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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


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

For the fiscal year ended December 31, 2005


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

For the transition period from to

Commission file number 0-27309

AAVID THERMAL TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)


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

ONE EAGLE SQUARE, SUITE 509, CONCORD, NEW HAMPSHIRE (Address of principal executive offices)		03301 (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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

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 o No þ(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. þ

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

Yes o No þ

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

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ

Aggregate market value of the Registrant’s common stock held by non-affiliates: N/A. The number of outstanding shares of the registrant’s Common Stock as of March 31, 2006 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.

TABLE OF CONTENTS


PART I
	ITEM 1. BUSINESS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
	ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
	ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	ITEM 9A. CONTROLS AND PROCEDURES
	ITEM 9B. OTHER INFORMATION
PART III
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
SIGNATURES
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

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, 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 (“Aavid Thermalloy”), which includes Applied Thermal Technologies, Inc.’s thermal design, validation and consulting services; and Fluent, Inc. (“Fluent”).

On February 15, 2006, Aavid Thermal Technologies, Inc. (“ATTI”) entered into a definitive merger agreement (the “Merger Agreement”) with ANSYS, Inc. (“ANSYS”), ANSYS XL, LLC (“Merger LLC”), a wholly-owned subsidiary of ANSYS, BEN I, Inc., a wholly-owned subsidiary of Merger LLC, HINES II, Inc., a wholly-owned subsidiary of Merger LLC, Heat Holdings Corp. (“Holding”), TROY III, Inc., a wholly-owned subsidiary of ATTI, Fluent Inc. (“Fluent”, and together with Holding and ATTI, the “Selling Companies”), and, for certain limited purposes described therein, Willis Stein & Partners II, L.P., Willis Stein & Partners III, L.P., Willis Stein & Partners Dutch, L.P., Willis Stein & Partners Dutch III-A, L.P., Willis Stein & Partners Dutch III-B, L.P., and Willis Stein & Partners III-C, L.P., and Willis Stein & Partners II, L.P., as Stockholders’ Representative. Pursuant to the Merger Agreement and through a series of mergers, ANSYS shall acquire directly or indirectly all of the outstanding stock of Holding, ATTI and Fluent. Following the mergers, each of Holding, ATTI and Fluent shall be indirect subsidiaries of ANSYS.

Pursuant to the terms of the Merger Agreement, ANSYS will issue 6,000,000 shares of its common stock and pay approximately $300 million in net cash, subject to certain adjustments at closing, to acquire the Selling Companies. The transaction is valued at approximately $565 million based on the $44.11 per share closing price of ANSYS’ common stock on February 15, 2006.

ATTI, the other Selling Companies and ANSYS have made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants (a) to conduct their respective businesses in the usual, regular and ordinary course consistent with past practice between the execution of the Merger Agreement and consummation of the mergers, and (b) not to engage in certain kinds of transactions during such period.

Consummation of the mergers are subject to customary conditions, including, among others, (a) the absence of any order prohibiting the closing, (b) expiration or termination of the applicable Hart-Scott-Rodino waiting period, (c) subject to certain exceptions, the accuracy of representations and warranties of the parties to the Merger Agreement, (d) the delivery of customary closing certificates and opinions and the delivery of certain employment related agreements and (e) the absence of any material adverse change with respect to each party’s business.

Prior to and in connection with the consummation of the mergers, ATTI and Holding will spin-off to stockholders ATTI’s thermal management products operating segment, which includes Aavid Thermal Products, Inc.(“ATP”), Aavid Thermalloy, LLC (“AT”) and Applied Thermal Technologies, Inc.(“Applied”).

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement filed as Exhibit 2.1 to Form 8-K dated February 22, 2006 and incorporated by reference.

On March 21, 2006, ATTI entered into a Third Supplement Indenture dated as of March 21, 2006 (the “Supplemental Indenture”) with the Guarantors named on the signature page thereto and Deutsche Bank Trust Company Americas (f/k/a Bankers Trust Company), a New York banking corporation, as trustee, to the Indenture dated as of February 2, 2000 (as amended, the “Indenture”), relating to ATTI’s 12-3/4% Senior Subordinated Notes due 2007 (the “Notes”). The Supplemental Indenture was entered into in connection with ATTI’s tender offer and consent solicitation with respect to the Notes, which was commenced on March 8, 2006.

