and Executive Officers**
 
 The
        following lists our executive officers and directors and their respective
        ages
        and positions as of December 31, 2005:
 
 **Name**
              
              **Age**
              
              **Positions**Donald
                  T. Johnson, Jr.
              
              53
              
              Chairman
                  of the Board, President and Chief Executive OfficerTodd
                  R. Peters
              
              43
              
              Vice
                  President and Chief Financial OfficerJohn
                  J. Machota
              
              53
              
              Vice
                  President, Human ResourcesJohn
                  M. Pinkerton
              
              48
              
              Vice
                  President and ControllerMary
                  T. Ryan
              
              52
              
              Vice
                  President, Communications and Investor RelationsJoseph
                  Salamunovich
              
              46
              
              Vice
                  President, General Counsel and SecretaryJohn
                  R. Colarossi
              
              53
              
              President,
                  Independent AftermarketWilliam
                  L. Conley, Jr.
              
              57
              
              President,
                  ATC LogisticsBrett
                  O. Dickson
              
              41
              
              Vice
                  President, North American Remanufacturing OperationsRobert
                  L. Evans
              
              53
              
              DirectorCurtland
                  E. Fields
              
              54
              
              DirectorDr.
                  Michael J. Hartnett
              
              60
              
              DirectorMichael
                  D. Jordan
              
              59
              
              Lead
                  DirectorS.
                  Lawrence Prendergast
              
              64
              
              DirectorEdward
                  Stewart
              
              63
              
              Director
 
 *Donald
        T. Johnson, Jr.* joined
        us as President
        and Chief Operating Officer in January 2004. In February 2004 Mr. Johnson
        became Chief Executive Officer, and became a member of the Board of Directors
        in
        May 2004 and Chairman of the Board in June 2005. Before joining us,
        Mr. Johnson was Global Director, Parts, Supply and Logistics for Ford Motor
        Company since 1999. Prior to that, Mr. Johnson spent 26 years working for
        Caterpillar, Inc. and its subsidiaries, including serving as Vice President
        of
        Caterpillar Logistics Services, Inc. from 1992 until he joined Ford.
        Mr. Johnson holds a B.A. in Management from the University of
        Illinois.
 
 *Todd
        R. Peters* joined
        us as Vice President, Finance in March 2004 and was appointed Chief Financial
        Officer in May 2004. Before joining us, Mr. Peters served TriMas
        Corporation, a manufacturer of automotive accessories and industrial products,
        as Executive Vice President and Chief Financial Officer from 2002 to 2003
        and as
        Vice President of Finance from 2001 to 2002. From 1994 to 2001, he held various
        positions with Dana Corporation, a manufacturer in the automotive, commercial
        vehicle, and off-highway markets, including Global Working Capital Team Leader
        from 2000 to 2001, Director of Operations - Long Manufacturing from 1999
        to 2000
        and Vice President of Finance from 1994 to 1999. Prior to that, Mr. Peters
        worked for Coopers & Lybrand for over eight years. Mr. Peters holds a
        B.S. in Business Administration from Central Michigan University and is a
        certified public accountant.
 
 *John
        J. Machota* joined
        us as Vice President, Human Resources in 1997. From 1996 to 1997, he was
        a
        self-employed human resources consultant. From 1995 to 1996, Mr. Machota
        was Vice President, Compensation for Waste Management, Inc. and from 1993
        to 1995, served as Waste Management's Vice President, Human Resource Services.
        From 1986 to 1993, Mr. Machota was Vice President, Human Resources for a
        subsidiary of Waste Management and prior to that held various other positions
        in
        the human resources area. Mr. Machota holds an M.S. in Industrial Relations
        from Loyola University.
  71
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            of Contents
  *John
        M. Pinkerton* joined
        us as Manager, Planning and Analysis in 1999, became Corporate Controller
        in
        2000 and became an executive officer in June 2005 when he was appointed Vice
        President and Controller. Prior to joining us, he was an independent financial
        consultant during 1998 and prior to that he spent ten years with Grimes
        Aerospace Company ,
        an
        international engineering, manufacturing and distribution company, where he
        held various financial analysis and planning related positions, including
        Director, Strategic Planning. From 1980 to 1988, Mr. Pinkerton worked for
        Cooper Industries (Power Systems Division) in various accounting and related
        positions. Mr. Pinkerton holds an M.B.A. from the University of
        Wisconsin-Milwaukee and is a certified public accountant
        (inactive).
 
 *Mary
        T. Ryan* joined
        us as Vice President, Communications and Investor Relations in 1999. From
        1996
        to 1998, Ms. Ryan served as Vice President, Corporate Affairs for American
        Disposal Services, Inc. From 1995 to 1996, she was a self-employed public
        relations consultant. Prior to that, Ms. Ryan was employed for more than
        ten years with Waste Management, Inc. Ms. Ryan holds an M.B.A. from
        DePaul University.
 
 *Joseph
        Salamunovich* joined
        us as Vice President, General Counsel and Secretary in 1997. From 1986 to
        1994
        Mr. Salamunovich was an associate, and from 1995 to 1997 Mr. Salamunovich
        was a partner, in the law firm of Gibson, Dunn & Crutcher LLP, where he
        specialized in corporate and securities law matters. Mr. Salamunovich holds
        a J.D. from Loyola Law School, Los Angeles.
 
 *John
        R. Colarossi* joined
        us in 2003 as President of our Independent Aftermarket business but will
        be
        leaving the Company in 2005 due to the closure of the Independent Aftermarket
        business. Prior to joining us, Mr. Colarossi served as Chief Operating
        Officer of Cottman Transmission Systems since 2001. During 1999 and 2000
        he was
        Executive Vice President of Sales and Marketing for Capsule Communications
        (formerly US WATS). Between 1993 and 1999 Mr. Colarossi held various positions
        with Moran Industries, including President from 1998 to 1999, and from 1984
        to
        1992 he was employed by AAMCO Transmissions, serving as Executive Vice President
        - Sales and Operations between 1989 and 1992. Mr. Colarossi holds a B.S. in
        Economics from the University of Pittsburgh.
 
 *William
        L. Conley, Jr.* joined
        us in 2002 as President of our ATC Logistics business. Prior to joining us
        Mr. Conley spent nearly 24 years with FedEx Corporation in a series of
        increasingly responsible sales and leadership positions. Most recently, Mr.
        Conley served as Vice President and General Manager - Europe, Middle East
        and
        Africa for FedEx Supply Chain Services (FedEx’s logistics operations).
        Mr. Conley holds a B.S. in Aeronautics from Parks College of Aeronautical
        Technology of St. Louis University.
 
 *Brett
        O. Dickson* joined
        us in 2001 as Director of Lean and Continuous Improvement. That same year
        he
        became Vice President and General Manager of our Autocraft Industries business
        and became an executive officer in 2004 when he was promoted to Vice President
        of our North American Remanufacturing Operations. Prior to joining us, Mr.
        Dickson held increasingly responsible positions in operations, supply chain
        management and repositioning within Grimes Aerospace Company from
        1995 to 2000, most recently serving as the Business Unit Manager for Grimes’
Exterior Lighting business. Between 1985 and 1995 he held various positions
        with
        Honeywell (formerly AlliedSignal) including Plant Manager, Production
        Engineering Manager and Six Sigma specialist. Mr. Dickson holds a B.S. in
        Electronic Engineering Technology from the DeVry Institute of
        Technology.
 
