10-K 1 b53307ate10vk.txt AAVID THERMAL TECHNOLOGIES, INC. FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission file number 0-27309 AAVID THERMAL TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 02-0466826 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)

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

Registrant's telephone number, including area code: (603) 224-1117 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report, and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X](1) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Aggregate market value of the Registrant's common stock held by non-affiliates: N/A. The number of outstanding shares of the registrant's Common Stock as of March 15, 2005 was 1,018.87 shares of class A, 1,078.87 shares of Class B and 40 shares of Class H, all of which are owned by Heat Holdings Corp. On February 2, 2000, a wholly-owned subsidiary of Heat Holdings Corp. was merged with and into the Registrant with the Registrant becoming a wholly-owned subsidiary of Heat Holdings Corp. and each share of Registrant's then outstanding common stock was converted into $25.50 in cash. The Registrant's Common Stock is no longer publicly traded; however, the Registrant's Senior Subordinated Notes are publicly traded. Documents incorporated by reference: none ---------- (1) Although the Company has not been subject to such filing requirements for the past 90 days, it has filed all reports required to be filed by Section 15(d) of the Securities Exchange Act (the "Act") of 1934 during the preceding twelve months. Pursuant to Section 15(d) of the Act, the Company's duty to file reports is automatically suspended as a result of having fewer than 300 holders of record of each class of its debt securities outstanding, as of January 1, 2003, but the Company agreed under the terms of certain long-term debt covenants to continue these filings. PART I ITEM 1. BUSINESS COMPANY INTRODUCTION We are a leading global provider of thermal management solutions for electronic products and the leading developer and marketer of computational fluid dynamics ("CFD") software. We design, manufacture and distribute on a worldwide basis thermal management products that dissipate unwanted heat, which can degrade system performance and reliability, from microprocessors and industrial electronics products. Our products, which include heat sinks, heat pipes, interface materials and attachment accessories, fans, heat spreaders and liquid cooling and phase change devices that we configure to meet customer-specific needs, serve the critical function of conducting, convecting and radiating away unwanted heat. CFD software is used for complex computer modeling of fluid flows, heat and mass transfer and chemical reactions. Our CFD software is used in a variety of industries, including the automotive, aerospace, chemical processing, power generation, material processing, electronics and HVAC industries. Our thermal management products are used in a wide variety of computer and networking and industrial electronics applications, including computer systems (desktops, laptops, disk drives, printers and peripheral cards), network devices (servers, routers, set top boxes and local area networks), telecommunications equipment (wireless base stations, satellite stations and PBXs), instrumentation (semiconductor test equipment, medical equipment and power supplies), transportation and motor drives (braking and traction systems) and consumer electronics (stereo systems and video games). Our CFD software is used for a wide variety of computer-based analyses, including the design of electronic components and systems, automotive design, combustion systems modeling and process plant troubleshooting. We have longstanding relationships with a highly diversified base of more than 3,000 national and international customers, including original equipment manufacturers (commonly referred to as OEMs), electronics distributors and contract manufacturers. On February 2, 2000 we were acquired in a merger ("Merger") with Heat Holdings Corp., a corporation newly formed by Willis Stein & Partners II, L.P. (together with affiliated funds, "Willis Stein") and other investors (collectively the "Purchaser"). The Merger was accounted for using the purchase method. In connection with the Merger, we consolidated our business into two operating segments: Aavid Thermalloy LLC, which includes Applied Thermal Technologies, Inc.'s thermal design, validation and consulting services; and Fluent. INDUSTRY OVERVIEW THERMAL MANAGEMENT In today's electronic environment, microprocessors and their associated power supplies, hard drives, advanced video chips and other peripheral devices draw large amounts of power and, consequently, must dissipate a significant amount of heat. The same heat generation occurs in semiconductors and integrated circuits, in motor controls, telecommunications switches and other electronics. Because these electronic components can only operate efficiently in narrow temperature bands, heat is an absolute constraint in electronic system design. The excessive heat generated within a component not only degrades semiconductor and system performance and reliability, but can also cause semiconductor and system failure. Increasingly, neither externally generated off-the-shelf thermal management products nor internally designed and produced parts have been able to effectively address the expanding complexity of thermal management problems resulting from the increasing amount of heat required to be dissipated by electronic products. The complexity of thermal management problems has been intensified by reductions in system size, shorter time-to-market, shorter product life cycles and more demanding operating environments. These factors have led to the development and growth of the thermal management industry. 2 We believe that future growth of the thermal management products market will be driven by the following factors: - Inherent unit growth in end-user products, such as desktop computers, laptops and telecommunications equipment. In particular, the volume of microprocessors and support chip units is increasing on an absolute and on a per product basis. - The wider use of electronic controls in numerous areas due to the general increase in automation. - The increasing use of microprocessors in industrial electronics applications, fueling the need for thermal management products to manage the different operating temperature characteristics of these devices. - The increased need for reliable power supplies. The quality of power can be adversely affected by thermal overload arising from ineffective thermal management. This is becoming increasingly important within the industrial, computer and telecommunications sectors where "irregular" power surges can damage equipment and cause productivity loss. - The complexity of thermal management problems, which has been intensified by the increasing amount of heat to be dissipated, reductions in system size, shorter time-to-market product cycles and more demanding temperature operating environments. COMPUTATIONAL FLUID DYNAMICS SOFTWARE CFD software is used in a wide range of industries for complex computer-based analysis of engineering designs involving fluid flows, heat and mass transfer, chemical reaction and other fluid flow phenomena. CFD software tools allow the analysis and evaluation of design modifications without the physical prototyping of each design modification, thereby reducing engineering cost, improving product performance and decreasing time-to-market for new products. However, CFD software is not a substitute for physical modeling and testing prior to production or manufacture of the final product. Specific uses of CFD-based flow analysis include the design of electronic components and systems, automotive design, combustion systems modeling and process plant troubleshooting. The CFD software market, which has been growing rapidly over the past decade, continued to grow in 2004. We believe that, through Fluent, we have approximately 35-40% of the developed market for CFD software applications. We expect that future growth of the CFD software market will be driven by the following factors: - The ability of customers using CFD software to reduce their product development costs, minimize time-to-market for their new products and improve product performance. - The ability to analyze fluid flows is becoming increasingly important across a wide range of industries. - The development of more powerful and affordable computers that are capable of running CFD software. - The growing trend among customers to improve the engineering efficiency of product development and improvement through computer-aided analysis and design. - Expansion of the traditional user base for CFD software beyond Ph.D.-level engineers in corporate research and development centers to the larger base of design engineers. 3 COMPETITIVE STRENGTHS We believe that the following competitive strengths have enabled us to become a worldwide leader in both the thermal management market and the CFD software market. TOTAL INTEGRATED SOLUTIONS PROVIDER The increasing complexity of heat dissipation problems and the growing trend among manufacturers to outsource development of thermal management solutions has stimulated demand for total integrated solutions. We provide total integrated solutions by analyzing customers' thermal management problems at the device-, board- and system-level, designing, simulating and prototyping thermal management solutions and manufacturing, distributing and supporting these solutions worldwide. VALUE-ADDED PARTNERING WITH OUR CUSTOMERS We work closely with our customers to develop customized thermal management solutions. We believe that our close relationships with customers and their design and development teams, as well as our worldwide manufacturing capabilities, allow us to anticipate customers' needs and, through our engineering expertise and experience, provide quality product solutions more quickly than our competitors. WORLDWIDE LOW COST MANUFACTURER We have manufacturing operations in the United States, Canada, Mexico, Europe and Asia, including China. As an increasing number of electronics systems are being manufactured outside the United States, our low cost foreign manufacturing operations enable us to supply products directly to our customers at their geographically dispersed manufacturing locations. LEADERSHIP IN CFD SOFTWARE We believe that we are the technology leader in CFD software. As a result of our technological leadership, we develop software that enables our customers to generate the increasingly complex computer models they demand for more cost-efficient product design. This factor, as well as the relative ease-of-use and predictive accuracy of our CFD software, are of primary importance to our customers. RECURRING REVENUES FROM SOFTWARE BUSINESS Our CFD software business is characterized by high customer retention and recurring revenues. In recent years, approximately 80% of our annual software license revenue was renewed in the following year. This is driven by the significant value added by our CFD software to the design process and the high cost of switching to a competitor's software. EXPERIENCED MANAGEMENT TEAM Our senior management team has extensive operating and marketing experience in the thermal management and CFD software markets. This management team has grown our business, both organically and through strategic acquisitions, and has been responsible for improving operating efficiencies. Bharatan R. Patel, our chief executive officer who founded our CFD software business, has 31 years of experience in the area of fluid flows and thermal management and H. Ferit Boysan, president of our CFD software business, has 24 years of experience in the area of fluid flows and CFD software. 4 BUSINESS STRATEGY Our business strategy is to continue to be a market leader in both the thermal management and CFD software markets. We intend to continue this business strategy and strengthen our competitive position through the following initiatives: CAPITALIZE ON THERMAL MANAGEMENT INDUSTRY GROWTH We believe that our existing thermal management markets will continue to experience growth in the long term. Growth will be driven by the need to dissipate the increasing amount of heat being generated by electronic products, as well as unit growth in these products. We believe our competitive strengths position us to capitalize on these growth trends. TAKE ADVANTAGE OF OUTSOURCING TREND The increasing complexity of heat dissipation problems is driving a trend among manufacturers to outsource the development of thermal management solutions to companies with high levels of expertise in solving these problems. We intend to capitalize on this trend by leveraging our technical expertise in designing thermal management products and through continuing to partner with our customers in creating customized solutions. EXPAND OUR ADDRESSED THERMAL MANAGEMENT MARKET We believe we have significant opportunities to expand the portion of the outsourced thermal management market that we address. Our strategy is to expand into the part of the outsourced thermal management market that we do not currently serve by entering into new geographic markets and introducing new products that complement our existing product offerings. ACCELERATE GROWTH IN COMPUTATIONAL FLUID DYNAMICS SOFTWARE MARKET Growth in the CFD software market will be driven by customers' needs to reduce product development costs, minimize the time-to-market for their new products and improve product performance, as well as by increasing applications for CFD software. We intend to grow our CFD software business through internal product development, licensing of externally developed technology, and possibly strategic acquisitions to leverage our core technological competence in the development of computerized design and simulation software. Our goal is to further expand this market beyond its traditional user base of Ph.D.-level engineers in corporate research and development centers to the larger base of design engineers by providing them relatively easy-to-use industry-specific software. PROVIDE TOTAL THERMAL MANAGEMENT SOLUTIONS ON A GLOBAL BASIS We intend to continue capitalizing on our state-of-the-art worldwide manufacturing capabilities and to further leverage our expertise and technology to offer our customers a complete global solution to their thermal management problems. The increasing number of electronics systems manufactured outside of the United States has forced many electronics manufacturers to seek a highly integrated, worldwide provider of thermal solutions. We plan to continue to expand our quick-ramp, high-volume manufacturing and our design, sales and distribution activities globally as our customers continue to expand their operations overseas. LEVERAGE OUR TECHNOLOGICAL LEADERSHIP Our approximately 150 Ph.D.s and 280 engineers focus on new technology initiatives as well as developing new and enhancing existing products, processes and materials to address the evolving needs of our customers. We seek to enhance our internal research and development activities through collaborations with our customers and third parties in order to gain access to, or to pursue the development of, new technologies for thermal management applications and CFD software. 5 MARKETS AND CUSTOMERS We sell our thermal management products and services to a highly-diversified base of customers across a wide range of industries and applications. Our customer base includes major customers which operate in the computer, networking, contract manufacturing, communications and electronics distribution market sectors. One customer represented approximately 10.2% of our thermal management net sales during 2003. No customer represented more than 10% of our thermal management net sales in 2004 or 2002. We currently have more than 2,000 licensees of our CFD software. Our largest customers for CFD software applications operate in the aerospace, automotive, chemical process, electronics, consumer products and power generation market sectors. THERMAL MANAGEMENT PRODUCTS AND SERVICES We provide total integrated solutions to our thermal management customers. We have the thermal design know-how to first analyze customers' thermal management problems at the device-, board- and system-level, to then design, simulate and prototype thermal management solutions and to finally manufacture, distribute and support these solutions around the world. We design, manufacture and sell both standard and customized thermal management products. We seek to become a strategic supplier to our customers and to differentiate ourselves from our competitors by offering a higher level of service. We currently offer heat sinks, interface materials and attachment accessories, fans, heat spreaders and liquid cooling and phase change devices that we configure to meet customer-specific needs. The prices for our thermal management products (including attachment devices and interface materials), depend primarily on cost, the technology used to make the part and its value in the customer's application. Because of the continued shrinking time-to-market for most new products and the corresponding contraction of design cycles, we also offer simulation and modeling software and hardware prototyping and testing to assist our customers in handling the complexity of the design of a thermal solution. The following is a brief description of our thermal management products and services:

COMPUTATIONAL FLUID DYNAMICS SOFTWARE PRODUCTS We are the leading provider of general purpose CFD software used to predict fluid flow, heat and mass transfer, chemical reaction and related phenomena. We provide CFD-based flow analysis software and consulting services that are used by engineers in corporations worldwide for the design and analysis of products and processes. Our software and services help engineers reduce engineering and product development costs, improve product performance and reduce time-to-market for new products. We currently license our software products to more than 2,000 licensees worldwide. In North America, we typically license our software products under one year, renewable agreements. In Europe and the Far East, a significant portion of our CFD software sales are derived from licenses of this software for one-time fees; in such situations, we also typically receive annual maintenance and support fees. We have also introduced CFD-based industry-specific products, such as Icepak, for use by designers and engineers in the electronics cooling industry, Airpak, for use by designers and engineers in the HVAC industry and Mixsim, for use by designers and engineers in the chemical mixing industry. We believe that our relatively easy-to-use, industry-specific products are expanding the CFD total market beyond its traditional user base of Ph.D.-level engineers in corporate research and development centers to the larger base of design engineers. We also market engineering consulting services. With over 15 years of CFD and engineering consulting experience, our worldwide team of CFD professionals supports clients with senior engineering consultants, experienced CFD analysts, leading CFD software developers and mesh generation experts. Support services include expertise in the physics of heat, fluid flow and related phenomena, in CFD modeling and analysis, and in selection of engineering design solutions. In addition to providing CFD software expertise and access to high-performance computing systems, our CFD software consulting group works under contract to develop software with specific features required by individual clients. 7 We provide a complete suite of CFD software products, with each product designed for a specific task or for optimal performance on a specific class of problems. The following is a brief description of our major CFD software products:

SALES AND SUPPORT We sell our thermal management products and CFD software primarily through a global network of direct sales personnel, manufacturers' representatives, agents and a network of independent distributors. We provide support services to our customers, particularly in the CFD software area where we believe that high-quality support service is critical to the success of the CFD software business. Aavid Thermalloy (including Applied Thermal Technologies) and Fluent both have their own sales, support and marketing personnel, all of whom cross-sell each other's products and services where appropriate. We currently employ approximately 325 sales, support and marketing personnel. TECHNOLOGY We believe that technology leadership is essential to our growth strategy and have focused our approximately 150 Ph.D.s and 280 engineers on the development of technology in two areas: THERMAL MANAGEMENT TECHNOLOGY We believe that we are a technology leader in thermal management due to our extensive design expertise, technical manufacturing capabilities and process technology. We intend to develop new technologies and to enhance existing technologies in order to meet our customers' needs for higher performance products on a timely basis. We have developed proprietary software tools (analytical models) which enable fast approximation answers for a large class of thermal management problems which, in turn, permits quicker design and prototyping of thermal solutions. We have extensive prototyping capabilities and state-of-the-art thermal laboratory facilities, including a wind tunnel which allows us to test and validate the design of thermal solutions. As part of Aavid Thermalloy, Applied Thermal Technologies leverages Aavid Thermalloy's capabilities and Icepak's technology to assist customers in analyzing their thermal problems at the device-, board- and system-levels and to efficiently design, simulate and prototype thermal management solutions. By entering into the customer relationship at the onset of the product design cycle, Applied Thermal Technologies greatly enhances our knowledge of future industry trends, including technology development and acceptance. Additionally, Applied Thermal Technologies provides a smooth transition from design and validation to outsourced manufacturing with Aavid Thermalloy. 9 COMPUTATIONAL FLUID DYNAMIC SOFTWARE TECHNOLOGY We believe that we are the technology leader in CFD software. Fluent's CFD software includes: - automatic unstructured mesh generation, which allows the automatic creation of meshes, - numerical algorithms for the accurate solution of fluid flow equations on structured and unstructured meshes, - solution adaptive mesh which allows for interactive mesh refinement to provide improved solution accuracy, - state-of-the-art physical models for important fluid flow phenomena such as turbulence, turbulence-chemistry interactions, free surface flows and multiphase flows, - algorithms for efficient execution on multi-processor computers and distributed computer networks, - interactive client/server architecture with a flexible and customizable user interface, and - post-processing and data analysis tools. PRODUCT DEVELOPMENT Our thermal management product development activities are focused on lowering production costs, improving thermal characteristics and ease of attachment of conventional heat sinks, and developing new thermal management products and technologies to address the emerging and anticipated thermal management problems of our customers. We are developing new products, both internally as well as through collaborative efforts with third parties. These development efforts are directed toward: heat sink characterization and optimization; fan designs; air flow management; boundary layer optimization and focused flow; re-circulating passive and active cooling systems including heat pipes; thermoelectric coolers, which use electricity to create a temperature difference across an interface between the electronic device and a heat sink; liquid and sub-ambient cooling systems; tab and surface mount heat sink attachment methods; and adhesive and interface systems that have a high degree of thermal conductivity. Our CFD product development activities are focused on enhancing the capabilities of its solvers, implementing new physical models to increase the range of applications and developing front-end user interfaces that are easy to use for engineers in specific industries. We are also focusing on various application and industry-specific CFD software projects which we believe will enable us to penetrate the design engineering market. SUPPLIERS We purchase raw aluminum, aluminum extrusion, aluminum coil and various components from a limited number of outside sources. We purchase substantially all of our aluminum coil stock from a single supplier. We believe that purchasing aluminum extrusion and coil stock from a limited number of suppliers is necessary to obtain lower prices and to consistently achieve the tolerances and design and delivery flexibility that we require. For raw aluminum extrusion and coil stock, we typically make a purchasing commitment to a key supplier of up to 24 months. In return, this supplier commits to maintaining local inventory and to reserving run-time on critical machines. The cost of aluminum extrusion is generally negotiated annually, with the price adjusted monthly, based upon the changes in the price of aluminum ingot, which has historically been highly cyclical. 10 COMPETITION Our thermal management products business competes with a number of major providers of thermal management products throughout the world. In addition, there are a large number of smaller heat sink companies, as well as hundreds of machine shops, that fabricate heat sinks, usually under subcontract with an OEM customer. Further, some aluminum die casters offer cast heat sinks, and a number of aluminum extruders sell heat sink products and fabrication capability, including aluminum extruders serving the automotive industry and the power conversion market. Fluent currently competes with a number of companies, primarily on the basis of product performance. To the extent that Fluent expands into additional applications and industry-specific markets, it will encounter additional competition from software companies already serving such specific markets. In addition, certain CFD software is available in the public domain. BACKLOG AND LICENSE RENEWAL Our hardware products typically are produced and shipped within 30 days of the receipt of orders and, accordingly, we operate with little backlog. As a result, net sales in any quarter generally are dependent on orders booked and shipped in that quarter. All orders are subject to cancellation or rescheduling by customers. Because of our quick turn of orders to shipments, the timing of orders, delivery intervals, customer and product mix and the possibility of customer changes in delivery schedules, we do not believe our backlog at a particular date is a reliable indicator of actual sales for any succeeding period. Our software products are typically sold under annual license agreements or with annual maintenance agreements. In recent years, greater than 80% of our annual software license revenue was renewed in the following year. EMPLOYEES As of December 31, 2004, we had a total of 2,157 employees including approximately 500 contract employees in China. Except for the employees in our manufacturing facility in Mexico, none of our employees are represented by labor unions or collective bargaining units. We believe that our relationship with our employees is good. RISK FACTORS This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements regarding our expected future financial position, results of operations, cash flows, financing plans, business strategy, competitive position, plans and objectives and words such as "anticipate," "believe," "estimate," "expect," "intend," "plan" and other similar expressions are forward-looking statements. Such forward looking statements are inherently uncertain, and holders of our securities must recognize that actual results could differ materially from those projected or contemplated in the forward-looking statements as a result of a variety of factors, including the factors set forth below. Holders of our securities should not place undue reliance on these forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the effect of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 11 RISKS RELATING TO OUR BUSINESS WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR INTERNAL GROWTH. We intend to increase our thermal products and software businesses overseas, expand the products and services we offer, and possibly make selective acquisitions as the economy improves. This growth and expansion may place a significant strain on our production, technical, financial and other management resources. To manage any growth effectively, we must maintain a high level of manufacturing quality, efficiency, delivery and performance and must continue to enhance our operational, financial and management systems, and attract, train, motivate and manage our employees. We may not be able to effectively manage this expansion, and any failure to do so could have a material adverse effect on our business and financial condition. OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. Our quarterly and annual operating results are affected by a wide variety of factors, many of which are outside our control, that have in the past and could in the future materially and adversely affect our net sales, gross margins and profitability. These factors include: - the volume and timing of orders received; - competitive pricing pressures; - the availability and cost of raw materials; - changes in the mix of products and services sold; - potential cancellation or rescheduling of orders; - general economic conditions; - changes in the level of customer inventories of our products; - the timing of new product and manufacturing process technology introductions by us or our competitors; - the availability of manufacturing capacity; and - market acceptance of new or enhanced products introduced by us. Additionally, our growth and results of operations have in the past been, are currently being and would in the future be, adversely affected by downturns in the semiconductor or electronics industries. Our ability to reduce costs quickly in response to revenue shortfalls is limited, and this limitation will be exacerbated to the extent we continue to add additional manufacturing capacity. The need for continued investment in research and development could also limit our ability to reduce expenses accordingly. As a result of these factors, we expect our operating results to continue to fluctuate. Results of operations in any one quarter should not be considered indicative of results to be expected for any future period, and fluctuations in operating results may also cause fluctuations in the market price of the senior subordinated notes. We cannot provide assurance that the overall thermal management market, or the segments of the market served by us, will continue to grow in the future. See "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations." 12 OUR BUSINESS IS DEPENDENT ON THE SEMICONDUCTOR MARKET. A significant portion of our net sales has been, and is expected to continue to be, dependent upon sales of thermal management products for industrial electronics applications, consisting primarily of integrated circuits, and for computer and networking applications, consisting primarily of microprocessors and related chip sets. The thermal management market for computer and networking applications is characterized by rapid technological change, short product life cycles, greater pricing pressure and increasing foreign and domestic competition as compared to the thermal management market for industrial electronics applications. Future growth will, to a significant extent, depend upon increased demand for semiconductor devices and products that require thermal solutions. The semiconductor industry (both computer and networking and industrial) has historically been cyclical and subject to significant economic downturns characterized by diminished product demand and eroding average selling prices. A decrease in demand for semiconductor products would reduce demand for our products and have an adverse impact on our results of operations. Further, in developing and designing new products, semiconductor manufacturers and their customers typically seek to eliminate or minimize thermal problems, and such efforts could have the effect of reducing or eliminating demand for certain of our products. Additionally, we believe that many of our OEM customers compete in intensely competitive markets characterized by declining prices and low margins. These OEMs apply continued pricing pressure on their component suppliers, including us. We cannot provide assurance that we will not be adversely affected by cyclical conditions in the semiconductor and electronics industries. CHANGES IN THE AVAILABILITY OR PRICE OF ALUMINUM CAN SIGNIFICANTLY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. Aluminum is the principal raw material used in our products and represents a significant portion of our cost of goods sold. We purchase raw aluminum, aluminum extrusion, aluminum coil and various components from a limited number of outside sources. During the years ended December 31, 2004, 2003 and 2002, we purchased a significant portion of our aluminum coil stock from a single supplier. We believe that purchasing aluminum extrusion and coil stock from a limited number of suppliers is necessary in order to obtain lower prices and to achieve, consistently, the tolerances and design and delivery flexibility that we require. If the available supply of aluminum declines, or if one or more of our current suppliers is unable for any reason to meet our requirements, is acquired by a competitor or decides to compete with us, we could experience cost increases, a deterioration of service from our suppliers, or interruptions, delays or a reduction in raw material supply that may cause us to fail to meet delivery schedules to customers. Although we believe that viable alternate suppliers exist for the aluminum coil stock and components, any unanticipated interruption of supply would have a short-term material adverse effect on us. In addition, our ability to pass price increases for aluminum or other raw materials along to our customers may be limited by competitive pressures, customer resistance and price adjustment limitations in our product purchase contracts with our customers. Even if we are able to pass along all or a portion of raw material price increases, there is typically a lag of three to twelve months between the actual cost increase of raw material and the corresponding increase in the prices of our products. We cannot provide assurance that in the future we will be able to recover increased aluminum or other raw material costs through higher prices to our customers. Market prices for raw aluminum, which have historically been cyclical and highly volatile, have a significant effect on our gross margin. An increase in the market price for aluminum could have a material adverse effect upon our results of operations and business. See "Our operating results may fluctuate significantly." 13 WE SUPPLY PRODUCTS AND SERVICES TO INDUSTRIES THAT EXPERIENCE RAPID TECHNOLOGICAL CHANGE, WHICH MAY MAKE OUR PRODUCTS OBSOLETE. The markets for our products are characterized by rapidly changing technology, frequent new product introductions and enhancements and rapid product obsolescence. Our future success will be highly dependent upon our ability to continually enhance or develop new thermal and software products, materials, manufacturing processes and services in order to keep pace with the technological advancements of our customers and their corresponding increasingly complex thermal management and computational fluid dynamics software needs. We may not be able to identify new product trends or opportunities, develop and bring to market new products or respond effectively to new technological changes or product announcements by others, develop or obtain access to advanced materials, or achieve commercial acceptance of our products. In addition, other companies, including our customers, may develop products or technologies which render our products or technologies noncompetitive or obsolete. WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MAINTAIN OR INCREASE SALES OF OUR PRODUCTS. The markets for thermal management products and computational fluid dynamics software are highly competitive. Certain of our competitors, which include divisions or subsidiaries of large companies, may have greater technical, financial, research and development and marketing resources than we do. Further, we expect that as the trend toward outsourcing continues, a number of new competitors may emerge, some of which may have greater technical, financial, research and development and marketing resources than we do. Our ability to compete successfully depends upon a number of factors, including price, customer acceptance of our products, cost effective high-volume manufacturing, proximity to customers, lead times, ease of installation of our products, new product and manufacturing process technology introductions by us and our competitors, access to new technologies and general market and economic conditions. We cannot provide assurance that we will be able to compete successfully in the future against existing or potential competitors, or that our operating results will not be adversely affected by increased price competition. In addition, our customers for thermal management and software products may manufacture or develop such products internally or actively support new entrants into our market rather than purchase thermal products from us. Further, many of our customers like to maintain dual sources for thermal management products. OUR BUSINESS EXPERIENCES SEASONAL VARIATIONS. Our CFD software business has experienced and is expected to continue to experience significant seasonality due to, among other things, the second and third quarter slowdown in software billings primarily due to the purchasing and budgeting patterns of Fluent's software customers. In addition, our thermal management business has experienced slight seasonal variations due to the slowdown during the third quarter's summer months which historically has occurred in the electronics industry. Typically, our billings are lowest during the second and third quarters of the fiscal year, which ends in December. WE DEPEND ON KEY PERSONNEL AND SKILLED EMPLOYEES WHO MAY NOT REMAIN WITH US IN THE FUTURE. Our success depends to a large extent upon the continued services of our senior management and technical personnel. Our business also depends upon our ability to retain skilled and semi-skilled employees. There is intense competition for qualified management and skilled and semi-skilled employees and our failure to recruit, train and retain such employees could adversely affect our business. 14 OUR INTERNATIONAL OPERATIONS EXPOSE US TO ADDITIONAL RISKS. We currently have multiple international manufacturing locations to better service our customers, many of whom have moved their manufacturing operations and expanded their business overseas. International operations are subject to a number of risks, including: - greater difficulties in controlling and administering business; - less familiarity with business customs and practices; - increased reliance on key local personnel; - the imposition of tariffs and import and export controls; - changes in governmental policies (including U.S. policy toward these countries); - difficulties caused by language barriers; - increased difficulty in collecting receivables; - availability of, and time required for, the transportation of products to and from foreign countries; - political instability; - foreign currency fluctuations; and - expropriation and nationalization. The occurrence of any of these or other factors may have a material adverse effect on our results of operations and could have an adverse effect on our relationships with our customers. Furthermore, the occurrence of certain of these factors in countries in which we operate could result in the impairment or loss of our investment in such countries. The trend by our customers to move manufacturing operations and expand their business overseas may have an adverse impact on our sales of domestically manufactured products. A part of our net sales is currently derived from products manufactured at our manufacturing facility in Guang Dong Province in The People's Republic of China. We commenced manufacturing at this facility in early 1998 and currently maintain approximately 140,000 square feet of manufacturing space. Because of language and cultural differences, managing operations in China can be difficult, and although we have focused significant management resources on this operation, we cannot provide assurance that this business will be successful. An inability to successfully manage this business or an interruption in the operations at this facility could have a material adverse effect on our overall financial performance until we are able to obtain substitute production capability with similar low operating costs. We have additional manufacturing facilities in North America and Europe. As of the date of this filing, there has been significant speculation that the People's Republic of China may elect to adjust the exchange rate of the Chinese Yuan against the U.S. Dollar. While there have been no official decisions made, or timetables established, current press reports indicate that some form of revaluation may occur in 2005. Currently, the Chinese Yuan has a fixed exchange rate against the U.S. dollar. Should China adjust the exchange rate of the Yuan, or allow the value of the Yuan to float, it is possible that this change could negatively impact our operation in China by making it more expensive for us to do business there. A revaluation of the Yuan could also result in foreign currency exchange gains or losses within our statement of operations in 2005 or future periods. It is impossible, based on current facts or circumstances, to estimate the impact on our business in 2005 or future periods of a revaluation of the Chinese Yuan. 15 WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY. Our success depends in part on our proprietary technology. We attempt to protect our proprietary technology through patents, copyrights, trademarks, trade secrets and license agreements. We believe, however, that our success will depend to a greater extent upon innovation, technological expertise and distribution strength. We cannot provide assurance that we will be able to protect our technology, or that our competitors will not be able to develop similar technology independently. We cannot provide assurance that the claims allowed on any patents held by us will be sufficiently broad to protect our technology. In addition, no assurance can be given that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to us. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries in which we conduct business. Although we believe that our products and technology do not infringe upon proprietary rights of others, there can be no assurance that third parties will not assert infringement claims in the future. Moreover, litigation may be necessary in the future to enforce our patents, copyrights and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our financial condition and results of operations. WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL AND OTHER REGULATIONS. We are subject to a variety of United States and foreign environmental laws and regulations, including those relating to the use, storage, treatment, discharge and disposal of hazardous materials, substances and wastes used to manufacture our products and remediation of soil and groundwater contamination. Public attention has increasingly been focused on the environmental impact of operations that use hazardous materials. Some of the environmental laws impose strict, and in certain cases joint and several, liability for response costs at contaminated properties on their owners or operators, or on persons who arranged for the disposal of regulated materials at these properties. Our operations are also governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations thereunder which, among other requirements, establish noise and dust standards. We believe we are in material compliance with applicable environmental, health and safety requirements. Our failure to comply with present or future laws or regulations could result in substantial liability to us. We cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not previously applied. Enactment of more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies or discovery of previously unknown conditions requiring remediation, could require substantial expenditures by us and could adversely affect our results of operations. RISKS RELATED TO OUR INDEBTEDNESS OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE SENIOR SUBORDINATED NOTES. We have a substantial amount of debt. The following chart shows certain important credit statistics:

16 Our substantial indebtedness could have important consequences to holders of our senior subordinated notes. For example, it could: - make it difficult for us to satisfy our obligations with respect to the senior subordinated notes and our obligations under our current senior credit facility (the "Loan and Security Agreement"); - require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which will reduce amounts available for working capital, capital expenditures, research and development and other general corporate purposes; - limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - increase our vulnerability to general adverse economic and industry conditions; - place us at a competitive disadvantage compared to our competitors with less debt; and - limit our ability to borrow additional funds. The terms of the indenture governing our senior subordinated notes do not fully prohibit us or our subsidiaries from incurring substantial additional debt in the future. Our Loan and Security Agreement also permits additional borrowing. All of the borrowings under our Loan and Security Agreement are senior to the senior subordinated notes. If new debt is added to our current debt levels, the related risks that we now face could intensify. In addition, a portion of our debt, including debt incurred under our Loan and Security Agreement, bears interest at variable rates. An increase in the interest rates on our debt will reduce the funds available to repay the senior subordinated notes and our other debt and for operations and future business opportunities and will intensify the consequences of our leveraged capital structure. See "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations" for a description of our Loan and Security Agreement and the senior subordinated notes. TO SERVICE OUR DEBT, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH, WHICH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. Our ability to make payments on and to refinance our debt, including the senior subordinated notes and the Loan and Security Agreement, will depend on our ability to generate cash in the future. This, to an extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot provide assurance that our business will generate sufficient cash flow or that future borrowings will be available to us in an amount sufficient to enable us to pay our debt, including the senior subordinated notes, or to fund our other liquidity needs. If our future cash flow from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to reduce or delay our business activities and capital expenditures, sell assets, obtain additional equity capital or restructure or refinance all or a portion of our debt, including the senior subordinated notes, on or before maturity. We cannot assure noteholders that we will be able to refinance any of our debt, including the senior subordinated notes, on a timely basis or on satisfactory terms if at all. In addition, the terms of our existing debt, including the senior subordinated notes and the Loan and Security Agreement, and other future debt may limit our ability to pursue any of these alternatives. 17 OUR LOAN AND SECURITY AGREEMENT AND THE INDENTURE IMPOSE OPERATIONAL AND FINANCIAL RESTRICTIONS ON US. Our Loan and Security Agreement and the indenture under which our senior subordinated notes were issued include restrictive covenants that, among other things, restrict our ability to: - incur more debt; - pay dividends and make distributions; - issue stock of subsidiaries; - make certain investments; - repurchase stock; - create liens; - enter into transactions with affiliates; - enter into sale-leaseback transactions; - merge or consolidate; and - transfer and sell assets. Our Loan and Security Agreement also requires us to maintain financial ratios. All of these restrictive covenants may restrict our ability to expand or to pursue our business strategies. Our ability to comply with these and other provisions of our indenture and Loan and Security Agreement may be affected by changes in our business condition or results of operations, adverse regulatory developments or other events beyond our control. RISKS RELATED TO THE SENIOR SUBORDINATED NOTES OUR CONTROLLING STOCKHOLDER, WILLIS STEIN, MAY HAVE INTERESTS THAT CONFLICT WITH HOLDERS OF THE SENIOR SUBORDINATED NOTES. We are a wholly owned subsidiary of Heat Holdings Corp., whose equity securities are held by Willis Stein and some co-investors. Through its controlling interest in Aavid and pursuant to the terms of the security holders' agreement among the equity investors, Willis Stein has the ability to control the operations and policies of Aavid. Circumstances may occur in which the interests of Willis Stein, as the controlling equity holder, could be in conflict with the interests of the holders of the senior subordinated notes. In addition, the equity investors may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to the holders of the senior subordinated notes. THE SENIOR SUBORDINATED NOTES ARE CONTRACTUALLY SUBORDINATED IN RIGHT OF PAYMENT TO OUR SENIOR DEBT. The senior subordinated notes are senior subordinated obligations of Aavid ranking junior to all of our existing and future senior debt, equal in right of payment with all of our existing and future senior subordinated debt and senior in right of payment to any of our subordinated debt. The senior subordinated notes are contractually subordinated in right of payment to borrowings under our Loan and Security Agreement. 18 As of December 31, 2004, we had $14.7 million of senior debt outstanding under the Loan and Security Agreement, all of which was secured debt. The indenture limits, and in some (but not all) instances prohibits, the incurrence of additional debt. In addition, all payments on the senior subordinated notes will be blocked in the event of a payment default under the Loan and Security Agreement and may be blocked for up to 179 consecutive days in any given year in the event of non-payment defaults on senior debt. In the event of a default on the senior subordinated notes and any resulting acceleration of the senior subordinated notes, the holders of senior debt then outstanding will be entitled to payment in full in cash of all obligations in respect of such senior debt before any payment or distribution may be made with respect to the senior subordinated notes. In a bankruptcy, liquidation or reorganization or similar proceeding relating to us, holders of the senior subordinated notes will participate with trade creditors and all other holders of subordinated debt in the assets remaining after we have paid all of the senior debt. However, because the indenture requires that amounts otherwise payable to holders of the senior subordinated notes in a bankruptcy or similar proceeding be paid to holders of senior debt instead, holders of the senior subordinated notes may receive proportionately less than holders of trade payables in any such proceeding. In any of these cases, we cannot provide assurance that sufficient assets will remain to make any payments on the senior subordinated notes. WE ARE A HOLDING COMPANY AND OUR ONLY SOURCE OF CASH TO PAY INTEREST ON AND THE PRINCIPAL OF THE SENIOR SUBORDINATED NOTES IS DISTRIBUTIONS FROM OUR SUBSIDIARIES. We are a holding company with no business operations of our own. Our only significant asset is and will be our equity interests in our subsidiaries. We conduct all of our business operations through our subsidiaries. Accordingly, our only source of cash to make payments of interest on and principal of the senior subordinated notes is distributions with respect to our ownership interest in our subsidiaries from the net earnings and cash flows generated by such subsidiaries. WE MAY NOT HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER REQUIRED BY THE INDENTURE. If we undergo a "change of control," as defined in the indenture under which the senior subordinated notes were issued, we must offer to buy back the senior subordinated notes for a price equal to 101% of the principal amount, plus interest that has accrued but has not been paid as of the repurchase date. We cannot assure note holders that we will have sufficient funds available to make the required repurchases of the senior subordinated notes in that event, or that we will have sufficient funds to pay our other debts. In addition, our Loan and Security Agreement prohibits us from repurchasing the senior subordinated notes after a change of control until we have repaid in full our debt under such credit facility. If we fail to repurchase the senior subordinated notes upon a change of control, we will be in default under both the senior subordinated notes and our Loan and Security Agreement. Any future debt that we incur may also contain restrictions on repurchases in the event of a change of control or similar event. 19 THE SENIOR SUBORDINATED NOTES AND THE GUARANTEES COULD BE VOIDED OR SUBORDINATED TO OUR OTHER DEBT IF THE ISSUANCE OF THE SENIOR SUBORDINATED NOTES OR THE GUARANTEES CONSTITUTED A FRAUDULENT CONVEYANCE. If a bankruptcy case or lawsuit is initiated by our unpaid creditors, the debt represented by the senior subordinated notes and the guarantees of the senior subordinated notes by certain of our subsidiaries may be reviewed under the federal bankruptcy laws and comparable provisions of state fraudulent transfer laws. Under these laws, the debt could be voided, or claims in respect of the senior subordinated notes and the guarantees could be subordinated to all other debts of Aavid or its subsidiaries if, among other things, the court found that, at the time we incurred the debt represented by the senior subordinated notes and the subsidiaries incurred the debt represented by the guarantee, we or any subsidiary: - received less than reasonably equivalent value or fair consideration for the incurrence of such debt; and - were insolvent or rendered insolvent by reason of such incurrence; or - were engaged in a business or transaction for which the remaining assets constituted unreasonably small capital; or - intended to incur, or believed that we or a subsidiary executing a guarantee thereof would incur, debts beyond the ability to pay such debts as they matured; or - intended to hinder, delay or defraud creditors. The measure of insolvency for purposes of fraudulent transfer laws varies depending on the law applied. Generally, however, a debtor would be considered insolvent if: - the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets; or - the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or - it could not pay its debts as they become due. EFFECT OF ORIGINAL ISSUE DISCOUNT ON HOLDERS OF THE SENIOR SUBORDINATED NOTES. The senior subordinated notes are considered to have been issued with original issue discount. Holders of the senior subordinated notes are required to include the accretion of the original issue discount in gross income for U.S. federal income tax purposes in advance of receipt of the cash payments to which such income is attributable. If a bankruptcy case is commenced by or against us under the United States Bankruptcy Code, the claim of a holder of senior subordinated notes with respect to the principal amount thereof may be limited to an amount equal to the sum of (i) the purchase price and (ii) that portion of the original issue discount which has been amortized as of the date of any such bankruptcy filing. 20 ITEM 2. PROPERTIES Aavid Thermalloy has a total of approximately 480,000 square feet of manufacturing space with locations in Laconia, New Hampshire; Monterrey, Mexico; the United Kingdom; Italy; China; and Toronto, Canada. We employ a broad range of aluminum and copper fabrication and processing capabilities. Manufacturing operations consist of cutting, stamping, machining, joining, brazing, soldering, assembling and finishing, including anodizing capabilities. We have a substantial in-house tool and die capability that enables us to create our own extrusion and progressive stamping dies and other production tooling. A key element of our business strategy has been to expand internationally. Many of our customers have short product cycles that demand facilities to support quick-ramp, high-volume, high-quality manufacturing at their geographically dispersed manufacturing locations. We plan to continue to build or acquire additional manufacturing facilities overseas and/or expand supplier relationships to better service our customers, many of whom have moved manufacturing operations and expanded their business overseas. Fluent's total sales, marketing, development, and support facilities consist of approximately 237,000 square feet. There can be no assurance that our expansion of our foreign operations will be successful. Foreign operations are subject to a number of risks including: work stoppages; transportation delays and interruptions; expropriation; nationalization; misappropriation of intellectual property; imposition of tariffs, foreign currency fluctuations and import and export controls; changes in governmental policies (including U.S. policy toward these countries); and other factors which could have an adverse effect on our business. In addition, we may be subject to risks associated with the availability of, and time required for, the transportation of products to and from foreign countries. The occurrence of any of these factors may delay or prevent the delivery of goods ordered by customers, and such delay or inability to meet customers' requirements would have a materially adverse effect our results of operations and could have an adverse effect on the our relationships with our customers. Furthermore, the occurrence of certain of these factors in countries where we own or operate manufacturing facilities could result in the impairment or loss of our investment in such countries. We currently operate in the following locations:

21 ITEM 3. LEGAL PROCEEDINGS We are involved in various legal proceedings that are incidental to the conduct of our business, none of which we believe could reasonably be expected to have a materially adverse effect on our financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET PRICES OF AAVID COMMON STOCK Our Common Stock traded on the Nasdaq National Market under the symbol "AATT" until February 2, 2000, the date we were acquired by Heat Holdings. As a result of the merger, our Common Stock is no longer publicly traded. We have never paid a cash dividend on our Common Stock, and we currently intend to retain all earnings for use in our business and do not anticipate paying cash dividends in the foreseeable future. Our current Loan and Security Agreement and senior subordinated notes indenture contain restrictive covenants which, among other things, impose limitations on the payment of dividends. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1) The following tables set forth selected statement of operations and balance sheet data derived from the consolidated financial statements of the Company and the Predecessor for the periods indicated. The following tables should be read in conjunction with "Management Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements, and related Notes thereto included elsewhere herein. The purchase method of accounting was used to record assets acquired and liabilities assumed by the Company. Such accounting generally results in increased amortization and depreciation reported in future periods. Accordingly, the accompanying financial statements of the Predecessor and the Company are not comparable in all material respects since those financial statements report financial position, results of operations, and cash flows for these two separate entities. 22