The Supplemental Indenture amends the Indenture governing the Notes to (i) eliminate substantially all of the restrictive covenants and reporting covenants and certain events of default contained in the Indenture and (ii) amend the minimum notice requirement in respect of a redemption of Notes so that ATTI may within five days redeem any Notes that remain outstanding following the mergers (as defined below) and tender offer.

The amendments to the Indenture pursuant to the Supplemental Indenture will not become effective until the satisfaction of various conditions, including but not limited to, the consummation of proposed mergers (collectively, the “mergers”) pursuant to which ANSYS, Inc. and certain of its affiliates will acquire ATTI and the computational fluid dynamics software business operated by ATTI’s wholly owned subsidiary, Fluent Inc. Consummation of the mergers is also subject to various customary conditions, including, among others, expiration or termination of the applicable Hart-Scott-Rodino waiting period and the absence of any material adverse change with respect to each party’s business.

The foregoing description of the Supplemental Indenture does not purport to be complete and is qualified in its entirety by reference to the Supplemental Indenture filed as Exhibit 4.1 and incorporated by reference.

To date, ATTI had received the requisite tenders and consents from holders of $123,759,000 in aggregate principal amount of the Notes, representing approximately 99.96% of the outstanding Notes, in connection with ATTI’s tender offer and consent solicitation for the Notes which was commenced on March 8, 2006. The amount tendered represents a sufficient number of consents required to approve the Supplemental Indenture.

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.

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 2005. We believe that, through Fluent, we have approximately 35% of the developed market for commercial CFD software.

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

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

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

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

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

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

COMPETITIVE STRENGTHS

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

TOTAL INTEGRATED SOLUTIONS PROVIDER

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

VALUE-ADDED PARTNERING WITH OUR CUSTOMERS

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

WORLDWIDE LOW-COST MANUFACTURER

We have manufacturing operations in the United States, 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 primarily by the significant value added by our CFD software to the design process.

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 32 years of experience in the area of fluid flows and thermal management, and H. Ferit Boysan, president of our CFD software business, has 25 years of experience in the area of fluid flows and CFD software.

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 173 Ph.D.s and 290 engineers focus on new technology initiatives as well as developing new and enhancing existing products, processes and materials to address the evolving needs of our customers. We seek to enhance our internal research and development activities through collaborations with our customers and third parties in order to gain access to, or to pursue the development of, new technologies for thermal management applications and CFD software.

MARKETS AND CUSTOMERS

We sell our thermal management products and services to a highly-diversified base of customers across a wide range of industries and applications. Our customer base includes major customers which operate in the computer, networking, contract manufacturing, communications and electronics distribution market sectors.

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.

There were no individual customers who made up more than 10% of our consolidated revenues in the years ended December 31, 2005, 2004 or 2003.

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:


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

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

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

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

COMPUTATIONAL FLUID DYNAMICS SOFTWARE PRODUCTS

We are a 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 20 years of CFD and engineering consulting experience, our worldwide team of CFD professionals supports clients with senior engineering consultants, experienced CFD analysts, leading CFD software developers and mesh generation experts. Support services include expertise in the physics of heat, fluid flow and related phenomena, in CFD modeling and analysis, and in selection of engineering design solutions. In addition to providing CFD software expertise and access to high-performance computing systems, our CFD software consulting group works under contract to develop software with specific features required by individual clients.

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


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

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


PRODUCT OR SERVICE	DESCRIPTION	FEATURES
Icepak	Icepak is a fully-interactive, object-based CFD software tool specifically designed to analyze air flow and thermal management in electronics design.	- -	Used for component board- and cabinet- level design Reduces design costs

		-	Reduces the time-to-market of high-performance electronic systems

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

		-	Improves the energy performance of heating and cooling designs.

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

		-	Enables users to automatically create unstructured meshes for extremely complex geometries

		-	Provides a concise and powerful set of solid modeling-based geometry tools with both geometry and “clean-up” functions

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

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

		-	A Wizard driven interface that requires minimal user training.

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 524 sales, support and marketing personnel.

TECHNOLOGY

We believe that technology leadership is essential to our growth strategy and have focused our approximately 173 Ph.D.s and 290 engineers on the development of technology in two areas:

I. 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.

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

For raw aluminum extrusion and coil stock, we typically make purchasing commitments to several key suppliers of up to 12 months. In return, these suppliers commit 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.