 *Robert
        L. Evans*  became
        a
        director in December 2004. He served
        as
        Managing Director of Symphony Technology Group (a strategic holding company
        that
        invests primarily in software and services firms) and a predecessor firm,
        the
        Valent Group, from 2001 until October 2004. Prior to that, he was President
        and
        Chief Operating Officer of Aspect Development, Inc. from 1999 until its
        acquisition by *i2* Technologies, Inc. in 2000, after which he served as Chief Operating Officer
        of *i2* Technologies. Mr. Evans was employed by Accenture (formerly Andersen Consulting)
        from 1993 to 1999, where he held a variety of positions, including Managing
        Partner of the Americas Supply Chain practice. From 1990 to 1993 Mr. Evans
        served as Vice President, Customer Support (Parts & Service) for Mazda Motor
        of America, and between 1975 and 1990 he held various positions with Caterpillar
        Inc., including President of Caterpillar Logistics Services. Mr. Evans serves on our Compensation and Nominating Committee.
 
  72
 Table
            of Contents
  *Curtland
        E. Fields*  became
        a
        director in December 2004. Mr. Fields is the Executive
        Director and chief executive officer and a trustee of the Turrell Fund, a
        $130
        million foundation serving the needs of underprivileged children. Prior to
        joining the Turrell Fund in 2003, Mr. Fields was employed by AT&T
        Corporation for over 30 years, serving most recently as President of the
        Consumer Transactions Services Group between 2000 and 2003, as President
        of the
        Consumer Markets Group (Central Region) from 1999 to 2000 and Vice President,
        Strategy and Marketing for the Business Markets Group from 1998 to 1999.
        Prior
        to that he held other positions with AT&T including Financial Vice President
        for Investor Relations. Mr. Fields is Chairman of our Compensation and Nominating
        Committee.
 
 *Dr. Michael
        J. Hartnett* became a
        director in 1994. Since 1992, Dr. Hartnett has been Chairman, President and
        Chief Executive Officer of Roller Bearing Company of America, Inc., a
        manufacturer of ball and roller bearings, and has been a member of the Roller
        Bearing compensation committee since 2005. Prior to joining Roller Bearing
        in
        1990 as General Manager of its Industrial Tectonics subsidiary, he spent
        18 years with The Torrington Company, a subsidiary of Ingersoll-Rand.
        Dr. Hartnett serves on our Audit Committee.
 
 *Michael
        D. Jordan* became a
        director in May 2004 and Lead Director in June 2005. Prior to retirement
        in
        2001, he was employed by Ford Motor Company for over 30 years, serving most
        recently as President of Ford’s Automotive Consumer Services Group since 1997.
        Prior to that he was President of the Ford Customer Service Division—Europe for
        three years. Mr. Jordan
        serves on our Compensation and Nominating Committee.
 
 *S.
        Lawrence Prendergast* became a
        director in May 2004. Between 1999 and his retirement in June 2005, he was
        Executive Vice President of Finance of LaBranche & Co. Inc., a New York
        Stock Exchange specialist firm. Prior to that he spent over 30 years with
        AT&T Corporation, including serving as Chairman of the Board and Chief
        Executive Officer of AT&T Investment Management Corp. from 1997 to 1999 and
        as Vice President and Treasurer of AT&T Corporation for 14 years before
        that. Mr. Prendergast is Chairman of our Audit Committee.
 
 *Edward
        Stewart*  became
        a
        director in December 2004. Prior to his retirement in 2002, he was
        employed by General Electric Company for 37 years, serving most recently
        as
        Executive Vice President of GE Capital and Chief Executive Officer of GE
        Card
        Services from 1997, and prior to that he was a Vice President of General
        Electric since 1991. Mr.
        Stewart serves on our Audit Committee.
 
 Directors
        serve one-year terms and are elected annually. Executive officers serve until
        they resign or replacements are appointed by the Board of
        Directors.
 
 **Audit
        Committee Financial Expert.**
 
 Our
        Board
        of Directors has determined that S. Lawrence Prendergast, Chairman of our
        Audit Committee, is a financial expert for purposes of Item 401(h) of Regulation
        S-K under the Exchange Act. Mr. Prendergast is an independent director
        within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the Exchange
        Act.
 
 **Section
        16(a) Beneficial Ownership Reporting Compliance.**
 
 Section 16(a)
        of the Exchange Act requires our officers, directors and persons who own
        more
        than 10% of our outstanding common stock to file reports of ownership and
        changes in ownership with the Securities and Exchange Commission and to furnish
        copies of these reports to us. Based solely on a review of the copies of
        the
        forms that we have received, we believe that all such forms required during
        2005
        were filed on a timely basis.
  **Code
        of Ethics**
 
 We
        have
        adopted a code of ethics that applies to our directors, officers and employees.
        The code of ethics contains written standards that we believe are reasonably
        designed to deter wrongdoing and to promote (i) honest and ethical conduct,
        including the ethical handling of actual or apparent conflicts of interest,
        (ii) full, fair, accurate, timely and understandable disclosure in the
        reports that we file with or submit to the Securities and Exchange Commission
        and our other public communications, (iii) compliance with applicable
        governmental laws, rules and regulations, (iv) prompt internal reporting of
        violations of the code of ethics to an appropriate person, and
        (v) accountability for adherence to the code.
 
  73
 Table
            of Contents
  The
        full
        text of our code of ethics was filed as an exhibit to our 2003 Annual Report
        on
        Form 10-K and is posted on our website at www.goATC.com .
        A copy
        of the code of ethics may be obtained without charge by sending a written
        request to us at 1400 Opus Place, Suite 600, Downers Grove, Illinois 60515,
        attention: Corporate Secretary. We intend to disclose future amendments to
        certain provisions of our code of ethics, or waivers of such provisions granted
        to executive officers and directors, on our website within five business
        days
        following the date of such amendment or waiver.
  
 **ITEM
                  11.**
              **EXECUTIVE
                  COMPENSATION**
  **Summary
        Compensation Table**
 
 The
        following table sets forth, for the three most recently completed fiscal
        years,
        the cash compensation, for services to us in all capacities, of those persons
        who were, as of December 31, 2005, our Chief Executive Officer and the four
        persons who were the other most highly compensated executive officers of
        Aftermarket Technology Corp. and its subsidiaries:
 
 **Annual
                  Compensation**
              
              **Long-Term**
                **Compensation
                  Awards****Name
                  and Principal Position**
              
              
              **Year**
              
              
              **Salary**
              
              
              **Bonus
                  (1)**
              
              
              **Other**
                **Annual**
                **Compensation**
              
              **Restricted**
                **Stock**
                **Award(s)**
                **($)
                  (2****)**
              
              **Securities**
                **Underlying**
                **Options**
                **(#)
                  (3)**
              
              
              **All
                  Other**
                **Compensation**Donald
                  T. Johnson, Jr. (4)
              
              
              2005
              
              $
              500,000
              (5)
              $
              700,462
              (6)
              $
              30,000
              (7)
              $
              396,250
              (8)
              
              75,000
              
              $
              17,310
              (9)Chairman,
                  President, CEO
              
              
              2004
              
              
              500,000
              
              
              53,614
              
              
              26,420
              (10)
              
              1,050,000
              
              
              140,000
              
              
              204,875
              (11)2003
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Todd
                  R. Peters (12)
              
              
              2005
              
              $
              308,077
              
              $
              346,694
              
              $
              14,853
              (13)
              $
              118,875
              (14)
              
              22,500
              
              
              —Vice
                  President, CFO
              
              
              2004
              
              
              244,262
              
              
              27,500
              
              
              13,072
              (15)
              
              371,250
              
              
              70,000
              
              $
              254,448
              (16)2003
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Brett
                  O. Dickson (17)
              
              
              2005
              
              $
              255,385
              (18)
              $
              138,306
              
              $
              3,522
              (19)
              $
              59,438
              (20)
              
              11,250
              
              $
              9,300
              (21)Vice
                  President, N.A. Reman
              
              
              2004
              
              
              238,081
              
              
              46,750
              
              
              1,183
              (19)
              
              149,000
              
              
              15,000
              
              
              6,500
              (22)Operations
              
              
              2003
              
              
              183,672
              
              
              21,720
              
              
              —
              
              
              —
              
              
              —
              
              
              5,477
              (22)William
                  L. Conley, Jr.
              