23 NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (AMOUNTS IN THOUSANDS) (1) This financial data reflects the consolidated financial position of the Company as of December 31, 2004, 2003, 2002, 2001 and 2000, and the consolidated results of operations of the Company for the years ended December 31, 2004, 2003, 2002, 2001, and the period February 2, 2000 through December 31, 2000 and of the Predecessor for the period from January 1, 2000 to February 1, 2000. The Predecessor financial statements have been prepared using the historical cost of the Company's assets and have not been adjusted to reflect the merger with Heat Holdings Corp. on February 2, 2000. The accompanying financial data as of and for the years ended December 31, 2004, 2003, 2002, 2001 and as of December 31, 2000 and for the period from February 2, 2000 to December 31, 2000 reflect the consolidated financial position and results of operations of the Company subsequent to the date of the merger and include adjustments required under the purchase method of accounting. (2) In the fourth quarter of 2001 and in accordance with SFAS 121, we recorded an impairment charge related to goodwill and intangible assets acquired in connection with the Merger. (3) Represents the credit in 1999 of $630 related to the reversal of excess restructuring reserves which were no longer required upon the completion of the Manchester restructuring in the fourth quarter of 1999. Restructuring charges of $16,885 in 2001 were recorded in connection with the cessation of manufacturing activities at the Dallas, Texas, Terrell, Texas and Loudwater, United Kingdom facilities, reduction of the New Hampshire workforce and reduction of China workforce including closure of the fan factory and write-off of associated fixed assets. Restructuring charges of $858 in 2002 were recorded in the fourth quarter of 2002 in connection with the reduction in workforce and cessation of manufacturing activities in Singapore and Malaysia. Restructuring credit of $90 in 2003 and $6 in 2004 consists of excess accruals originally recorded in Singapore that were reversed once actual restructuring activities were concluded in 2003 and 2004. (4) Represents loss realized on sale of Franklin, New Hampshire extrusion plant that occurred in the fourth quarter of 2001. (5) The $15,000 charge in 2000 represents the amount of the purchase price allocated to technology acquired by Heat Holdings related to Fluent, Inc., which was not fully commercially developed and had no alternative future use at the time of acquisition. (6) On July 17, 2002, the Company sold all of the outstanding shares of Aavid Thermalloy Holdings, GmbH, which in turn owned approximately 89.5% of the outstanding shares of curamik electronics GmbH, pursuant to a Share Sale and Purchase Agreement between the Company and Electrovac Fabrikation Electrotechnischer Spezialartikel GesmbH dated July 10, 2002 (the "Sale Agreement"). The sale of Curamik and its related operating results have been excluded from income (losses) from continuing operations and is classified as a discontinued operation for all periods presented, in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets". (7) Because the Company's common stock is not publicly traded, earnings per share information is not presented. 24 ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations together with the financial statements and the notes to such statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industries. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements, as more fully described in "Item 1. Business - Risk Factors". We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. OVERVIEW AND EXECUTIVE SUMMARY We are a leading global provider of thermal management solutions for electronic products and the leading developer and marketer of CFD software. Prior to February 2, 2000 we were a publicly traded company, listed on the NASDAQ National Market under the trading symbol "AATT". Since February 2, 2000, we have been a privately held company, owned by Heat Holdings Corp., a corporation formed by Willis Stein and other investors. Our acquisition by Willis Stein was accounted for under the purchase method of accounting and was financed through a combination of 12 3/4% senior subordinated notes and senior bank debt. We are organized as two operating units known as Aavid Thermalloy and Fluent. Aavid Thermalloy designs, manufactures and distributes thermal management products that dissipate unwanted heat from microprocessors and industrial electronics products. Fluent develops and markets CFD software that is used in complex computer-generated modeling of fluid flows, heat and mass transfer and chemical reactions. These two business units, while complementary, are quite different from each other and as a result, Aavid Thermalloy and Fluent will be discussed separately when analyzing performance and industry trends. Aavid Thermalloy is a global manufacturing business. Revenues are generated through the sale of fabricated and purchased thermal management products and components. Our thermal management products are used in a wide variety of computer, networking and industrial electronics applications, including computer systems (desktops, laptops, disk drives, printers and peripheral cards), network devices (servers, routers, set top boxes and local area networks), telecommunications equipment (wireless base stations, satellite stations and PBXs), instrumentation (semiconductor test equipment, medical equipment and power supplies), transportation and motor drives (braking and traction systems) and consumer electronics (stereo systems and video games). Our primary raw materials include extruded aluminum and copper and our business can be greatly affected by changes in the prices of aluminum and copper. We have manufacturing operations in the U.S., Canada, Mexico, U.K., Italy and China. Additionally, we have several other sales offices throughout the world. The electronics industry in which Aavid Thermalloy operates is very cost competitive. We compete in this market by manufacturing many of our products in low cost regions, such as China and Mexico. We also compete by offering state of the art engineering and design services to our customers to assist them in solving difficult and complex thermal management problems. These design services are carried out or assisted through our specialized engineering and design consulting offices in New Hampshire, California and India. We partner very closely with many of our customers in the design phase of product development in order to assist in prototype development and to develop relationships that allow us to maintain a strong position as a primary supplier for new products. The operating environment for Aavid Thermalloy over the past several years has been very difficult due to the global economic slowdown experienced by the electronics industry. We have adjusted to the slowdown through significant cost cutting and consolidation of manufacturing operations that have occurred over the period of 2000 through 2002. By the end of 2002, we had completed our restructuring efforts and achieved an appropriate cost structure to support the current market environment. In 2004, Aavid Thermalloy achieved revenue growth of over 20% when compared with 2003 while keeping our operating expenses as a percentage of revenue below 2003 levels, allowing us to significantly improve cash flows. 25 Fluent's CFD software is used for a wide variety of computer-based analyses, including the design of electronic components and systems, automotive design, combustion systems modeling and process plant troubleshooting. Fluent's software is used in a variety of industries including, among others, the automotive, aerospace, chemical processing, power generation, material processing, electronics and HVAC industries. Fluent develops and markets their CFD software products worldwide and currently maintains sales, support and design centers in North America, Europe and Asia. Fluent markets their product using two different licensing options. Annual licenses, which make up the majority of the overall licenses sold, allow the user to use the software and obtain support and other services for a period of one year. Each year the entire license must be renewed or the software can no longer be used. Perpetual licenses allow the customer to use the software for life, however, in order to continue to receive support, upgrades etc, the customer must purchase an annual maintenance contract. Revenue from annual licenses (and the bundled maintenance) is recognized ratably over the term of the license. However, in most cases, the entire fee for the license and maintenance is billed and collected at the beginning of the contract period. Software license revenue for perpetual licenses is recognized immediately upon the signing of the contract and delivery of the software, while the related maintenance revenue is recognized ratably over the term of the maintenance agreement. Similar to the annual licenses, the entire perpetual license and related maintenance contracts are billed and collected at the beginning of the contract term. Historically, Fluent has achieved an annual contract renewal rate of greater than 80% and overall annual revenue growth of better than 19% each of the last two years. The nature of Fluent's products allow for a very consistent recurring revenue base and associated cash flows. Fluent is one of the larger companies within the CFD market space. Fluent has achieved consistent growth by penetrating new industries and also by achieving greater penetration within companies in existing industries. In the past, CFD software was a generalized software that required complex customization to be adapted for use within a particular industry. As a result, the primary user base was limited to upper level PhD caliber engineers. In the past few years, Fluent has worked to develop industry specific tools that come with many pre-loaded templates that simplify the overall use of the CFD software. This has opened up the use of CFD software to a much broader range of customer employee skill sets and therefore has allowed Fluent to sell more seat licenses per customer. This strategy is ultimately leading to a much greater penetration of customer R&D departments. In 2004, Fluent achieved revenue growth of over 20% when compared with 2003, while keeping operating expenses as a percentage of revenues below 2003 levels, allowing us to improve cash flows. Both Fluent and Aavid Thermalloy have significant operations outside the United States. As a result, financial performance can be affected by changes in foreign currency exchange rates. As of the date of this filing, there has been significant speculation that the People's Republic of China may elect to adjust the exchange rate of the Chinese Yuan against the U.S. Dollar. While there have been no official decisions made, or timetables established, current press reports indicate that some form of revaluation is likely in 2005. Currently, the Chinese Yuan has a fixed exchange rate against the U.S. dollar. Should China adjust the exchange rate of the Yuan, or allow the value of the Yuan to float, it is possible that this change could negatively impact our operation in China by making it more expensive for us to do business there. A revaluation of the Yuan could also result in foreign currency exchange gains or losses within our statement of operations in 2005 or future periods. It is impossible, based on current facts or circumstances, to estimate the impact on our business in 2005 or future periods of a revaluation of the Chinese Yuan. RESULTS OF OPERATIONS The following table is derived from our consolidated statements of operations and sets forth the percentage relationship of certain items to net sales for the periods indicated. 26

2004 COMPARED WITH 2003

Net sales for 2004 were $227.1 million, an increase of $39.0 million, or 20.7%, compared with $188.2 million for 2003. The overall increase in sales was a combination of increasing revenues at both Aavid Thermalloy and Fluent as well as the benefit received due to the significant weakening of the U.S. Dollar versus foreign currencies, including the Euro, British Pound, and Canadian Dollar, that occurred over the course of 2004. Had 2004 revenues in local currencies been translated at the average exchange rates in effect during 2003, revenues would have been $8.7 million dollars lower. Aavid Thermalloy's net sales were $122.7 million for 2004, an increase of $21.1 million, or 20.8%, compared with $101.6 million for 2003. Excluding foreign exchange rate fluctuations from year to year, the increase was primarily the result of a moderate improvement in the semiconductor and electronics industries in 2004, as well as an improvement in the Company's market share position. Fluent's net sales were $104.3 million for 2004, an increase of $17.8 million, or 20.6%, over 2003 sales of $86.5 million. Excluding foreign exchange rate fluctuations from year to year, the increase was primarily due to an overall increase in sales across all of Fluent's offerings. International net sales (which include North American exports) increased to 56.4% of net sales for the year ended December 31, 2004 as compared with 53.1% for the year ended December 31, 2003. 27 Our gross profit in 2004 was $114.9 million, an increase of $23.8 million, or 26.1% higher than 2003 gross profit of $91.1 million. Our gross margin in 2004 was 50.6%, which compares with 48.4% in 2003. Aavid Thermalloy saw continued improvement in gross profit and gross margin in 2004. This is attributable to improved cost efficiencies in manufacturing and supply chain operations. Additionally, Fluent's revenue and gross profit remained a large percentage of the Company's overall revenue and gross profit in 2004. As Fluent's gross margin tends to be much greater than the gross margin of Aavid Thermalloy, the high percentage of Fluent revenue to overall Company revenues also serves to increase the overall gross margin of the Company. Our selling, general and administrative expenses, excluding amortization of intangibles, were $68.1 million, or 30.0% of sales for 2004, as compared with $59.1 million, or 31.4% of net sales, for 2003. Aavid Thermalloy's 2004 S,G&A expenses were up $1.4 million from 2003 levels, although such costs decreased as a percentage of net sales. Fluent's 2004 S,G&A increased $7.5 million from 2003 levels as Fluent continued to enhance its sales and support infrastructure to support its revenue growth. Lastly, the Company's corporate offices experienced a $0.2 million increase in administrative costs. Intangible asset amortization of $0.9 million was recorded in 2004 compared with $3.5 million recorded in 2003, a decrease of $2.6 million. This amortization is primarily related to intangible assets established as part of the acquisition of Aavid by Heat Holdings Corp. The decrease in amortization is due primarily to Fluent's developed technology intangible asset becoming fully amortized in January 2004, while 2003 had a full year of amortization expense related to this intangible asset. Our research and development expenses consist primarily of funding for internal product development activities as well as product development activities conducted by third parties on our behalf. Research and development expenses also include the costs of obtaining patents on the technology developed in research and development activities. Research and development expenses were $16.7 million, or 7.3% of net sales, which compares with $15.0 million, or 8.0% of net sales, in 2003. The increase in research and development expense was primarily due to increased expenditures at Fluent in connection with the development of next generation software. Our income from continuing operations in 2004 was $29.3 million, an increase of $15.7 million over 2003 income from continuing operations of $13.6 million. Aavid Thermalloy, excluding intangible asset amortization and restructuring costs, had operating income of $5.4 million in 2004 compared with an operating loss of $0.2 million in 2003. This improvement stemmed primarily from the Aavid Thermalloy's ability to increase its sales and gross profit in 2004, while holding S,G&A costs in line with 2003 levels. Fluent's operating income, excluding intangible asset amortization, increased to $25.3 million in 2004, compared with an operating income of $17.7 million in 2003. Fluent experienced an increase in operating profit primarily due to its ability to hold S,G&A growth to a lower rate than the growth rate seen in revenue and gross profit. Our foreign exchange gains were $0.9 million in 2004 compared with $2.5 million in 2003. Foreign exchange gains occurred in 2004 due to the continued weakening of the U.S. Dollar versus the Euro, British Pound, and Canadian Dollar experienced over the last two years. Aavid Thermalloy and Fluent have significant long-term inter-company notes due to certain U.S. locations from certain foreign locations. These inter-company notes are the primary contributor to the foreign exchange gains recorded in 2004 and 2003. Should the U.S. dollar strengthen in 2005, it is likely that the Company will realize foreign currency losses associated with these inter-company notes. Our net interest charges were $17.9 million in 2004, compared with $18.1 million in 2003 as interest rates in 2004 remained at levels comparable to 2003, while overall debt levels remained relatively flat from year to year. 28 The Company recorded a tax provision of $4.8 million in 2004 compared to a tax provision of $1.6 million in 2003. The Company incurred a tax provision in 2003 despite having significant operating losses because of state tax provisions on applicable state components of U.S. income and foreign tax provisions on foreign earnings. We recorded a tax provision on foreign earnings which are expected to be repatriated into the U.S. to service debt. Because the Company is in a net operating loss carryforward position for U.S. tax purposes, the Company will not receive any tax benefit from foreign tax credits. These repatriated earnings will, therefore, incur both foreign income taxes and U.S. income taxes, effectively doubling up the tax rate on the foreign earnings. The significant net operating loss carryforwards in the U.S. will help offset the actual cash paid for taxes in the U.S. when the foreign earnings are repatriated. The Company's EBITDA, as defined in the Loan and Security Agreement with the Company's senior lenders, was $44.4 million in 2004 compared with $35.7 million in 2003. EBITDA is a non-GAAP financial measure that the Company believes is relevant to potential readers of our financial statements as it is the primary measure of performance and compliance with financial covenants utilized by our lenders. A reconciliation of net income to EBITDA is as follows:

Net sales for 2003 were $188.2 million, an increase of $26.3 million, or 16.2%, compared with $161.9 million for 2002. The overall increase in sales was a combination of increasing revenues at both Aavid Thermalloy and Fluent as well as the benefit received due to the significant weakening of the U.S. Dollar versus foreign currencies, including the Euro, British Pound, and Canadian Dollar, that occurred over the course of 2003. Had 2003 revenues in local currencies been translated at the exchange rates in effect during 2002, revenues would have been $9.4 million dollars lower. Aavid Thermalloy's net sales were $101.6 million for 2003, an increase of $12.0 million, or 13.4%, compared with $89.6 million for 2002. Excluding foreign exchange rate fluctuations from year to year, the 29 increase was primarily the result of a moderate improvement in the semiconductor and electronics industries in 2003, as well as an improvement in the Company's market share position. Fluent's net sales were $86.5 million for 2003, an increase of $14.3 million, or 19.8%, over 2002 sales of $72.2 million. Excluding foreign exchange rate fluctuations from year to year, the increase was primarily due to an overall increase in sales across all of Fluent's offerings. International net sales (which include North American exports) increased to 53.1% of net sales for the year ended December 31, 2003 as compared with 50.3% for the year ended December 31, 2002. Our gross profit in 2003 was $91.1 million, an increase of $17.7 million, or 24.1% higher than 2002 gross profit of $73.4 million. Our gross margin in 2003 was 48.4%, which compares with 45.3% in 2002. Aavid Thermalloy saw a significant improvement in gross profit and gross margin in 2003 primarily due to the restructuring activities that occurred over the prior two years. Additionally, Fluent's revenue and gross profit continued to become a larger percentage of the overall Company's revenue and gross profit in 2003. As Fluent's gross margin tends to be much greater than the gross margin of Aavid Thermalloy, the increase of Fluent as a percentage of overall Company revenues also serves to increase the overall gross margin of the Company. Our selling, general and administrative expenses, excluding amortization of intangibles, were $59.1 million, or 31.4% of sales for 2003, as compared with $55.4 million, or 34.2% of net sales, for 2002. Aavid Thermalloy's 2003 S,G&A expenses were down $0.6 million from 2002 levels primarily due to a Company wide effort to maintain costs consistent with 2002 levels. Fluent's 2003 S,G&A increased $5.9 million from 2002 levels as Fluent continued to enhance its sales and support infrastructure to support its revenue growth. Lastly, the Company's corporate offices experienced a $1.6 million decrease in administrative costs primarily related to lower legal and accounting costs incurred in 2003. In 2002, the Company incurred higher than normal legal and accounting costs associated with debt refinancings, re-audits of prior years due to the dissolution of the Company's previous audit firm, Arthur Andersen, and foreign corporate reorganizations. Intangible asset amortization of $3.5 million was recorded in 2003 compared with $3.4 million recorded in 2002. This amortization is primarily related to intangible assets established as part of the acquisition of Aavid by Heat Holdings Corp. Our research and development expenses consist primarily of funding for internal product development activities as well as product development activities conducted by third parties on our behalf. Research and development expenses also include the costs of obtaining patents on the technology developed in research and development activities. Research and development expenses were $15.0 million, or 8.0% of net sales, which compares with $12.5 million, or 7.7% of net sales, in 2002. The increase in research and development expense was primarily due to increased expenditures at Fluent in connection with the development of next generation software. Our income from continuing operations in 2003 was $13.6 million, an increase of $12.4 million over 2002 income from continuing operations of $1.2 million. Aavid Thermalloy, excluding intangible asset amortization and restructuring costs, had an operating loss of $0.2 million in 2003 compared with an operating loss of $6.2 million in 2002. This improvement stemmed primarily from the Aavid Thermalloy's ability to increase its sales and gross profit in 2003, while holding S,G&A costs in line with 2002 levels. Fluent's operating income, excluding intangible asset amortization, increased to $17.7 million in 2003, compared with an operating income of $14.1 million in 2002. Fluent experienced an increase in operating profit primarily due to its ability to hold S,G&A growth to a lower rate than the growth rate seen in revenue and gross profit. Our foreign exchange gains were $2.5 million in 2003 compared with $0.5 million in 2002. Foreign exchange gains increased primarily due to the significant weakening of the U.S. Dollar versus the Euro, British Pound, and Canadian Dollar that occurred over the course of 2003. Aavid Thermalloy and Fluent have significant long-term inter-company notes due to certain U.S. locations from certain foreign locations. These inter-company notes are the primary contributor to the foreign exchange gains recorded in 2003. 30 Our net interest charges were $18.1 million in 2003 compared with $20.1 million in 2002. This decrease in interest expense was a combination of lower interest rates in 2003 and a small reduction in outstanding balances of senior debt in 2003 compared with 2002. The Company recorded a tax provision of $1.6 million in 2003 compared to a tax provision of $0.8 million in 2002. The Company incurred a tax provision in 2003 despite having significant operating losses because of state tax provisions on applicable state components of U.S. income and foreign tax provisions on foreign earnings. We had to record a tax provision on foreign earnings which are expected to be repatriated into the U.S. to service debt. Because the Company is in a net operating loss carryforward position for U.S. tax purposes, the Company will not receive any tax benefit from foreign tax credits. These repatriated earnings will, therefore, incur both foreign income taxes and U.S. income taxes, effectively doubling up the tax rate on the foreign earnings. The significant net operating loss carryforwards in the U.S. will help offset the actual cash paid for taxes in the U.S. when the foreign earnings are repatriated. The Company's EBITDA, as defined in the Loan and Security Agreement with the Company's senior lenders, was $35.7 million in 2003 compared with $22.0 million in 2002. EBITDA is a non-GAAP financial measure that the Company believes is relevant to potential readers of our financial statements as it is the primary measure of performance and compliance with financial covenants utilized by our lenders. A reconciliation of net income to EBITDA is as follows:

(1) Change in deferred revenue as defined in the Loan and Security Agreement represents the net change in deferred revenue found on the Company's balance sheet from the beginning of the applicable reporting period to the end of the applicable reporting period. An increase in deferred revenue during the period will increase EBITDA. A decrease in deferred revenue during the period will decrease EBITDA, as defined. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46") to clarify the conditions under which assets, liabilities and activities of another entity should be consolidated into the financial statements of a company. FIN 46 requires the consolidation of a variable interest entity by a company that bears the majority of the risk of loss from the variable interest entity's activities, is entitled to receive a majority of the variable interest entity's residual returns, or both. The provisions of FIN 46, required to be adopted in fiscal 2005, are not expected to have a material impact on the Company's financial position or results of operations. In November 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during 31 fiscal years beginning after November 23, 2004. It is not believed that the adoption of SFAS No. 151 will have a material impact on the consolidated financial position, results of operations or cash flows of the Company. CRITICAL ACCOUNTING POLICIES We prepare the consolidated financial statements of Aavid Thermal Technologies, Inc. in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our financial reporting results include the following: REVENUE RECOGNITION AND SALES RETURNS AND ALLOWANCES Thermal Products Revenue is recognized when products are shipped. We offer certain distributors limited rights of return and stock rotation rights. Due to these return rights, we continuously monitor and track product returns and we record a provision for the estimated future amount of such future returns, based on historical experience and any notification we receive of pending returns. While such returns have historically been within our expectations and provisions established, we cannot guarantee that we will continue to experience the same return rates that we have in the past. Any significant decrease in product demand experienced by our distributor customers and the resulting credit returns could have a material adverse impact on our operating results for the period or periods in which such returns materialize. Software The Company recognizes revenue on its software license and maintenance arrangements in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition", as amended by SOP 98-9, and related pronouncements. The pronouncements provide specific industry guidance and stipulate that revenue recognized from software arrangements is to be allocated to each element of the arrangement based on relative fair values of the elements, such as software products, upgrades, enhancements, post-contract customer support ("PCS"), installation and training. The Company licenses its software products under both perpetual and annual license arrangements. For perpetual license arrangements, software license revenue is recognized upon the execution of the license arrangement and shipment of the product, provided that no significant vendor post-contract support obligations remain outstanding and collection of the resulting receivable is deemed probable. The Company recognizes revenue from post-contract support, which consists of telephone support and the right to software upgrades, ratably over the period of the PCS arrangement. For annual license arrangements, with unbundled PCS, since vendor specific objective evidence ("VSOE") of value for the PCS does not exist, the Company recognizes revenue for both the software license and the PCS ratably over the 12-month term of the license. Training and consulting revenues are recognized upon completion of services or, in certain instances, on the proportional performance method. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. ACCOUNTS RECEIVABLE We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit 32 losses based on our historical experience and any specific customer collection issues we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates we have in the past. In the event that economic or other conditions cause a change in liquidity or financial condition in multiple customers, there could be a material adverse effect on our collection of receivables and future results of operations. INVENTORIES We value our inventory, which consists of materials, labor and overhead, at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production demand for the next twelve months. As experienced in prior years, demand for our products can fluctuate significantly. A significant increase in demand for our products could result in a short-term increase in the cost of inventory purchases and production costs while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, our industry is characterized by rapid technological change, frequent new product development and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess or obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our cost of sales in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and reported operating results. VALUATION OF GOODWILL AND OTHER INTANGIBLE ASSETS We review goodwill and other intangible assets for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." The provisions of SFAS No. 142 require that a two-step impairment test be performed on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. Our reporting units are consistent with the reportable segments identified in Note M of the Consolidated Financial Statements. We determine the fair value of our reporting units using a combination of the income approach and the market approach. Under the income approach, we calculate the fair value of a reporting unit based on the present value of estimated future cash flows. Under the market approach, we estimate the fair value based on market multiples of revenues or earnings for comparable companies. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step in order to determine the implied fair value of the reporting unit's goodwill and compare it to the carrying value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we must record an impairment loss equal to the difference. SFAS No. 142 also requires that the fair value of the purchased intangible assets with indefinite lives be estimated and compared to the carrying value. We estimate the fair value of these intangible assets using the income approach. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value. The income approach, which we use to estimate the fair value of our reporting units and purchased intangible assets, is dependent on a number of factors including estimates of future market growth and trends, forecasted revenue and costs, expected periods the assets will be utilized, appropriate discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. In addition, we make certain judgments about the selection of comparable companies used in the market approach in valuing our reporting units, as well as certain assumptions to allocate shared assets and liabilities to calculate the carrying values for each of our reporting units. 33 LIQUIDITY AND CAPITAL RESOURCES Historically, we have used internally generated funds and proceeds from financing activities to meet our working capital and capital expenditure requirements. As a result of the Thermalloy acquisition and the merger, we have significant cash requirements for debt service relating to the notes and our senior credit facility. We intend to use amounts available under our senior credit facility, future debt and equity financings and internally generated funds to finance our working capital requirements, capital expenditures and potential acquisitions. Net cash provided by operating activities for the year ended December 31, 2004 was $24.9 million compared to $11.0 million provided by operating activities for the year ended December 31, 2003. We had $12.8 million in negative working capital as of December 31, 2004 compared with $18.3 million in negative working capital at December 31, 2003. Deferred revenue recorded as a currently liability on the balance sheet was $43.1 million at December 31, 2004, compared to $37.7 million at December 31, 2003. At December 31, 2004, accounts receivable days sales outstanding ("DSO") were 68.7 days, compared with 64.4 days at December 31, 2003. During the fourth quarter of 2004, inventory turns were 8.1, compared to 9.7 during the fourth quarter of 2003. During the year ended December 31, 2004, we made capital expenditures of $5.4 million compared with $4.0 million in 2003. In addition, $1.7 million and $0.6 million of assets were acquired under capital leases in 2004 and 2003, respectively. On January 29, 2002, the Company's owners contributed $12.0 million of additional equity as part of a forbearance agreement entered into with its lenders at the time. The forbearance agreement allowed the Company to pay its semi-annual interest payment that was due February 1, 2002 on its 12 3/4% Senior Subordinated Notes. The forbearance agreement also required the Company to accelerate a principal payment of $1.985 million on the term loan that was originally due on March 31, 2002. This payment of $1.985 million was made at the time of the signing of the forbearance agreement. On August 1, 2002, the Company refinanced its Amended and Restated Credit Facility with two of the four banks that were party to the Amended and Restated Credit Facility. The new credit facility (the "Loan and Security Agreement") is a $27.5 million asset based facility. The facility consists of a term loan component secured by certain United States real estate and machinery and equipment, and requires quarterly principal payments of $0.4 million commencing November 1, 2002. The Loan and Security Agreement also consists of a revolving line of credit component secured by inventory in the United States and accounts receivable in the United States and the United Kingdom. Availability under the line of credit component is determined by a borrowing base of 85% of eligible accounts receivable and 50% of eligible inventory, as defined in the Loan and Security Agreement. Debt outstanding under the Loan and Security Agreement bears interest at a rate equal to, at the Company's option, either (1) in the case of LIBOR rate loans, the sum of the offered rate for deposits in United States dollars for a period equal to such interest period as it appears on Telerate page 3750 as of 11:00am London time and a margin of between 2.5% and 2.85%, or (2) the sum of LaSalle Business Credit's prime rate plus a margin of between .25% and .50%. At December 31, 2004, the interest rates on the Loan and Security Agreement ranged from 4.92% to 5.75%. Total availability under the line of credit at December 31, 2004 was $19.6 million, of which $6.5 million was outstanding. On February 2, 2000, as part of the transactions relating to the Merger, we issued 150,000 units (the "Units"), consisting of $150 million aggregate principal amount of our 12 3/4 % Senior Subordinated Notes due 2007 (the "Senior Subordinated Notes") and warrants (the "Warrants") to purchase an aggregate of 60 shares of our Class A Common Stock, par value $0.01 per share, and 60 shares of our Class H Common Stock, par value $0.01 per share. The Senior Subordinated Notes are fully and unconditionally guaranteed on a joint and several basis by each of our domestic subsidiaries. The senior subordinated notes were issued pursuant to an indenture (the "Indenture") among us, the subsidiary guarantors and Bankers Trust Company, as trustee. Approximately $4.6 million of the proceeds from the sale of the Units was allocated to the fair value of the Warrants and approximately $143.7 million was allocated to the Senior Subordinated Notes, net of original issue discount of approximately $1.7 million. In May, 2001 certain of the Company's stockholders purchased $26.2 million principal amount of Senior Subordinated Notes and contributed them to the Company for cancellation in 34 satisfaction of their obligations resulting from the Company's failure to achieve their required leverage ratio as of December 31, 2000. The Indenture limits our ability to incur additional debt, to pay dividends or make other distributions, to purchase or redeem our stock or make other investments, to sell or dispose of assets, to create or incur liens, and to merge or consolidate with any other person. The Indenture provides that upon a change in control of Aavid, we must offer to repurchase the Notes at 101% of the face value thereof, together with accrued and unpaid interest. The Notes are subordinated in right of payment to amounts outstanding under our senior credit facility and certain other permitted indebtedness. The Company has an obligation to purchase from one of its key suppliers a minimum quantity of aluminum coil stock. The Company believes that purchasing aluminum coil stock from this supplier is necessary to achieve consistently low tolerances, design, delivery flexibility, and price stability. Under the terms of this agreement the Company has agreed to purchase certain minimum quantities which approximates $0.1 million at December 31, 2004; however, there are no required dates within which these quantities may be purchased, as such, this purchase commitment is not included in the table below. Additionally, the Company has entered into various long-term debt, capital lease and operating lease arrangements. The future payments required by these arrangements are as follows:

Further expansion of our business or the completion of any material strategic acquisitions may require additional funds which, to the extent not provided by internally generated sources, could require us to seek access to debt and equity markets. There can be no assurance that such funds would be available to the Company at favorable terms or at all. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Upward or downward changes in market interest rates and their impact on the reported interest expense of the Company's variable rate borrowings will affect our future earnings; however, a ten percent change in 2004 effective interest rates would have an approximate $0.1 million impact on our earnings for 2005, based on debt composition and rates in effect at December 31, 2004. The Company is exposed to certain foreign currency risks in connection with its foreign operations. The Company does not currently engage in foreign currency hedging activities. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements and supplementary data required pursuant to this Item begin on page 47 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES (1) Evaluation of disclosure controls and procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2004, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in this report is made known to the chief executive officer and chief financial officer by others within Aavid during the period in which the report was being prepared. (2) Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The following table sets forth the names of each of the our directors as of March 15, 2005, their ages, the year in which each became a director and their principal occupations during the past five years:

37 MEETINGS OF THE BOARD OF DIRECTORS Our business affairs are managed under the direction of the Board of Directors. Members of the Board are kept informed through various reports and documents sent to them, through operating and financial reports routinely presented at Board and committee meetings by the Chairman and other officers, and through other means. In addition, our directors discharge their duties throughout the year not only by attending Board meetings, but also through personal meetings and other communications, including considerable telephone contact, with the Chief Executive Officer and others regarding matters of interest and concern to Aavid. During the fiscal year ended December 31, 2004, our Board of Directors held 5 formal meetings. Each director attended at least 75% of the meetings of the Board of Directors held during 2004. BOARD COMMITTEES Our Board of Directors formed an audit committee in 2002 comprised of Daniel Blumenthal and David Steadman. No member of the Company's audit committee is a financial expert as such term is defined by the Securities and Exchange Commission. We have not designated a member of the Company's audit committee as a financial expert as such term is defined by the Securities and Exchange Commission. The Company does not consider it necessary to designate a financial expert at this time because a sufficient number of the members of its Board have backgrounds and experience in sophisticated financial and accounting matters. EXECUTIVE OFFICERS Our executive officers are as follows:

BHARATAN R. PATEL, PH.D. became our and Aavid Thermalloy's Chief Executive Officer on January 1, 2000. He served as one of our directors since April 1996, our President since October 15, 1997 and Chief Executive Officer of Fluent since he helped form it in 1988 as a subsidiary of Creare, Inc. He served as our Chief Operating Officer from October 15, 1997 until December 31, 1999. Dr. Patel worked at Creare, Inc., an engineering consulting firm, from 1976 to 1988, serving in various capacities including Principal Engineer and Vice President. From 1971 to 1976, Dr. Patel was employed as a Senior Engineer in the Power Systems Group of Westinghouse Electric Corporation. BRIAN A. BYRNE joined Aavid Thermal Technologies, Inc. in April, 2000 as its Chief Financial Officer. Mr. Byrne comes to Aavid from Jabil Circuits, Inc., where he served as Operations Manager. Prior to his position at Jabil, Mr. Byrne served as the Vice President Business Development for Altron Incorporated's (subsequently Sanmina Corporation) and its Massachusetts' printed circuit assembly division for 3 years. Prior to that, he spent 20 years at Compangnie Des Machines Bull in increasingly senior financial and executive positions, most recently as Division General Manager of Bull Electronics. JOHN W. MITCHELL joined us in December 1995 as Vice President and General Counsel. From 1979 until he joined us, Mr. Mitchell was a corporate and business attorney at Sulloway & Hollis, a Concord, New Hampshire law firm, where he served as our principal outside legal counsel since May 1985. 38 H. FERIT BOYSAN, PH.D. became Chief Operating Officer of Fluent in July 1997 and President of Fluent in December 1998. Since 1991, he had been Managing Director of Fluent's European operations, headquartered in Sheffield, England. From 1986 to 1991, Dr. Boysan was the Managing Director of Flow Simulations, Ltd., the European distributor of Fluent products until the formation of Fluent Europe in 1991. Dr. Boysan was one of the original developers of Fluent's CFD software. PETER L. CHRISTIE joined Fluent in 1998 as its Vice President and Chief Financial Officer. From 1984 to 1998, Mr. Christie held several senior management positions, including President and Chief Financial Officer, at Verax Corporation, a bioprocessing company. Prior to joining Verax, Mr. Christie was employed at Creare Inc., an engineering consulting firm, where he held the position of Chief Financial Officer from 1973 to 1978 and was President and founder of Creare Products Inc., a medical instruments manufacturer, from 1978 to 1984. CODE OF ETHICS The Company adopted a Code of Ethics for CEO and Senior Financial Officers and a Code of Ethics that applies to all of its directors, officers and employees in February 2005. The Company has made the Codes available on its website at http://www.aatt.com. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS The following table summarizes all compensation earned by or paid to our Chief Executive Officer and the four other most highly paid executive officers whose annual salary and bonus exceeded $100,000 (collectively, the "Named Executive Officers") for services rendered in all capacities to Aavid during the fiscal years indicated. SUMMARY COMPENSATION TABLE

39 EMPLOYMENT AGREEMENTS Aavid has entered into an employment agreements with Messrs. Patel, Byrne and Mitchell, which currently expire on July 1, 2007 and Fluent has entered into employment agreements with Mr. Boysan and Mr. Christie, which currently expire on July 1, 2007. The employment agreements require each employee to devote his full business time and best efforts, business judgment, skill and knowledge exclusively to the advancement of the business and interests of Aavid. The employment agreements currently provide for the payment of a base salary to Messrs. Patel, Boysan, Christie, Mitchell and Byrne, subject to increase at the discretion of the board of directors of their respective employers. The board of directors did increase base compensation of Messrs. Patel, Mitchell and Byrne as set forth in the Summary Compensation Table above. Each employment agreement provides that the employee will continue to receive his base salary, benefits and other compensation for a specified period in the event their respective employers terminate their employment other than for "cause" or under certain other circumstances. Each of Messrs. Byrne, Mitchell, and Patel is entitled to an annual bonus of 30%, 33.33% and 50% of base salary, respectively, based on Aavid's performance. Mr. Boysan is entitled to an annual bonus based on our actual performance against budgeted performance. We may renegotiate our obligation to make the payments under those employment agreements in connection with certain public offering or acquisition transactions. The employment agreements contain non-competition covenants. COMPENSATION OF DIRECTORS Each of Messrs. Steadman and Dickinson receives an annual fee of $15,000 and an additional $1,000 for each Board of Directors meeting attended. In addition, each of Mr. Steadman and Mr. Dickinson purchased 0.05% of the non-voting common equity of Aavid Thermalloy LLC. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT BENEFICIAL OWNERSHIP OF COMMON STOCK Heat Holdings Corp. currently owns all of the issued and outstanding common and preferred stock of Aavid. Aavid also has issued detachable warrants, sold to noteholders in connection with the sale of the senior subordinated notes, to acquire, in the aggregate, 60 shares of Aavid's Class A common stock, representing 3% of the common stock of Aavid (on a fully diluted basis) and 60 shares of Aavid's Class H common stock (representing rights to less than 1% of the equity securities of Aavid Thermalloy, LLC). Holdings currently owns a portion of such warrants. 40 The following table sets forth certain information regarding the beneficial ownership of the issued and outstanding stock of Holdings as of March 1, 2005. BENEFICIAL OWNERSHIP(1)

(1) "Beneficial ownership" means any person who, directly or indirectly, has or shares voting or investment power with respect to a security or has the right to acquire such power within 60 days. Unless otherwise indicated, we believe that each holder has sole voting and investment power with regard to the equity interests listed as beneficially owned. (2) Each share of Series A preferred stock is convertible into approximately .9346 shares of Class A common stock and each share of Series B preferred stock is convertible into approximately .9346 shares of Class B common stock. Each share of Series C preferred stock is convertible into approximately 2.817 shares of Class A common stock, and each share of Series D preferred stock is convertible into approximately 2.817 shares of Class B common stock. 41 (3) Consists of 4,096,770.66 shares of each of Class A common stock and Class B common stock directly beneficially held by Willis Stein & Partners II, L.P. and 262,075.91 shares of each of Class A common stock and Class B common stock directly beneficially held by Willis Stein & Partners Dutch, L.P. Willis Stein & Partners Management II, L.L.C. is the general partner of the general partner of both partnerships and may be deemed to beneficially own such shares. John R. Willis and Daniel H. Blumenthal are managing directors and Christopher G. Boehm is a principal of Willis Stein & Partners Management II, L.L.C. As a result of such relationships, Messrs. Willis, Blumenthal and Boehm may be deemed to beneficially own the shares of stock beneficially owned by the partnerships and their general partners, but each of Messrs. Willis, Blumenthal and Boehm disclaim beneficial ownership of any of such shares. The address of Willis Stein & Partners Management II, L.L.C. and each partnership is One North Wacker Drive, Suite 4800, Chicago, IL 60606. (4) Consists of (a) 972,735.80 shares of each of Series A preferred stock and Series B preferred stock and 445,655.86 shares of each of Series C preferred stock and Series D preferred stock directly beneficially held by Willis Stein & Partners III, L.P., (b) 29,288.68 shares of each of Series A preferred stock and Series B preferred stock and 13,418.52 shares of each of Series C preferred stock and Series D preferred stock directly beneficially held by Willis Stein & Partners Dutch III-A, L.P., (c) 29,288.68 shares of each of Series A preferred stock and Series B preferred stock and 13,418.52 shares of each of Series C preferred stock and Series D preferred stock directly beneficially held by Willis Stein & Partners Dutch III-B, L.P. and (d) 8,435.15 shares of each of Series A preferred stock and Series B preferred stock and 3,864.54 shares of each of Series C preferred stock and Series D preferred stock directly beneficially held by Willis Stein & Partners III-C, L.P. Willis Stein & Partners Management III, L.L.C. is the general partner of the general partner of each partnership and may be deemed to beneficially own such shares. John R. Willis and Daniel H. Blumenthal are managing directors and Christopher G. Boehm is a principal of Willis Stein & Partners Management III, L.L.C. As a result of such relationships, Messrs. Willis, Blumenthal and Boehm may be deemed to beneficially own the shares of stock beneficially owned by the partnerships and their general partners, but each of Messrs. Willis, Blumenthal and Boehm disclaim beneficial ownership of any of such shares. The address of Willis Stein & Partners Management III, L.L.C. and each partnership is One North Wacker Drive, Suite 4800, Chicago, IL 60606. (5) The Chase Manhattan Bank acts as the trustee for the First Plaza Group Trust, a trust under and for the benefit of certain employee benefit plans of General Motors Corporation ("GM"), its subsidiaries and unrelated employers. These shares may be deemed to be owned beneficially by General Motors Investment Management Corporation ("GMIMCo"), a wholly-owned subsidiary of GM. GMIMCo's principal business is providing investment advice and investment management services with respect to the assets of certain employee benefit plans of GM, its subsidiaries and unrelated employers, and with respect to the assets of certain direct and indirect subsidiaries of GM and associated entities. GMIMCo is serving as the trust's investment manager with respect to these shares and in that capacity it has the sole power to direct the trustee as to the voting and disposition of these shares. Because of the trustee's limited role, beneficial ownership of the shares by the trustee is disclaimed. First Plaza Group Trust's address is c/o GMIMCo, 767 Fifth Ave., 16th Floor, New York, NY 10153. (6) Consists of (a) 333,857.73 shares of each of Class A common stock and Class B common stock directly beneficially held by Abbott Capital 1330 Investors II, L.P., (b) 66,771.55 shares of each of Class A common stock and Class B common stock, 93,163.66 shares of each of Series A preferred stock and Series B preferred stock, and 31,804.53 shares of each of Series C preferred stock and Series D preferred stock directly beneficially held by Abbott Capital Private Equity Fund III, L.P. and (c) 26,708.62 shares of each of Class A common stock and Class B common stock and 1,741.76 shares of each of Series C preferred stock and Series D preferred stock directly beneficially held by BNY Partners Fund, L.L.C. The address of such funds is c/o Abbott Capital Management, LLC, 1211 Avenue of the Americas, Suite 4300, New York, New York 10036. 42 (7) Consists of (a) 424,061.76 shares of each of Class A common stock and Class B common stock, and 49,881.15 shares of each of Series A preferred stock and Series B preferred stock directly beneficially held by Nassau Capital Partners III, L.P., and (b) 3,276.14 shares of each of Class A common stock and Class B common stock and 385.36 shares of each of Series A preferred stock and Series B preferred stock directly beneficially held by NAS Partners I L.L.C. Such funds' address is 22 Chambers Street, Princeton, New Jersey 08542. (8) BancBoston's address is 175 Federal Street, 10th Floor, Boston, Massachusetts 02110. Each of the stockholders listed in the table above currently holds Class A and Class B common stock and Series A, Series B, Series C and Series D preferred stock of Heat Holdings II Corp. in a percentage equal to such stockholder's ownership of the corresponding class and series of Holdings shares. Heat Holdings II Corp. holds or has the rights to acquire approximately 98% of the outstanding common and convertible preferred membership interests in Aavid Thermalloy, LLC. Our executive officers and certain of our employees currently own approximately 1.5% of the non-voting common equity of Aavid Thermalloy, LLC and approximately 9.5% of the non-voting common equity of Fluent Holdings, Inc. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS NONE ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES INDEPENDENT AUDITOR FEE INFORMATION Fees for professional services provided by our independent auditors in each of the last two fiscal years, in each of the following categories (in millions) are:

Fees for audit services include fees associated with the annual audit, the reviews of the Company's quarterly reports on Form 10-Q, and statutory audits required internationally. Tax fees included tax compliance, tax advice, and tax planning including expatriate tax services. Our independent auditor did not perform any audit-related services or other services for us in 2003 or 2004. The Company's audit committee charter requires the audit committee to pre-approve all audit and non-audit services provided by our independent auditors. Formal approval was given for 2004 audit fees. The audit committee also approved non-audit and non-tax fees totaling $78 for 2004 and $348 for 2005. None of the fees paid in 2003 to the Company's principal accountants were pre-approved by the audit committee. 43 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K (a) Financial Statements and Financial Schedules (1) and (2) See "Index to Consolidated Financial Statements" beginning on page 47. Schedule II - Valuation and Qualifying Accounts and the Financial Data Schedule are filed herewith. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. (3) The following exhibits are filed or incorporated by reference as part of this Annual Report. Exhibits pertaining to management contracts, compensatory plans or arrangements are as follows: Exhibits 5.15, 5.25, 5.35, 5.45 and 5.55.

(1) Incorporated by reference to Exhibits to the Company's Current Report on Form 8-K dated August 23, 1999. (2) Incorporated by reference to Exhibits to the Company's Registration Statement on Form S-4 (No. 333-33126). (3) Incorporated by reference to Exhibits to the Company's Current Report on Form 8-K dated February 2, 2000. (4) Incorporated by reference to Exhibits to the Company's Registration Statement on Form S-1 (No. 33-99232). (5) Incorporated by reference to Exhibits to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 29, 2002. (6) Incorporated by reference to Exhibits to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2004. 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. AAVID THERMAL TECHNOLOGIES, INC. By: /s/ Bharatan R. Patel ------------------------------------ Bharatan R. Patel, President and Chief Executive Officer March 28, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

46 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AAVID THERMAL TECHNOLOGIES, INC.