              
              2005
              
              $
              237,531
              (23)
              $
              206,095
              (24)
              $
              14,300
              (25)
              $
              59,438
              (26)
              
              11,250
              
              $
              11,832
              (27)President,
                  ATC Logistics
              
              
              2004
              
              
              235,000
              
              
              146,187
              
              
              14,300
              (25)
              
              37,250
              
              
              10,000
              
              
              6,500
              (22)2003
              
              
              235,000
              
              
              —
              
              
              13,578
              (28)
              
              —
              
              
              —
              
              
              3,669
              (22)Joseph
                  Salamunovich
              
              
              2005
              
              $
              226,442
              
              $
              126,852
              
              $
              14,134
              (29)
              $
              59,438
              (30)
              
              11,250
              
              $
              6,300
              (22)Vice
                  President, General
              
              
              2004
              
              
              220,000
              
              
              22,300
              
              
              10,370
              (31)
              
              74,500
              
              
              10,000
              
              
              6,500
              (22)Counsel
                  and Secretary
              
              
              2003
              
              
              220,000
              
              
              —
              
              
              12,566
              (32)
              
              61,000
              
              
              —
              
              
              6,000
              (22)
 _______________
 (1)
              Bonuses
                  are paid under our incentive compensation plan for a particular
                  yearif
                  we achieve or exceed specified EPS and other financial targets
                  for the
                  year,
                  and are paid during the first quarter of the following
                  year.
 (2)
              Calculated
                  by multiplying the number of shares awarded by the closing price
                  of our
                  common stock on the Nasdaq National Market System on the day the
                  restricted stock was awarded. No consideration was paid for the
                  shares.
                  Holders of restricted stock have the same dividend and voting rights
                  as
                  other holders of our common stock.
 (3)
              Consists
                  of options to purchase shares of our common stock, which options
                  were
                  issued pursuant to our 1996 Stock Incentive Plan, 1998 Stock Incentive
                  Plan, 2000 Stock Incentive Plan, 2002 Stock Incentive Plan or 2004
                  Stock
                  Incentive Plan. Pursuant to the stock incentive plans, the Compensation
                  and Human Resources Committee of the Board of Directors grants
                  options to
                  executive officers other than the Chief Executive Officer and makes
                  recommendations to the Board of Directors regarding the amount,
                  terms and
                  conditions of options to be granted to the Chief Executive Officer.
                  See
                  “Option Grants Table” and “Stock Incentive Plans”
                  below.
 (4)
              Mr.
                  Johnson joined us as President in January 2004 and became Chief
                  Executive
                  Officer in February 2004.
 (5)
              Mr.
                  Johnson deferred $173,077 of this amount pursuant to our executive
                  deferred compensation plan.
 (6)
              Mr.
                  Johnson deferred all of his bonus pursuant to our executive deferred
                  compensation plan.
  74
 Table
            of Contents
  (7)
              Consists
                  of a $20,000 automobile allowance and reimbursement for $10,000
                  of club
                  dues and personal financial planning
                  costs.
 (8)
              During
                  2005, 37,500 shares of restricted stock granted to Mr. Johnson in
                  2004 vested and ceased to be restricted. As of December 31, 2005, he
                  held an aggregate of 25,000 shares of restricted stock valued at
                  $486,000
                  (based on the $19.44 closing price of our common stock on
                  December 30, 2005), of which 8,334 vest in 2006 and 8,333 vest in
                  each of 2007 and 2008.
 (9)
              Consists
                  of Company contributions of $11,538 and $5,772 under our executive
                  deferred compensation plan and our 401K plan,
                  respectively.
 (10)
              Consists
                  of a $20,000 automobile allowance and reimbursement for $6,420
                  of club
                  dues and personal financial planning
                  costs.
 (11)
              Consists
                  of $201,413 of relocation benefits and Company contributions of
                  $3,462
                  under our 401K plan.
 (12)
              Mr.
                  Peters joined us as Vice President, Finance in March 2004 at an
                  annual
                  salary of $300,000 and became Chief Financial Officer in May
                  2004.
 (13)
              Consists
                  of a $9,600 automobile allowance and reimbursement for $5,253 of
                  club dues
                  and personal financial planning
                  costs.
 (14)
              During
                  2005, 8,334 shares of restricted stock granted to Mr. Peters in 2004
                  vested and ceased to be restricted. As of December 31, 2005, he held
                  an aggregate of 24,166 shares of restricted stock valued at $469,787
                  (based on the $19.44 closing price of our common stock on
                  December 30, 2005), of which 10,833 vest in each of 2006 and 2007 and
                  2,500 vest in 2008.
 (15)
              Consists
                  of a $7,754 automobile allowance and reimbursement for $5,318 of
                  club dues
                  and personal financial planning
                  costs.
 (16)
              Consists
                  of relocation benefits.
 (17)
              Mr.
                  Dickson became an executive officer in May 2004, at which time
                  his annual
                  salary was increased from $217,200 to
                  $250,000.
 (18)
              Mr.
                  Dickson deferred $6,000 of this amount pursuant to our executive
                  deferred
                  compensation plan.
 (19)
              Consists
                  of reimbursement for club dues and personal financial planning
                  costs. Mr.
                  Dickson is provided with a company
                  car.
 (20)
              During
                  2005, 3,334 shares of restricted stock granted to Mr. Dickson in 2004
                  vested and ceased to be restricted. As of December 31, 2005, he held
                  an aggregate of 10,416 shares of restricted stock valued at $202,487
                  (based on the $19.44 closing price of our common stock on
                  December 30, 2005), of which 4,583 vest in each of 2006 and 2007 and
                  1,250 vest in 2008.
 (21)
              Consists
                  of Company contributions of $3,000 and $6,300 under our executive
                  deferred
                  compensation plan and our 401K plan,
                  respectively.
 (22)
              Consists
                  of Company contributions under our 401K
                  plan.
 (23)
              Mr.
                  Conley deferred $11,985 of this amount pursuant to our executive
                  deferred
                  compensation plan.
 (24)
              Mr.
                  Conley deferred 50% of his bonus pursuant to our executive deferred
                  compensation plan.
 (25)
              Consists
                  of a $9,600 automobile allowance and reimbursement for $4,700 of
                  club dues
                  and personal financial planning
                  costs.
 (26)
              During
                  2005, 833 shares of restricted stock granted to Mr. Conley in 2004
                  vested and ceased to be restricted. As of December 31, 2005, he held
                  an aggregate of 5,416 shares of restricted stock valued at $105,287
                  (based
                  on the $19.44 closing price of our common stock on December 30,
                  2005), of which 2,083 vest in each of 2006 and 2007 and 1,250 vest
                  in
                  2008.
 (27)
              Consists
                  of Company contributions of $5,532 and $6,300 under our executive
                  deferred
                  compensation plan and our 401K plan,
                  respectively.
 (28)
              Consists
                  of a $9,600 automobile allowance and reimbursement for $3,978 of
                  club dues
                  and personal financial planning
                  costs.
 (29)
              Consists
                  of a $9,600 automobile allowance and reimbursement for $4,534 of
                  club dues
                  and personal financial planning
                  costs.
 (30)
              During
                  2005, 3,333 shares of restricted stock granted to Mr. Salamunovich in
                  2003 and 2004 vested and ceased to be restricted. As of December 31,
                  2005, he held an aggregate of 8,750 shares of restricted stock
                  valued at
                  $170,100 (based on the $19.44 closing price of our common stock
                  on
                  December 30, 2005), of which 4,583 vest in 2006, 2,917 vest in 2007
                  and 1,250 vest in 2008.
 (31)
              Consists
                  of a $9,600 automobile allowance and reimbursement for $770 of
                  club dues
                  and personal financial planning
                  costs.
 (32)
              Consists
                  of a $9,600 automobile allowance and reimbursement for $2,966 of
                  club dues
                  and personal financial planning
                  costs.
 
  75
 Table
            of Contents
  Set
        forth
        below is the annual base salary for our Chief Executive Officer and each
        of our
        four other most highly compensated executive officers as of February 10,
        2005:
 
 **Name**
              
              
              **Annual**
                **Base
                  Salary**Donald
                  T. Johnson, Jr.
              
              $
              535,000Todd
                  R. Peters
              
              
              324,500Brett
                  O. Dickson
              
              
              260,000William
                  L. Conley, Jr.
              
              
              252,000Joseph
                  Salamunovich
              
              
              234,600
 
 In
        2005
        we adopted a nonqualified deferred compensation plan for our executive officers
        and directors that provides for, among other things, a company contribution
        of
        50 cents for each dollar of base salary deferred by the executive officer,
        up to
        10% of base salary. The plan is designed to comply with the requirements
        of
        Section 409A of the Internal Revenue Code.
 
 **Option
        Grants Table**
 
 Shown
        below is information concerning grants of options by us during 2005 to our
        Chief
        Executive Officer and each of our four other most highly compensated executive
        officers as of December 31, 2005:
  **Individual**
                  **Grants**
                
                
                
                
                
                **Potential
                    Realizable**
                  **Value
                    at Assumed****Number
                    of**
                  **Securities**
                  **Underlying**
                  **Options
                    Granted**
                
                **%****of
                    Total**
                  **Options**
                  **Granted
                    to**
                  **Employees
                    in**
                
                **Exercise**
                  **Price**
                
                **Expiration**
                
                **Annual
                    Rates of**
                  **Stock
                    Price**
                  **Appreciation**
                  **For
                    Option Term (2)****Name**
                
                
                **(#)
                    (1)**
                
                
                **Fiscal
                    Year**
                
                
                **($/Share)**
                
                
                **Date**
                
                
                **5%
                    ($)**
                
                
                **10%
                    ($)**Donald
                    T. Johnson, Jr.
                
                
                75,000
                
                
                17.9
                
                
                $15.85
                
                
                6/2/15
                
                $
                747,598
                
                $
                1,894,561Todd
                    R. Peters
                
                
                22,500
                
                
                5.4
                
                
                $15.85
                
                
                6/2/15
                
                
                224,280
                
                
                568,368Brett
                    O. Dickson
                
                
                11,250
                
                
                2.7
                
                
                $15.85
                
                
                6/2/15
                
                
                112,140
                
                
                284,184William
                    L. Conley
                
                
                11,250
                
                
                2.7
                
                
                $15.85
                
                
                6/2/15
                
                
                112,140
                
                
                284,184Joseph
                    Salamunovich
                
                
                11,250
                
                
                2.7
                
                
                $15.85
                
                
                6/2/15
                
                
                112,140
                
                
                284,184
 ________________
 (1)
              These
                  options were granted under our 2004 Stock Incentive Plan. All of
                  the
                  options vested and became exercisable in
                  2005.
 (2)
              The
                  potential gains shown are net of the option exercise price and
                  do not
                  include the effect of any taxes associated with exercise. The amounts
                  shown are for the assumed rates of appreciation only, do not constitute
                  projections of future stock price performance, and may not necessarily
                  be
                  realized. Actual gains, if any, on stock option exercises depend
                  on the
                  future performance of the common stock, continued employment of
                  the
                  optionee through the term of the options, and other factors.
 
  76
 Table
            of Contents
  **Aggregated
        Option Exercises and Year-End Option Value Table**
 
 Shown
        below is information relating to (i) the exercise of stock options during
        2005 by our Chief Executive Officers and each of our four other most highly
        compensated executive officers as of December 31, 2005, and (ii) the value
        of unexercised options for each of such persons as of December 31,
        2005:
 
 **Shares**
                **Acquired
                  on**
              
              **Value**
              
              **Number
                  of Securities**
                **Underlying
                  Unexercised**
                **Options
                  at Fiscal Year-End**
              
              **Value
                  of Unexercised**
                **In-The-Money
                  Options**
                **at
                  Fiscal Year-End (1)****Name**
              
              
              **Exercise**
              
              
              **Realized**
              
              
              **Exercisable**
              
              
              **Unexercisable**
              
              
              **Exercisable**
              
              
              **Unexercisable**Donald
                  T. Johnson, Jr.
              
              
              —
              
              
              —
              
              
              121,667
              
              
              93,333
              
              $
              523,118
              
              $
              507,732Todd
                  R. Peters
              
              
              —
              
              
              —
              
              
              45,834
              
              
              46,666
              
              
              187,878
              
              
              214,197Brett
                  O. Dickson
              
              
              5,000
              
              $
              64,088
              
              
              31,250
              
              
              12,500
              
              
              67,488
              
              
              82,593William
                  L. Conley
              
              
              —
              
              
              —
              
              
              39,584
              
              
              6,666
              
              
              188,774
              
              
              30,264Joseph
                  Salamunovich
              
              
              80,788
              
              $
              532,218
              
              
              49,584
              
              
              6,666
              
              
              68,674
              
              
              30,264
 _______________
 (1)
              Based
                  on the closing price of our common stock on the Nasdaq National
                  Market
                  System on December 30, 2005, which was $19.44 per
                  share.
 
 **Employment
        Agreements**
 
 We
        have
        entered into an employment agreement with each of our executive officers
        that
        provides for a three-year term and is automatically renewable thereafter
        on a
        year-to-year basis. Each agreement includes a noncompetition provision for
        a
        period of 18 months (24 months in the case of Mr. Peters) from the
        termination of the executive officer’s employment with Aftermarket Technology
        Corp. If the executive officer is terminated without cause (including, in
        the
        case of Mr. Johnson, due to disability), he will receive severance equal
        to his
        base salary for a period of 12 months (18 months in the case of Messrs. Johnson
        and Peters) after termination plus a pro rata portion of his incentive
        compensation bonus for the year in which he is terminated, as well as medical
        benefits during the severance period. If the termination occurs within
        18 months after a change of control, the executive will also receive a
        payment equal to his target bonus under the incentive compensation plan for
        the
        year in which he is terminated.
 
 Any
        executive who ceases to be employed under circumstances that entitle him
        to
        severance payments will ordinarily receive those payments over the severance
        period unless the end of employment occurs within 18 months after a change
        in control, in which case the severance will be made in a single
        payment.
 
 Each
        of
        our executive employment agreements contains a confidentiality provision
        and a
        provision that prohibits the executive officer, during a specified period
        after
        leaving Aftermarket Technology Corp., from soliciting our employees for
        employment by other companies.
 
 **Stock
        Incentive Plans**
 
 Pursuant
        to our 1998, 2000, 2002 and 2004 stock incentive plans, officers, directors,
        employees and consultants of Aftermarket Technology Corp. and its affiliates
        are
        eligible to receive stock options, annual incentive bonuses and incentive
        stock.
        In addition, we have stock options outstanding under a 1996 stock incentive
        plan
        under which awards may no longer be made.
 