47 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Stockholders and Board of Directors Aavid Thermal Technologies, Inc. We have audited the accompanying consolidated balance sheets of Aavid Thermal Technologies, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aavid Thermal Technologies, Inc. and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion of the basic financial statements taken as a whole. The schedule listed in the Index To Consolidated Financial Statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Ernst & Young LLP MANCHESTER, NEW HAMPSHIRE February 18, 2005 48 AAVID THERMAL TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The accompanying notes are an integral part of these consolidated financial statements. 49 AAVID THERMAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial statements. 50 AAVID THERMAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated financial statements. 51 AAVID THERMAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated financial statements. 52 AAVID THERMAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)

The accompanying notes are an integral part of these consolidated financial statements. 53 AAVID THERMAL TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

The accompanying notes are an integral part of these consolidated financial statements. 54 AAVID THERMAL TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) A. BACKGROUND Aavid Thermal Technologies, Inc. (the "Company" or "Aavid") is a leading global provider of thermal management solutions for electronic products and the leading developer and marketer of computational fluid dynamics ("CFD") software. Each of these businesses has an established reputation for high product quality, service excellence and engineering innovation in its market. Aavid designs, manufactures and distributes on a worldwide basis thermal management products that dissipate unwanted heat, which can degrade system performance and reliability, from microprocessors and industrial electronics products. Aavid's products, which include heat sinks, interface materials and attachment accessories, fans, heat spreaders and liquid cooling and phase change devices that it configures to meet customer-specific needs, serve the critical function of conducting, convecting and radiating away unwanted heat. CFD software is used in complex computer-generated modeling of fluid flows, heat and mass transfer and chemical reactions. Aavid's CFD software is used in a variety of industries, including the automotive, aerospace, chemical processing, power generation, material processing, electronics and HVAC industries. Overall, the Company services a highly diversified base of more than 3,000 national and international customers including OEMs, distributors, and contract manufacturers through a highly integrated network of software, development, manufacturing, sales and distribution locations throughout North America, Europe, and the Far East. The Company has been privately held since February 2, 2000, when it was acquired by Heat Holdings Corp., a corporation formed by Willis Stein & Partners II, L.P and other investors. Heat Holdings II Corp., an affiliate of Heat Holdings, owns 89% of the common equity of Aavid Thermalloy LLC, the thermal management hardware business. The Company controls Aavid Thermalloy LLC through a preferred equity interest and holds a 5% common equity interest and, thus, consolidates Aavid Thermalloy LLC in its results within the accompanying financial statements. The investment by Heat Holdings II Corp. has been recorded as minority interest within the accompanying financial statements. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All material inter-company transactions have been eliminated. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of trade accounts receivable. The risk is limited due to the relatively large number of customers comprising the Company's customer base and their dispersion across many industries within the United States, Europe, and Asia. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable based upon expected collectibility of all accounts receivable, considering historical losses, existing economic conditions and individual customers' credit worthiness. The Company's write-offs of accounts receivable have not been significant during the periods presented. At December 31, 2004 and 2003, there were no individual customer accounts receivable balances greater than 10% of total accounts receivable. INCOME TAXES The Company accounts for income taxes under Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under this method, the amount of deferred tax liabilities or assets is 55 calculated by applying the provisions of enacted tax laws to determine the amount of taxes payable or refundable currently or in future years. SFAS No. 109 requires a valuation allowance against deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realizable. RESEARCH AND DEVELOPMENT Research and development costs are charged to operations as incurred. SFAS No. 86, "Accounting for the Costs of Computer Software To Be Sold, Leased, or Otherwise Marketed," requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have not been material. Accordingly, all research and software development costs have been expensed. CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS For purposes of the consolidated statements of cash flows, cash and cash equivalents consist of highly liquid investments with original maturities at date of purchase of three months or less. The estimated fair value of the Company's financial instruments, including accounts receivable, accounts payable and cash equivalents approximates carrying value. The fair value of the Company's long-term debt instruments under the Company's senior credit facilities also approximates carrying value due to their variable interest rates and relatively short maturities. The fair value of the Company's 12 3/4% senior subordinated notes was $134,952 at December 31, 2004 and $123,809 at December 31, 2003. INVENTORIES Inventories are valued at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory, using the first-in, first-out (FIFO) method of accounting, and consists of materials, labor and overhead. The Company regularly reviews its inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on the estimated forecast of product demand and production demand for the next twelve months. As demonstrated in 2004 and 2003, demand for the Company's products can fluctuate significantly. A significant increase in demand for the Company's products could result in a short-term increase in the cost of inventory purchases and production costs while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, the Company's industry is characterized by rapid technological change, frequent new product development and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Additionally, the Company's estimates of future product demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for excess or obsolete inventory. In the future, if the Company's inventory is determined to be overvalued, the Company would be required to recognize such costs in our cost of goods sold at the time of determination. Likewise, if the Company's inventory is determined to be undervalued, the Company may have over-reported our cost of sales in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of the Company's inventory and reported operating results. SHIPPING AND HANDLING COSTS Shipping and handling costs are included in cost of goods sold in the accompanying consolidated statements of operations. 56 PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment are stated at cost. The Company depreciates property, plant and equipment over their estimated remaining useful lives (buildings - 30 to 40 years; machinery and equipment, - 1 to 10 years; computer equipment - 3 to 5 years; furniture and fixtures - 5 years; and vehicles - 4 to 5 years) using both the straight-line and accelerated methods of depreciation. Leasehold improvements are amortized using the straight-line method over the lesser of the original term of the respective lease or the estimated useful life of the asset. Repairs and maintenance are charged against income when incurred; renewals and betterments are capitalized. When property, plant, and equipment are retired or sold, their cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized. INTANGIBLE ASSETS Costs incurred in connection with the issuance of the Company's debt obligations have been deferred and are being amortized over the term of the respective debt obligations. Other intangible assets consist principally of goodwill and developed technology. The Company accounts for goodwill in accordance with the provision of SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 also requires the identification of reporting units, which the Company deemed to be the operating segments described in Note M. Goodwill is allocated to the reporting units for the purposes of goodwill impairment testing, which is performed at least annually. The impairment test is also performed if an event occurs or when circumstances change between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying value. Intangible assets with finite lives will continue to be amortized over their estimated useful lives as follows:

Information regarding intangible assets at December 31 follows:

Aggregate amortization expense for the year ended December 31, 2004, 2003 and 2002, was $1,880, $4,399 and $5,189, respectively. Amortization expense for each of the next five years is estimated as follows. ~~2005... $1,985 2006... 2,007 2007... 425 2008... 300 2009... 175~~

57 The Company assessed the impairment of identifiable intangibles in accordance with the requirements of SFAS No. 142, and determined that no impairment had occurred for the years ended December 31, 2004, 2003 or 2002. LONG-LIVED ASSETS The Company periodically considers whether there has been a permanent impairment in the value of its long-lived assets, primarily property, plant and equipment, in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company evaluates various factors, including current and projected future operating results and the undiscounted cash flows for the under-performing long-lived assets. The Company then compares the carrying amount of the asset to the estimated future undiscounted cash flows expected to result from the use of the asset. To the extent that the estimated future undiscounted cash flows are less than the carrying amount of the asset, the asset is written down to its estimated fair market value and an impairment loss is recognized. The value of the impaired long-lived assets is adjusted periodically based on changes in these factors. At December 31, 2004, the Company determined, based on its evaluation, that the carrying value of its long-lived assets was appropriate. REVENUE RECOGNITION THERMAL PRODUCTS Revenue is recognized when products are shipped. The Company offers certain distributors limited rights of return and stock rotation rights. Due to these return rights, the Company continuously monitors and tracks product returns and records a provision for the estimated future amount of such future returns, based on historical experience and any notification received of pending returns. While such returns have historically been within the Company's expectations and provisions established, there can be no guarantee that the Company will continue to experience the same return rates that it has in the past. Any significant decrease in product demand experienced by distributor customers and the resulting credit returns could have a material adverse impact on the Company's operating results for the period or periods in which such returns materialize. SOFTWARE The Company recognizes revenue on its software license and maintenance arrangements in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition", as amended by SOP 98-9, and related pronouncements. The pronouncements provide specific industry guidance and stipulate that revenue recognized from software arrangements is to be allocated to each element of the arrangement based on relative fair values of the elements, such as software products, upgrades, enhancements, post-contract customer support ("PCS"), and training. In accordance with SOP 97-2, the Company recognizes revenue from software licenses and related ancillary products when: - Persuasive evidence of an arrangement exists, which is typically when a non-cancelable sales and software license agreement has been signed; - Delivery, which is typically FOB shipping point, is complete for the software (either physically or electronically) and related ancillary products; - The customer's fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties; - Collectibility is probable, and; - Vendor-specific objective evidence ("VSOE") of fair value exists for all undelivered elements, typically PCS and professional services. The Company licenses its software products under both perpetual and annual license arrangements. 58 For perpetual license arrangements, the Company uses the residual method to recognize revenue. Under the residual method, the fair value (VSOE) of the undelivered elements (typically PCS) is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements (software) and is recognized as revenue, assuming all other conditions for revenue recognition have been satisfied. The Company recognizes revenue from the undelivered PCS element ratably over the period of the PCS arrangement. For annual license arrangements, with unbundled PCS, since VSOE of value for the PCS does not exist, the Company recognizes revenue for both the software license and the PCS ratably over the 12-month term of the license. Training and consulting revenues are recognized upon completion of services or, in certain instances, on the proportional performance method. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income", requires reporting and display of comprehensive income and its components. SFAS No. 130 requires companies to report all changes in stockholders' equity during a period, except those resulting from investment by owners and distribution to owners, in comprehensive income (loss) in the period in which they are recognized. Accordingly, the foreign currency translation adjustments are included in other comprehensive income (loss). USE OF ACCOUNTING ESTIMATES The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses during the reporting period, and to disclose contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. TRANSLATION OF FOREIGN CURRENCY The financial statements of the Company's foreign subsidiaries are translated in accordance with SFAS No. 52, "Foreign Currency Translation". The financial statements of the Company's subsidiaries are translated from their functional currency into U.S. dollars utilizing the current rate method. Accordingly, assets and liabilities are translated at exchange rates in effect at the end of the year, and revenues and expenses are translated at the weighted average exchange rates during the year. All cumulative translation gains and losses from the translation into U.S. dollars are included as a separate component of stockholders' equity in the consolidated balance sheets. Transaction gains and losses are included in the consolidated statements of operations. Net foreign currency gains included in the consolidated statement of operations were $902, $2,460 and $465 for the years ended December 31, 2004, 2003 and 2002, respectively. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46") to clarify the conditions under which assets, liabilities and activities of another entity should be consolidated into the financial statements of a company. FIN 46 requires the consolidation of a variable interest entity by a company that bears the majority of the risk of loss from the variable interest entity's activities, is entitled to receive a majority of the variable interest entity's residual returns, or both. The provisions of FIN 46, required to be adopted in fiscal 2005, are not expected to have a material impact on the Company's financial position or results of operations. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, 59 freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after November 23, 2004. It is not believed that the adoption of SFAS No. 151 will have a material impact on the consolidated financial position, results of operations or cash flows of the Company. C. SALE OF BUSINESSES AND DISCONTINUED OPERATION On July 17, 2002, the Company sold all of the outstanding shares of Aavid Thermalloy Holdings, GmbH, which in turn owned approximately 89.4% of the outstanding shares of curamik electronics GmbH, pursuant to a Share Sale and Purchase Agreement between the Company and Electrovac Fabrikation Electrotechnischer Spezialartikel GesmbH dated July 10, 2002 (the "Sale Agreement"). Under the Sale Agreement, the Company received consideration of $31,524, subject to possible adjustment based upon the level of consolidated net assets of Curamik and certain indemnification obligations of the Company. The Company recorded a pre-tax gain on the sale of $7,082 in the accompanying statements of operations for the year ended December 31, 2002. $27,683 of the sale proceeds was used to pay down senior debt. The sale of curamik and its related operating results have been excluded from the results from continuing operations and is classified as a discontinued operation in 2002, in accordance with the requirements of SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets". The following is a summary of the results of discontinued operations for the year ended December 31, 2002:

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

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

60 F. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment, recorded at cost, by major classification at December 31, 2004 and 2003 consist of the following:

Substantially all property, plant, and equipment serve as collateral under the Company's borrowing arrangements. G. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Included in accrued expenses and other current liabilities at December 31, 2004 and 2003 are the following:

H. DEBT OBLIGATIONS Debt obligations at December 31, 2004 and 2003 consist of the following:

61 On February 2, 2000, as part of the transactions relating to the acquisition of the Company by Heat Holdings, the Company issued 150,000 units (the "Units"), consisting of $150,000 aggregate principal amount of its 12 3/4% Senior Subordinated Notes due 2007 (the "Notes") and warrants (the "Warrants") to purchase an aggregate of 60 shares of the Company's Class A Common Stock, par value $0.0001 per share, and 60 shares of the Company's Class H Common Stock, par value $0.0001 per share. The Notes are fully and unconditionally guaranteed on a joint and several basis by each of the Company's domestic subsidiaries (the "Subsidiary Guarantors") (see note (Q) for selected consolidating financial statements of parent, guarantors and non-guarantors). The Notes were issued pursuant to an Indenture (the "Indenture") among the Company, the Subsidiary Guarantors and Bankers Trust Company, as trustee. $4,560 of the proceeds from the sale of the Units was allocated to the fair value of the Warrants and $143,752 was allocated to the Notes, net of original issue discount of $1,688. The total discount of $6,248 is being accreted over the term of the notes, using the effective interest rate method. This accretion is recorded as interest expense within the accompanying statements of operations for the years ended December 31, 2004, 2003 and 2002. In May 2001, certain of the Company's stockholders purchased $26,191 principal amount of Senior Subordinated Notes and contributed them to the Company for cancellation in satisfaction of their obligations resulting from the Company's failure to achieve their required leverage ratio at December 31, 2000. On August 1, 2002, the Company entered into a new credit facility (the "Loan and Security Agreement") consisting of a $27,500 asset based facility. The facility consists of a term loan component which requires quarterly principal payments of between $215 and $359 which commenced November 1, 2002. The Loan and Security Agreement also consists of a revolving line of credit component. All borrowings under the credit facility are secured by substantially all assets of the Company. Availability under the line of credit component is determined by a borrowing base of 85% of eligible accounts receivable and 50% of eligible inventory, as defined in the Loan and Security Agreement. At August 1, 2002, the available borrowing base was $23,880, of which $22,620 was drawn at closing. Debt outstanding under the Loan and Security Agreement bears interest at a rate equal to, at the Company's option, either (1) in the case of LIBOR rate loans, the sum of the offered rate for deposits in United States dollars for a period equal to such interest period as it appears on Telerate page 3750 as of 11:00am London time and a margin of between 2.5% and 2.85%, or (2) the sum of LaSalle Business Credit's prime rate plus a margin of between .25% and .50%. At December 31, 2004, the interest rates on the Loan and Security Agreement ranged from 4.92% to 5.75%. Availability under the revolving line of credit was $19,650 at December 31, 2004, of which $6,472 had been drawn. The Company incurred costs for underwriting, legal and other professional fees in connection with the issuance of the Notes and the establishment of other credit facilities. These costs have been capitalized as deferred financing fees and are being amortized over the respective terms of the related debt. This amortization is recorded in interest expense in the accompanying statements of operations for the years ended December 31, 2004, 2003, and 2002. The Company had no letters of credit outstanding at December 31, 2004 or 2003. Debt maturities payable for the five years subsequent to December 31, 2004 and thereafter are as follows: 2005......... $ 8,948 2006......... 7,366 2007......... 122,000 2008......... 32 2009......... 20 Thereafter... 101 -------- Total........ $138,467 ========