 The
        stock
        incentive plans are administered by the Compensation and Nominating Committee
        of
        our Board of Directors, although the Board of Directors makes decisions with
        respect to awards for our Chief Executive Officer and may exercise any of
        the
        Committee’s other authority under the plans in lieu of the Committee’s exercise
        thereof. Subject to the express provisions of the stock incentive plans,
        the
        Committee has broad authority in administering and interpreting the plans.
        Options granted to employees may be options intended to qualify as incentive
        stock options under Section 422 of the Internal Revenue Code of 1986, as
        amended, or options not intended to so qualify. Currently there are no incentive
        stock options outstanding. Awards to employees may include a provision
        terminating the award upon termination of employment under certain circumstances
        or accelerating the receipt of benefits upon the occurrence of specified
        events.
        The vesting of stock options and restricted stock will be accelerated in
        the
        event of a change of control of Aftermarket Technology Corp. Restricted stock
        granted under the stock incentive plans are subject to vesting provision.
        In
        most cases, outstanding options are also subject to vesting provisions and
        expire on the tenth anniversary of the date of grant.
  77
 Table
            of Contents
 As
        of February 10,
        2006 ***,*** there
        were 145,121 shares of restricted stock issued to our directors, officers
        and
        employees and 1,761,647 options to purchase common stock granted to our
        directors, officers and employees pursuant to the plans, and the number of
        shares available for future issuance pursuant to the plans was 345,892. The
        exercise prices of options outstanding under the stock incentive plans as
        of
        February 10, 2006 are as follows:
 
 **Number
                  of Option**
                **Shares**
              
              
              **Exercise
                  Price**6,500
              
              $
              4.56351,330
              
              
              5.061,000
              
              
              6.87520,666
              
              
              8.501,167
              
              
              9.0081,333
              
              
              9.6339,164
              
              
              11.1252,000
              
              
              11.43751,667
              
              
              11.79333
              
              
              11.803,000
              
              
              12.20140,000
              
              
              14.0033,000
              
              
              14.1114,500
              
              
              14.365,000
              
              
              14.8070,000
              
              
              14.85258,321
              
              
              14.90336,500
              
              
              15.8560,000
              
              
              17.8929,166
              
              
              18.1251,000
              
              
              18.2520,000
              
              
              19.006,000
              
              
              19.673,000
              
              
              20.52227,000
              
              
              22.90350,000
              
              
              30.001,761,647
 
 For
        information regarding restricted stock and stock options held by our directors
        and officers, see Item 12. "Security Ownership of Certain Beneficial Owners
        and Management and Related Stockholder Matters."
 
 **Director
        Compensation**
 
 W e
        pay our
        independent directors an annual fee of $50,000 for serving on the Board and
        we
        reimburse them for
        their expenses in connection with attending Board and committee
        meetings.
 
 In
        addition to the annual fee, each independent directors receives an annual
        grant
        of restricted stock and options to purchase our common stock. For 2005 the
        grant
        was 2,500 shares of restricted stock and 7,500 stock options. Each director’s
        restricted stock (for which no consideration was paid), which was valued
        at
        $39,625 as of the grant date (based on the $15.85 closing price of our common
        stock on the Nasdaq National Market System on the grant date), vests in
        one-third increments on the first, second and third anniversaries of the
        date of
        grant. The option exercise price is $15.85 (the closing price of our common
        stock on the date the options were granted), the options vested and became
        exercisable in December 2005, and they expire in 2015.
 
  78
 Table
            of Contents
  **Compensation
        and Nominating Committee Interlocks and** **Insider
        Participation in Compensation Decisions**
 
 The
        Compensation and Nominating Committee of our Board of Directors is composed
        of
        Robert L. Evans, Curtland E. Fields (Chairman) and Michael D.
        Jordan, none of whom are or have ever been an officer of Aftermarket Technology
        Corp. or its subsidiaries and each of whom is, and at all times during 2005
        was,
        independent as defined in the Nasdaq listing standards and the regulations
        of
        the Securities and Exchange Commission. During 2005 none of our executive
        officers served on the board of directors or compensation committee of any
        entity with which any of Messrs. Evans, Fields or Jordan or any other member
        of
        our Board of Directors had any affiliation.
 
 
 **ITEM
                  12.**
              **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT****AND RELATED STOCKHOLDER
                  MATTERS**
 
 **Security
        Ownership**
  The
        following table sets forth the beneficial ownership of our common stock (the
        only class of our issued and outstanding voting securities), as of
        February 15, 2006 by each of our directors, our Chief Executive Officer,
        each of our four other most highly compensated executive officers as of
        December 31, 2005, our directors and executive officers as a group, and
        each person who at February 15, 2006 was known to us to beneficially own
        more than 5% of our outstanding common stock.
 
 **Number
                  of**
                **Shares
                  (1)**
              
              **Voting**
                **Percentage**Wells
                  Fargo & Company (2)
              2,247,101
              
              
              10.3Wasatch
                  Advisors, Inc. (3)
              2,157,124
              
              
              9.9Daruma
                  Asset Management, Inc. (4)
              1,708,600
              
              
              7.8FMR
                  Corp. (5)
              1,359,384
              
              
              6.2Lord,
                  Abbett & Co. LLC (6)
              1,323,993
              
              
              6.1Pzena
                  Investment Management LLC (7)
              1,250,155
              
              
              5.7Donald
                  T. Johnson, Jr. (8)
              246,245
              
              
              1.1Todd
                  R. Peters (9)
              99,080
              
              
              *Brett
                  O. Dickson (10)
              46,396
              
              
              *William
                  L. Conley, Jr. (11)
              45,834
              
              
              *Joseph
                  Salamunovich (12)
              61,861
              
              
              *Robert
                  L. Evans (13)
              30,000
              
              
              *Curtland
                  E. Fields (13)
              30,000
              
              
              *Dr.
                  Michael J. Hartnett (14)
              120,000
              
              
              *Michael
                  D. Jordan (15)
              16,667
              
              
              *S.
                  Lawrence Prendergast (16)
              17,667
              
              
              *Edward
                  Stewart (17)
              31,000
              
              
              *All
                  directors and officers as a group (15 persons) (18)
              968,196
              
              
              4.3
 _______________
 *
        Less
        than 1%.
 
 (1)
              The
                  shares of common stock underlying options granted under our stock
                  incentive plans that are exercisable as of February 15, 2006 or that
                  will become exercisable within 60 days thereafter (such options
                  being
                  referred to as “exercisable”) are deemed to be outstanding for the purpose
                  of calculating the beneficial ownership of the holder of such options,
                  but
                  are not deemed to be outstanding for the purpose of computing the
                  beneficial ownership of any other person.
 (2)
              Wells
                  Fargo’s address is 420 Montgomery Street, San Francisco, CA
                  94104.
 (3)
              Wasatch
                  Advisors’ address is 150 Social Hall Avenue, Salt Lake City, UT
                  84111.
 (4)
              Daruma
                  Asset Management’s address is 80 West 40thStreet,
                  9thFloor, New York, NY 10018.
 (5)
              FMR’s
                  address is 82 Devonshire Street, Boston, MA
                  02109.
 (6)
              Lord,
                  Abbett’s address is 90 Hudson Street, Jersey City, NJ
                  07302.
 (7)
              Pzena’s
                  address is 120 West 45thStreet,
                  20thFloor, New York, NY 10036
  79
 Table
            of Contents
  (8)
              Includes
                  25,000 shares of restricted stock and 168,333 shares subject to
                  exercisable options. Excludes 46,667 shares subject to options
                  that are
                  not exercisable.
 (9)
              Includes
                  24,166 shares of restricted stock and 69,167 shares subject to
                  exercisable
                  options. Excludes 23,333 shares subject to options that are not
                  exercisable.
 (10)
              Includes
                  10,416 shares of restricted stock and 33,750 shares subject to
                  exercisable
                  options. Excludes 10,000 shares subject to options that are not
                  exercisable.
 (11)
              Includes
                  5,416 shares of restricted stock and 39,584 shares subject to exercisable
                  options. Excludes 6,666 shares subject to options that are not
                  exercisable.
 (12)
              Includes
                  8,750 shares of restricted stock and 49,584 shares subject to exercisable
                  options. Excludes 6,666 shares subject to options that are not
                  exercisable.
 (13)
              Consists
                  of 2,500 shares of restricted stock and 27,500 shares subject to
                  exercisable options.
 (14)
              Consists
                  of 2,500 shares of restricted stock and 117,500 shares subject
                  to
                  exercisable options. Excludes 5,000 shares subject to options that
                  are not
                  exercisable.
 (15)
              Consists
                  of 2,500 shares of restricted stock and 14,167 shares subject to
                  exercisable options. Excludes 13,333 shares subject to options
                  that are
                  not exercisable.
 (16)
              Includes
                  2,500 shares of restricted stock and 14,167 shares subject to exercisable
                  options. Excludes 13,333 shares subject to options that are not
                  exercisable.
 (17)
              Includes
                  2,500 shares of restricted stock and 27,500 shares subject to exercisable
                  options.
 (18)
              Includes
                  118,414 shares of restricted stock and 772,120 shares subject to
                  exercisable options. Excludes 150,330 shares subject to options
                  that are
                  not exercisable.
 
 Unless
        otherwise noted above, the address of each person in the above table is 1400
        Opus Place, Suite 600, Downers Grove, IL 60515.
 
 **Securities
        Authorized for Issuance Under Equity Compensation Plans**
 
 The
        following table sets forth certain information regarding our equity compensation
        plans as of December 31, 2005:
 
 **Plan
                  category**
              
              **Number
                  of securities**
                **to
                  be issued**
                **upon
                  exercise of**
                **outstanding
                  options,**
                **warrants
                  and rights**
              
              **Weighted-average**
                **exercise
                  price of**
                **outstanding
                  options,**
                **warrants
                  and rights**
              
              **Number
                  of securities**
                **remaining
                  available for**
                **future
                  issuances under**
                **equity
                  compensation plans**
                **(excluding
                  securities**
                **reflected
                  in column (a)****(a)**
              
              
              **(b)**
              
              
              **(c)**Equity
                  compensation plansapproved
                  by security holders
              
              
              1,798,139
              
              $
              18.43
              
              
              346,559Equity
                  compensation plans not approved by security holders
              
              
              **—**
              
              
              **—**
              
              
              **—**Total
              
              
              1,798,139
              
              
              
              
              
              346,559
 
 
 **ITEM
                  13.**
              **CERTAIN
                  RELATIONSHIPS AND RELATED
                  TRANSACTIONS**
 
 We
        believe the transactions described below were beneficial to us and were entered
        into on terms at least as favorable to us as we could have obtained from
        unaffiliated third parties in arms-length negotiations.
 
 **Relationship
        with Aurora Capital Group**
 
 We
        were
        formed in 1994 at the direction of Aurora Capital Group as a vehicle to acquire
        and consolidate companies in the fragmented drivetrain remanufacturing industry.
        Prior to March 28, 2005, Aurora Equity Partners L.P. and Aurora Overseas
        Equity Partners I, L.P., two limited partnerships that are part of Aurora
        Capital Group, controlled 28% of our outstanding common stock, and until
        June 2, 2005 two persons who are affiliated with Aurora Capital Group were
        members of our Board of Directors.
 
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  While
        the
        Aurora partnerships owned our stock, we paid to Aurora Management Partners,
        which is a part of Aurora Capital Group, an annual management fee for advisory
        and consulting services pursuant to a written management services agreement
        that
        expired when the partnerships sold the stock in March 2005. Aurora Management
        Partners also was reimbursed by us for all of its reasonable out-of-pocket
        costs
        and expenses incurred in connection with the performance of its obligations
        under the management services agreement. We paid management fees of $31,922
        to
        Aurora Management in 2005.
 
 **Indemnification
        Agreements**
 
 We
        have
        entered into separate but identical indemnification agreements with each
        of our
        directors and executive officers. These agreements provide for, among other
        things, indemnification to the fullest extent permitted by law and advancement
        of expenses.
 
 **ITEM
                  14.**
              **PRINCIPAL
                  ACCOUNTANT FEES AND
                  SERVICES**
 
 Our
        principal outside accountant is Ernst & Young LLP. Set forth below are the
        fees and expenses for Ernst & Young for each of the last two years for
        the following services provided to us:
 
 2005
              
              
              2004Audit
                  Fees (1)
              
              $
              1,049,400
              
              $
              1,344,580Audit-Related
                  Fees (2)
              
              
              -
              
              
              9,220Tax
                  Fees (3)
              
              
              69,081
              
              
              102,635All
                  Other Fees (4)
              
              
              120,537
              
              
              133,183Total
                  Fees
              
              $
              1,239,018
              
              $
              1,589,618
 _______________
 (1)
              The
                  fees for 2004 are $125,000 higher than reported in our Annual Report
                  on
                  Form 10-K for the year ended December 31, 2004 due to audit fees
                  incurred
                  but not communicated until after the filing of the 2004 Annual
                  Report.
 (2)
              Consists
                  of fees and expenses for financial accounting
                  consultations.
 (3)
              For
                  2005 consists of fees and expenses for assistance with (i) state,
                  federal and foreign tax returns ($63,712) and (ii) other tax audits
                  ($5,369). For 2004 consists of fees and expenses for assistance
                  with
                  (i) state, federal and foreign tax returns ($71,354) and
                  (ii) state, federal and sales tax audits and refunds
                  ($31,281).
 (4)
              For
                  2005 consists of fees and expenses for services relating to a Statement
                  of
                  Auditing Standards No. 70 review. For 2004 consists of fees and
                  expenses
                  for services relating to (i) a Statement of Auditing Standards No. 70
                  review ($120,394), (ii) diligence for a potential divestiture ($7,289)
                  and
                  (iii) the Form S-8 registration statement relating to our 2004 Stock
                  Incentive Plan ($5,500).
 
 The
        Audit
        Committee of our Board of Directors pre-approves each non-audit engagement
        or
        service with or by our independent auditor. Prior to pre-approving any such
        non-audit engagement or service, it is the Committee's practice to first
        receive
        information regarding the engagement or service that (i) is detailed as to
        the
        specific engagement or service, and (ii) enables the Committee to make a
        well-reasoned assessment of the impact of the engagement or service on the
        auditor’s independence. In addition, the Chairman of the Audit Committee is
        authorized to pre-approve any non-audit service between regularly scheduled
        meetings of the Audit Committee provided that the fees for such service do
        not
        exceed $50,000 and the Chairman’s approvals are reported to the full Audit
        Committee at the next Audit Committee meeting. The Audit Committee or the
        Audit
        Committee Chairman pre-approved all non-audit engagements with, and services
        provided by, our independent auditor during 2005 and 2004.
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  **PART
        IV**
 
 **ITEM
                  15.**
              **EXHIBITS
                  AND FINANCIAL STATEMENT
                  SCHEDULES**
  (a)
                Index
                    to Financial Statements, Financial Statement Schedules and
                    Exhibits:
 