62 I. EQUITY COMMON AND PREFERRED STOCK The Company's amended and restated certificate of incorporation authorizes the Company to issue 1,400 shares of Class A Common Stock, par value $0.0001 per share; 1,400 shares of Class B Common Stock, par value $0.0001 per share; 200 shares of Class H Common Stock, par value $0.0001 per share; 100 shares of Series A Preferred Stock, par value $0.0001 per share; and 100 shares of Series B Preferred Stock, par value $0.0001 per share. As of December 31, 2004, the Company had issued and outstanding 1,019 shares of Class A Common Stock, 1,079 shares of Class B Common Stock, 40 shares of Class H Common Stock, 68 shares of Series A Preferred Stock and 68 shares of Series B Preferred Stock. Common Stock In the election of directors, the holders of Class B Common Stock will be entitled to elect two directors or a greater number established in the Bylaws (the "Class B Directors") and the Class A Common Stock and the Class H Common Stock, voting together as a single class, will be entitled to elect the number of directors established in the Bylaws (the "Class A Directors"). Except as otherwise provided by law, the vote of any class of Common Stock, voting as a separate class, will be necessary to approve a merger of Aavid into another corporation if the merger would adversely affect the rights of the class. In addition, except as otherwise provided by law, the vote of the holders of at least 66 2/3% of the holders of Class H Common Stock, voting as a separate class, is necessary for certain transactions, including dividends made with proceeds from the disposition of Aavid Thermalloy, LLC in any of our businesses other than a business operated by Aavid Thermalloy, LLC or its successors. The Company is permitted to pay dividends on the Class A and B Common Stock out of funds legally available and on the Class H Common Stock only out of the lesser of (a) our funds legally available therefor and (b) the Available Hardware Dividend Amount, as defined in the amended and restated certificate of incorporation. Dividends payable in a class or series of capital stock may be paid only in the same class or series. If the Company disposes of all of its assets and liabilities to a wholly-owned subsidiary (a "Corporate Subsidiary"), the Company's board of directors may declare that all of the outstanding shares of Class A Common Stock and/or Class B Common Stock will be exchanged on a pro rata basis for all of the outstanding shares of the common stock of the Corporate Subsidiary having substantially similar rights, qualifications, limitations and restrictions to the Class A Common Stock and Class B Common Stock, respectively. Any share of Class A Common Stock or Class B Common Stock that is issued on conversion or exercise of any convertible securities will immediately upon issuance pursuant to such conversion or exercise be redeemed for $0.0001 in cash. If the Company consummates a disposition of Aavid Thermalloy, LLC to any person, the Company will, on or prior to the first business day following the 60th day following the consummation of the disposition (a) declare and pay a dividend in cash and/or in securities or other property received as proceeds of the disposition to the holders of Class H Common Stock in any amount equal to the net proceeds of the disposition; or (b) exchange the number of whole shares of outstanding Class H Common Stock that have an aggregate average market value of the net proceeds of such disposition, for the property received as proceeds of such disposition in an amount equal to such net proceeds; or (c) exchange each outstanding share of Class H Common Stock for a number of shares of Class A Common Stock or, if there are no shares of Class A Common Stock outstanding, Class B Common Stock, equal to the average daily ratio of the market value of the Class H Common Stock to the market value of the Class A Common Stock or Class B Common Stock, as the case may be. The Company's board of directors may, at any time after a dividend or redemption, declare that each of the remaining outstanding shares of Class H Common Stock will be exchanged for a number of shares of Class A Common Stock or, if there are no shares of Class A Common Stock outstanding and shares of Class B Common Stock are then outstanding, of Class B Common Stock, equal to the market value ratio of one share of Class H Common Stock to one share of Class A Common Stock or one share of Class B Common Stock, as the case may 63 be. If all of the Company's indirect or directly owned common membership interest in Aavid Thermalloy, LLC (and no other assets or liabilities) is held, directly or indirectly, by a wholly-owned subsidiary of Aavid (the "Aavid Thermalloy Subsidiary"), the Company's board of directors may declare that all of the outstanding shares of Class H Common Stock will be exchanged for all of the outstanding shares of common stock of the Aavid Thermalloy Subsidiary, on a pro rata basis. After any exchange date or redemption date on which all outstanding Class H Common Stock was exchanged or redeemed, any share of Class H Common Stock that is issued on conversion or exercise of any convertible securities will be (a) exchanged for the kind and amount of shares of capital stock and other securities and property that the holder would have received had the convertible security been converted immediately prior thereto; or (b) redeemed for $0.001 in cash. In the event the Company dissolves, liquidates or winds up, the holders of the outstanding shares of each class of Common Stock will be entitled to receive a fraction of the funds remaining based on the Market Value of each class of stock. Preferred Stock Dividends on the Company's Series A and Series B Preferred Stock ("Preferred Stock") shall be paid at the rate of 12% per annum, compounded annually, of the liquidation value of such shares (plus any accrued and unpaid dividends as of the end of the previous anniversary of the date of issuance of such shares) from and including the date of issuance of such shares of Preferred Stock to and including the first to occur of: (i) the date on which the liquidation value (plus all accrued and unpaid dividends thereon) of such shares of Preferred Stock is paid to the holder thereof in connection with the liquidation of the Corporation or the redemption of such shares of Preferred Stock by the Company or; (ii) the date on which such shares are otherwise acquired by the Company. Such dividends shall accrue whether or not they have been declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends, and such dividends shall be cumulative such that all accrued and unpaid dividends shall be fully paid or declared with funds irrevocably set apart for payment thereof and shall be paid before any dividends, distributions, redemptions or other payments may be made with respect to any Junior Securities, other than Participating Dividends. If any dividend or other distribution in cash or other property is paid with respect to the Common Stock, a dividend or other distribution in cash or other property shall also be paid with respect to shares of Preferred Stock, in an amount equal to the amount a holder of a share of Preferred Stock would have received had such holder converted such holder's Preferred Stock into Common Stock immediately prior to the record date (or if no record date is declared, the payment date) for the dividend. On all matters submitted to a vote of the stockholders, each holder of outstanding shares of Preferred Stock shall have the number of votes such holder would have had if such holder had converted such holder's Preferred Stock into Common Stock on the record date of such vote (or, if no record date is established, immediately prior to such vote). Upon any liquidation, dissolution or winding up of the Company, each holder of Preferred Stock shall be entitled to be paid, before any distribution or payment is made upon any Junior Securities, an amount in cash equal to the greater of (i) the aggregate liquidation value of all Shares of Preferred Stock held by such holder (plus any accrued and unpaid dividends) or (ii) the amount such holder of Preferred Stock would receive if the holder converted all of such holder's shares of Preferred Stock into shares of Common Stock immediately prior to such liquidation, dissolution or winding up of the Company. At any time after April 13, 2022, the Company may redeem the Preferred Stock by delivering a written notice of such redemption at least thirty days prior to the redemption date. For each share of Preferred Stock which is to be redeemed, the Company shall be obligated on the redemption date to pay the holder of such share an amount equal to the liquidation value of such share (plus any accrued and unpaid dividends). At any time and from time to time, any holder of Preferred Stock may convert all or any portion of the Preferred Stock (including a fraction of a share) held by such holder into a number of shares of Common Stock 64 computed by multiplying the number of shares to be converted by $10.00 and dividing the result by the applicable conversion price then in effect ($3.55 is the initial conversion price). The initial conversion price may be adjusted from time to time for certain dilutive events. The Preferred Stock also contains automatic conversion features whereby upon the closure of a qualifying public offering or upon the vote of a majority of Preferred Stockholders each share of Preferred Stock is converted to Common Stock as described above. The liquidation value of any share of Preferred Stock as of any particular date shall be $75,738.83 per share, as such amount is adjusted for stock splits, stock dividends and similar transactions. The total liquidation value of the Preferred Stock is $14,280 at December 31, 2004. Total cumulative unpaid dividends at December 31, 2004 were $4,024. WARRANTS AND ADDITIONAL EQUITY CONTRIBUTIONS In connection with the issuance of the 12 3/4% Senior Subordinated Notes, the Company issued warrants to purchase 60 shares of Class A common stock and 60 shares of Class H common stock. The warrants are exercisable on or after an exercise event, as defined, and will expire on February 1, 2007. Each warrant entitles its holder to purchase 0.0004 shares of Class A common stock and 0.0004 shares of Class H common stock, subject to adjustment, as defined, at an exercise price of $0.01 per share. On May 4, 2001 certain of the Company's stockholders and their affiliates made an equity contribution of $8,000 in cash and $26,191 in principal amount of senior subordinated notes in order to cure an event of non-compliance with certain financial ratio covenants related to the Company's senior credit facility. As part of the equity contribution discussed above, Heat Holdings contributed to Aavid Thermal Technologies, Inc. an aggregate of $8,000 in cash and $26,191 in principal amount of Aavid Thermal Technologies, Inc.'s 12 3/4% senior subordinated notes due 2007 in exchange for: (a) a warrant to purchase 2,224,472.5 Series B Preferred Units of Aavid Thermalloy, LLC held beneficially and of record by Aavid Thermal Technologies, Inc. and (b) 78.871 shares of Aavid Thermal Technologies, Inc. Class A Common Stock and 78.871 shares of Aavid Thermal Technologies, Inc. Class B Common Stock, par value $.01 per share. The portion of the equity contribution related to the warrants has been recorded in additional paid-in capital. On January 30, 2002, Heat Holdings contributed to Aavid Thermal Technologies, Inc. an aggregate of $12.0 million in cash in exchange for: (a) a warrant to purchase 174,389 Series B Preferred Units of Aavid Thermalloy, LLC held beneficially and of record by Aavid Thermal Technologies, Inc., and (b) 67.71 shares of Aavid Thermal Technologies, Inc. Series A Preferred Stock, par value $.0001 per share, and 67.71 shares of Aavid Thermal Technologies, Inc. Series B Preferred Stock, par value $.0001 per share. The portion of the equity contribution related to the warrant has been recorded in additional paid-in capital. MANAGEMENT INCENTIVE PURCHASE PROGRAM During 2000, the Board of Directors approved the Management Incentive Purchase Program (the "Program"). The Program provides for the grant and purchase of non-voting restricted stock of Fluent, Aavid Thermalloy and Enductive Solutions to and by certain employees and directors of the Company. Shares acquired pursuant to the Program are subject to a right of repurchase by the Company, which lapses as the stock vests. In the event of termination of services, the Company has the right to repurchase unvested shares at the original issuance price. The vesting is generally five years. The Board of Directors set aside approximately 10% of the common equity ownership in Aavid Thermalloy, Fluent and Enductive Solutions for the Program. The 10% of common equity in each company is equal to approximately 56,296 shares in Aavid Thermalloy, LLC, 28,149 shares in Fluent, Inc. and 500 shares in Enductive Solutions, Inc. 65

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

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

The Company has approximately $81,528 of U.S. federal net operating loss carryforwards available to reduce future taxable income, if any. These net operating loss carryforwards expire through 2024, and are subject to the review and possible adjustment by the Internal Revenue Service. Section 382 of the Internal Revenue Code also contains provisions that could place annual limitations on the utilization of these net operating loss carryforwards in the event of a change in ownership, as defined. These loss carryforwards have an annual limitation of approximately $13,000 per year as a result of the Merger described in Note A. A reconciliation of the income tax provision (benefit) at the statutory federal income tax rate to the Company's actual income tax provision is as follows: 66

Deferred tax assets and liabilities are measured as the difference between the financial statement and the tax bases of assets and liabilities at the applicable enacted tax rates. In 2004, 2003 and 2002, the Company provided for U.S. income taxes on undistributed earnings from its foreign subsidiaries as it is the Company's intention to repatriate those earnings from its foreign operations in future years. The components of the net deferred asset consist of the following:

SFAS No. 109 "Accounting for Income Taxes", requires a valuation allowance against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. Due to the uncertainty surrounding the Company's ability to realize the full benefit of the deferred tax assets, a valuation allowance in the amount of $13,439 and $16,828 has been established at December 31, 2004 and 2003, respectively. The American Jobs Creation Act of 2004 (the "Jobs Act"), enacted on October 24, 2004, provides for a temporary 85% dividends received deduction on certain foreign earnings repatriated by the end of 2005. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by the chief executive officer and approved by the board of directors. Certain other criteria must be satisfied as well. The Company is in the process of evaluating whether it will repatriate foreign earnings under the provisions of the Jobs Act. The Company expects to determine the amounts and sources of foreign earnings to be repatriated, if any, during 2005. The Company is not in a position to determine the impact of a qualifying repatriation, should it choose to make one, on its income tax expense for 2005. K. COMMITMENTS AND CONTINGENCIES LEASES The Company leases various equipment and facilities under the terms of non-cancelable operating and capital leases. Future lease commitments are as follows: 67

Lease expense was approximately $7,397, $6,723 and $6,978 for the years ended December 31, 2004, 2003 and 2002, respectively. LITIGATION The Company is involved in various legal proceedings that are incidental to the conduct of its business, none of which it believes could reasonably be expected to have a materially adverse effect on the Company's financial condition. PURCHASE COMMITMENT The Company has an obligation to purchase from one of its key suppliers a minimum quantity of aluminum coil stock. The Company believes that purchasing aluminum coil stock from this supplier is necessary to achieve consistently low tolerances, design, delivery flexibility, and price stability. Under the terms of this agreement the Company has agreed to purchase certain minimum quantities which approximate $73 at December 31, 2004. MEXICO LABOR AGREEMENT The Company is currently operating its Monterrey, Mexico facility under an annual collective bargaining agreement with its manufacturing employees. The contract covered 165 employees on December 31, 2004 and expires in March, 2005. The Company is currently renegotiating this agreement. L. 401(K) PROFIT SHARING PLAN The Company has profit sharing plans, which permit participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. Employee eligibility is based on a minimum age and employment requirement. Annual employer contributions are determined by the Board of Directors, but cannot exceed the amount allowable for federal income tax purposes. The Company's contributions were approximately $729, $646 and $555 for the years ended December 31, 2004, 2003 and 2002, respectively. M. SEGMENT REPORTING Aavid provides thermal management solutions for microprocessors and integrated circuits ("ICs") for digital and power applications. In February 2000, the business was consolidated into two operating segments: thermal management products and computational fluid dynamics ("CFD") software. Aavid's thermal management products consist of products and services that solve problems associated with the dissipation of unwanted heat in electronic and electrical components and systems. The Company develops and offers CFD software for computer modeling and fluid flow analysis of products and processes that reduce time and expense associated with physical models and the facilities to test them. The Company also provides thermal design services to customers who choose to outsource their thermal design needs. 68 The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. Aavid's reportable segments are strategic business units that offer different products and services. They are managed separately because each segment requires different marketing and sales strategies. Most of the businesses were acquired as a unit and the management at the time of acquisition has generally been retained. The following summarizes the continuing operations of each reportable segment for the years ended December 31, 2004, 2003 and 2002:

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

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

There were no individual customers who made up more than 10% of consolidated revenues for the years ended December 31, 2004, 2003 or 2002. N. RESTRUCTURING CHARGES AND RESERVES Approximately $2,130 of restructuring charges were recorded in connection with the Company's October 1999 acquisition of Thermalloy, the thermal management business of Bowthorpe plc. The restructuring plan included initiatives to integrate the operations of the Company and Thermalloy and reduce overhead. The primary components of these plans related to (a) the closure of duplicative Thermalloy operations in Hong Kong and the United Kingdom, (b) the elimination of duplicative selling, general and administration functions of Thermalloy on a global basis and (c) the termination of certain contractual obligations. During the year ended December 31, 2000, 136 individuals were terminated under the restructuring plan. The following amounts have been charged against the Thermalloy restructuring reserves during the years ended December 31, 2004 and 2003:

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

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

71 O. ACQUISITION On July 30, 2004, the Company acquired 100% of the outstanding stock of a small manufacturing company located in Taiwan. The total purchase price of the acquired company is $4,888, consisting of $3,088 cash paid upon closing and contingent consideration of $1,800 payable within two years of the closing date upon the satisfaction of certain conditions. Goodwill will be increased by the amount of the additional consideration, if any, when it becomes due and payable. The results of operations of the acquired company since July 30, 2004, are included in the consolidated statements of operations of the Company for the year ended December 31, 2004. The fair value of assets acquired and liabilities assumed at July 30, 2004, is as follows: Cash ............................................. $ 47 Accounts receivable .............................. 38 Inventories ...................................... 46 Prepaids and other current assets ................ 2 Property, plant and equipment, net ............... 650 Goodwill ......................................... 593 Developed technology ............................. 1,500 Other long-term assets ........................... 254 Accounts payable ................................. (14) Accrued expenses and other current liabilities ... (28) ------ Total $3,088 ======

P. QUARTERLY DATA (UNAUDITED) Following is a summary of the quarterly results of continuing operations for the years ended December 31, 2004 and 2003:

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

77 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) ALLOWANCE FOR DOUBTFUL ACCOUNTS:

AAVID THERMAL TECHNOLOGIES INC 10-K