 1.
                Financial
                    Statements
                    IndexSee
                    Index to Financial Statements and Supplemental Data on page
                    40.2.
                Financial
                    Statement Schedules IndexII
                    - Valuation and Qualifying
                    AccountsAll
                    other schedules for which provision is made in the applicable
                    accounting
                    regulation of the Securities and Exchange Commission are not
                    required
                    under the related instructions or are inapplicable and therefore
                    have been
                    omitted.3.
                Exhibit
                    IndexThe
                    following exhibits are filed as part of this Annual Report on
                    Form 10-K,
                    or are incorporated herein by reference.
 **Exhibit**
                **Number**
              **Description**3.1
              Restated
                  Certificate of Incorporation of Aftermarket Technology Corp (previously
                  filed as Exhibit 3.1 to the Company's Current Report on Form 8-K
                  filed on
                  December 21, 2001 and incorporated herein by this
                  reference)3.2*
              Bylaws
                  of Aftermarket Technology
                  Corp.10.1
              Amended
                  and Restated Tax Sharing Agreement, dated as of December 20, 1996,
                  among Aftermarket Technology Holdings Corp., Aaron's Automotive
                  Products, Inc., ATC Components, Inc., CRS Holdings Corp.,
                  Diverco Acquisition Corp., H.T.P., Inc., Mamco Converters, Inc.,
                  R.P.M. Merit, Inc. and Tranzparts Acquisition Corp. (previously filed
                  as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
                  year ended December 31, 1996 and incorporated herein by this
                  reference)10.2
              Lease,
                  dated January 1, 1994, between CRW, Incorporated and Aaron's
                  Automotive Products, Inc. with respect to property located at 2600
                  North Westgate, Springfield, Missouri (previously filed as Exhibit
                  10.4 to
                  the Company's Registration Statement on Form S-4 filed on
                  November 30, 1994, Commission File No. 33-86838, and
                  incorporated herein by this reference)10.3†
              Aftermarket
                  Technology Corp. 1996 Stock Incentive Plan (previously filed as
                  Exhibit
                  10.10 to the Company's Annual Report on Form 10-K for the year
                  ended
                  December 31, 1996 and incorporated herein by this
                  reference)10.4†
              Form
                  of Incentive Stock Option Agreement (previously filed as Exhibit
                  10.36 to
                  Amendment No. 1 to the Company's Registration Statement on Form
                  S-1 filed
                  on October 25, 1996, Commission File No. 333-5597, and
                  incorporated herein by this reference)10.5†
              Form
                  of Non-Qualified Stock Option Agreement (previously filed as Exhibit
                  10.37
                  to Amendment No. 1 to the Company's Registration Statement on Form
                  S-1
                  filed on October 25, 1996, Commission File No. 333-5597, and
                  incorporated herein by this reference)10.6†
              Aftermarket
                  Technology Corp. 1998 Stock Incentive Plan (previously filed as
                  Exhibit 10.55 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 1998 and incorporated herein by this
                  reference)10.7†
              Aftermarket
                  Technology Corp. 2000 Stock Incentive Plan (previously filed as
                  Exhibit 10.57 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 2000 and incorporated herein by this
                  reference)10.8†
              Aftermarket
                  Technology Corp. 2002 Stock Incentive Plan (previously filed as
                  Exhibit 10.31 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 2002 and incorporated herein by this
                  reference)
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 10.9†
              Aftermarket
                  Technology Corp. 2004 Stock Incentive Plan(previously filed as Exhibit 10.1 to the Company's Current Report
                  on Form
                  8-K filed on December 14, 2004 and incorporated herein by this
                  reference)10.10†
              Standard
                  Terms and Conditions Governing Nonemployee Director Stock Options
                  Granted
                  on or after May 12, 2004 under the Aftermarket Technology Corp. 1998,
                  2000, 2002, and 2004 Stock Incentive Plans(previously filed as Exhibit 10.2 to the Company's Current Report
                  on Form
                  8-K filed on December 14, 2004 and incorporated herein by this
                  reference)10.11†
              Standard
                  Terms and Conditions Governing Employee Non-Qualified Stock Options
                  Granted on or after May 12, 2004 under the Aftermarket Technology
                  Corp. 1998, 2000, 2002, and 2004 Stock Incentive Plans(previously filed as Exhibit 10.3 to the Company's Current Report
                  on Form
                  8-K filed on December 14, 2004 and incorporated herein by this
                  reference)10.12†
              Standard
                  Terms and Conditions Governing Nonemployee Director Stock Options
                  under
                  the Aftermarket Technology Corp. 1998, 2000 and 2002 Stock Incentive
                  Plans(previously filed as Exhibit 10.4 to the Company's Current Report
                  on Form
                  8-K filed on December 14, 2004 and incorporated herein by this
                  reference)10.13†
              Standard
                  Terms and Conditions Governing Employee Non-Qualified Stock Options
                  under
                  the Aftermarket Technology Corp. 1998, 2000 and 2002 Stock Incentive
                  Plans(previously filed as Exhibit 10.5 to the Company's Current Report
                  on Form
                  8-K filed on December 14, 2004 and incorporated herein by this
                  reference)10.14†
              Aftermarket
                  Technology Corp. Executive Nonqualified Excess Plan (previously
                  filed as
                  Exhibit 10 to the Company's Current Report on Form 8-K filed on
                  June 6, 2005 and incorporated herein by this reference)10.15†
              Executive
                  Employment Agreement, dated as of January 1, 2004, between
                  Aftermarket Technology Corp. and Donald T. Johnson, Jr. (previously
                  filed
                  as Exhibit 10.17 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 2003 and incorporated herein by this
                  reference)10.16†
              Executive
                  Employment Agreement, dated as of March 9, 2004, between Aftermarket
                  Technology Corp. and Todd R. Peters (previously filed as
                  Exhibit 10.22 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 2004 and incorporated herein by this
                  reference)10.17†
              Form
                  of Executive Employment Agreement between Aftermarket Technology
                  Corp. and
                  certain of its officers (previously filed as Exhibit 10.27 to the
                  Company's Annual Report on Form 10-K for the year ended
                  December 31, 2002 and incorporated herein by this
                  reference)10.18†
              Form
                  of Indemnification Agreement between Aftermarket Technology Corp.
                  and
                  directors and certain officers (previously filed as Exhibit 10.46
                  to
                  Amendment No. 1 the Company's Registration Statement on Form S-1
                  (File
                  No. 333-35543) filed on October 1, 1997 and incorporated herein by
                  this reference)10.19
              Stock
                  Purchase Agreement dated as of September 1, 2000 between Aftermarket
                  Technology Corp. and ATCDG Acquisition Corp., Inc.(previously
                  filed as Exhibit 10.1 to the Company's Current Report on
                  Form 8-K dated October 27, 2000 and incorporated herein by this
                  reference)10.20
              Amendment
                  to Stock Purchase Agreement dated as of October 27, 2000 between
                  Aftermarket Technology Corp. and ATCDG Acquisition Corp., Inc.(previously
                  filed as Exhibit 10.2 to the Company's Current Report on
                  Form 8-K dated October 27, 2000 and incorporated herein by this
                  reference)10.21
              Amendment
                  No. 2 to Stock Purchase Agreement dated as of May 25, 2001
                  between Aftermarket Technology Corp. and ATC Distribution Group
                  (as the
                  successor to ATCDG Acquisition Corp., Inc.) (previously filed as
                  Exhibit
                  10.1 to the Company's Current Report on Form 8-K filed on
                  December 21, 2001 and incorporated herein by this
                  reference)10.22
              Agreement
                  dated as of July 2, 2001 between Aftermarket Technology Corp. and ATC
                  Distribution Group (as the successor to ATCDG Acquisition Corp.,
                  Inc.)
                  (previously filed as Exhibit 10.2 to the Company's Current Report
                  on Form
                  8-K filed on December 21, 2001 and incorporated herein by this
                  reference)10.23
              Amendment
                  No. 3 to Stock Purchase Agreement dated as of October 19, 2001
                  between Aftermarket Technology Corp. and ATC Distribution Group
                  (as the
                  successor to ATCDG Acquisition Corp., Inc.) (previously filed as
                  Exhibit
                  10.3 to the Company's Current Report on Form 8-K filed on
                  December 21, 2001 and incorporated herein by this
                  reference)
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 Table
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 10.24
              Amendment
                  No. 4 to Stock Purchase Agreement dated as of December 28, 2001
                  between Aftermarket Technology Corp. and ATC Distribution Group
                  (as the
                  successor to ATCDG Acquisition Corp., Inc.)(previously filed as Exhibit 10.40 to the Company's Annual Report on
                  Form 10-K for the year ended December 31, 2001 and incorporated
                  herein by this reference)10.25
              Amendment
                  No. 5 to Stock Purchase Agreement dated as of August 2, 2002 between
                  Aftermarket Technology Corp. and ATC Distribution Group (as the
                  successor
                  to ATCDG Acquisition Corp., Inc.)(previously
                  filed as Exhibit 10.29 to the Company's Annual Report on
                  Form 10-K for the year ended December 31, 2002 and incorporated
                  herein by this reference)10.26
              Credit
                  Agreement, dated as of February 8, 2002, made by Aftermarket Technology
                  Corp., the several Lenders from time to time party thereto, J.P.
                  Morgan
                  Securities, Inc., JPMorgan Chase Bank and Credit Suisse First Boston
                  (previously filed as Exhibit 10.1 to Amendment No. 1 the Company's
                  Registration Statement on Form S-3 (File No. 333-75618) filed on
                  February 11, 2002 and incorporated herein by this
                  reference)10.27
              Guarantee
                  and Collateral Agreement, dated as of February 8, 2002, made by
                  Aftermarket Technology Corp. and certain of its subsidiaries in
                  favor of
                  JPMorgan Chase Bank, as Administrative Agent (previously filed
                  as
                  Exhibit 10.2 to Amendment No. 1 the Company's Registration Statement
                  on Form S-3 (File No. 333-75618) filed on February 11, 2002 and
                  incorporated herein by this reference)10.28
              First
                  Amendment, Dated as of December 12, 2003, to the Credit Agreement
                  dated as of February 8, 2002 among Aftermarket Technology Corp., the
                  several Lenders from time to time party thereto, J.P. Morgan Securities,
                  Inc., JPMorgan Chase Bank and Credit Suisse First Boston (previously
                  filed
                  as Exhibit 10.31 to the Company's Annual Report on Form 10-K for
                  the year ended December 31, 2003 and incorporated herein by this
                  reference)14
              Code
                  of Ethics (previously filed as Exhibit 14 to the Company's Annual
                  Report on Form 10-K for the year ended December 31, 2003 and
                  incorporated herein by this reference)21
              List
                  of Subsidiaries (previously filed as Exhibit 21 to the Company's
                  Annual Report on Form 10-K for the year ended December 31, 2004
                  and incorporated herein by this reference)23*
              Consent
                  of Independent Registered Public Accounting
                  Firm31.1*
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief
                  Executive Officer31.2*
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief
                  Financial Officer32.1*
              Section
                  1350 Certification of Chief Executive
                  Officer32.2*
              Section
                  1350 Certification of Chief Financial
                  Officer
 ______________
 *
        Filed
        herewith.
  † Compensation
        plan or arrangements in which directors or executive officers are eligible
        to
        participate.
 
 (b)
              Refer
                  to (a) 3 above.
 
 (c)
              Refer
                  to (a) 2 above.
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 Table
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  **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.
 
 AFTERMARKET
        TECHNOLOGY CORP.
 By:
              /s/
                  Donald T. Johnson, Jr.Donald
                  T. Johnson, Jr.
                Chairman,
                  President and Chief Executive OfficerMarch
                  1, 2006
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this Annual Report
        on Form 10-K has been signed by the following persons on behalf of the
        registrant and in the capacities and on the dates indicated.
 March
                  1, 2006
              /s/
                  Donald T. Johnson, Jr.Donald
                  T. Johnson, Jr.
                Chairman,
                  President and Chief Executive Officer
                (principal
                  executive officer)March
                  1, 2006
              /s/
                  Todd R. PetersTodd
                  R. Peters
                Vice
                  President and Chief Financial Officer
                (principal
                  financial officer)March
                  1, 2006
              /s/
                  John M. PinkertonJohn
                  M. Pinkerton
                Vice
                  President and Controller
                (principal
                  accounting officer)March
                  1, 2006
              /s/
                  Robert L. EvansRobert
                  L. Evans, DirectorMarch
                  1, 2006
              /s/
                  Curtland E. FieldsCurtland
                  E. Fields, DirectorMarch
                  1, 2006
              /s/
                  Michael J. HartnettMichael
                  J. Hartnett, DirectorMarch
                  1, 2006
              /s/
                  Michael D. JordanMichael
                  D. Jordan, DirectorMarch
                  1, 2006
              /s/
                  S. Lawrence PrendergastS.
                  Lawrence Prendergast, DirectorMarch
                  1, 2006
              /s/
                  Edward StewartEdward
                  Stewart, Director
 
 
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 Table
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 **Aftermarket
        Technology Corp.**
 
 **Schedule
        II - Valuation
        and Qualifying
        Accounts**
 **(In
        Thousands)**
 
 **Additions****Balance
                  at**
                **Beginning**
                **of
                  Period**
              
              **Charge**
                **(Income)
                  to**
                **Costs
                  and**
                **Expenses**
              
              **Adjustments**
                **to
                  Other**
                **Accounts**
              
              **Deductions**
              
              **Balance
                  at**
                **End
                  of Period**Year
                  ended December 31, 2003:Reserve
                  and allowances deducted from asset accounts:Allowance
                  for uncollectible accounts
              
              $
              1,300
              
              $
              (9)
              
              $
              234
              (1)
              $
              10
              (2)
              $
              1,515Reserve
                  for excess and obsolete inventory
              
              
              4,233
              
              
              1,166
              
              
              165
              (1)
              
              441
              
              
              5,123Valuation
                  allowance on deferred tax assets
              
              
              9,193
              
              
              893
              
              
              −
              
              
              −
              
              
              10,086Year
                  ended December 31, 2004:Reserve
                  and allowances deducted from asset accounts:Allowance
                  for uncollectible accounts
              
              
              1,515
              
              
              633
              
              
              −
              
              
              1,309
              (1)
              
              839Reserve
                  for excess and obsolete inventory
              
              
              5,123
              
              
              2,029
              
              
              −
              
              
              777
              
              
              6,375Valuation
                  allowance on deferred tax assets
              
              
              10,086
              
              
              3,795
              
              
              −
              
              
              −
              
              
              13,881Year
                  ended December 31, 2005:Reserve
                  and allowances deducted from asset accounts:Allowance
                  for uncollectible accounts
              
              
              839
              
              
              369
              
              
              194
              (3)
              
              194
              (2)
              
              1,208Reserve
                  for excess and obsolete inventory
              
              
              6,375
              
              
              1,452
              
              
              −
              
              
              1,269
              
              
              6,558Valuation
                  allowance on deferred tax assets
              
              
              13,881
              
              
              96
              
              
              −
              
              
              2,218
              (4)
              
              11,759
 
 (1) Balances
        added through acquisitions.
 (2) Accounts
        written off, net of recoveries.
 (3) Balance
        reclassified in current year.
 (4) Related
        to the expiration of capital loss carryforwards.
 
 
 S-1