COMPETITION

Our thermal management products business competes with numerous 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 or to companies through in-house code.

BACKLOG AND LICENSE RENEWAL

Our hardware products typically are produced and shipped within 30 to 45 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, 2005, we had a total of 2,410 employees including approximately 551 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.

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.”

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 AND COPPER CAN SIGNIFICANTLY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.

Aluminum and copper are the principal raw materials used in our products and they represent a significant portion of our cost of goods sold. We purchase copper bar, copper coil, aluminum extrusion, aluminum coil and various components from a limited number of outside sources. During the years ended December 31, 2005, 2004 and 2003, we purchased a significant portion of our aluminum and copper coil stock from one or two suppliers in each major commodity grouping regionally. We believe that purchasing copper bar, copper coil, aluminum extrusion and aluminum 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 copper or 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 copper and 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 copper, 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 and copper, which have historically been cyclical and highly volatile, have a significant effect on our gross margin. An increase in the market price for copper and aluminum could have a material adverse effect upon our results of operations and business. See “Our operating results may fluctuate significantly.”

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

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

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

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

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 continue to 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.

Prior to 2005, the Chinese Yuan had a fixed rate of exchange against the U.S. dollar. In 2005, the People’s Republic of China began the process of allowing the Yuan’s exchange rate to fluctuate based on market conditions. To date, these fluctuations have been relatively small in magnitude and have been managed closely by the Chinese government. Should China allow the value of the Yuan to float more freely, 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 significant revaluation of the Yuan could also result in foreign currency exchange gains or losses within our statement of operations in 2006 or future periods. It is impossible, based on current facts or circumstances, to estimate the impact on our business in 2006 or future periods of a revaluation of the Chinese Yuan.

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:


	AS OF DECEMBER 31, 2005
	(DOLLARS IN THOUSANDS)
Total debt (including current portion)		$ 135,391
Stockholders’ deficit		(61,285	)
Debt to stockholders’ equity		N/A

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.

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.

As of December 31, 2005, we had $10.6 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.

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.

ITEM 2. PROPERTIES

Aavid Thermalloy has a total of approximately 440,000 square feet of manufacturing space with locations in Laconia, New Hampshire; Monterrey, Mexico; the United Kingdom; Italy and China. 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 expand our manufacturing facilities in Asia 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 264,000 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:


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


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

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

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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


	YEAR ENDED			YEAR ENDED			YEAR ENDED			YEAR ENDED			YEAR ENDED
	DECEMBER 31,			DECEMBER 31,			DECEMBER 31,			DECEMBER 31,			DECEMBER 31,
	2001			2002			2003			2004			2005
STATEMENT OF OPERATIONS DATA: (AMOUNTS IN THOUSANDS)
Net sales	$	170,892		$	161,942		$	188,167		$	227,131		$	256,488
Cost of goods sold		124,000			88,532			97,061			112,232			127,331

Gross profit		46,892			73,410			91,106			114,899			129,157
Selling, general and administrative expenses		92,742			58,835			62,565			68,924			73,974
Research and development		10,775			12,492			15,004			16,658			18,603
Intangible asset impairment charge(1)		115,210			—			—			—			1,861
Restructuring charge (credit)(2)		16,885			858			(90	)		(6	)		—
Loss on sale of division(3)		4,322			—			—			—			—

Income (loss) from continuing operations		(193,042	)		1,225			13,627			29,323			34,719
Interest expense, net		(22,217	)		(20,141	)		(18,137	)		(17,940	)		(18,261	)
Other income (expense), net		1,098			453			2,483			1,077			(322	)

Income (loss) from continuing operations before income taxes and minority interest		(214,161	)		(18,463	)		(2,027	)		12,460			16,136
Benefit (provision) for income taxes		10,959			(817	)		(1,627	)		(4,807	)		(8,272	)

Income (loss) from continuing operations before minority interest		(203,202	)		(19,280	)		(3,654	)		7,653			7,864
Minority interest		3,294			—			—			—			—

Income (loss) from continuing operations		(199,908	)		(19,280	)		(3,654	)		7,653			7,864
Income (loss) from discontinued operations, net (including gain on disposal of $7,082 in 2002)(4)		1,445			6,725			—			—			—

Net income (loss)(5)	$	(198,463	)	$	(12,555	)	$	(3,654	)	$	7,653		$	7,864

BALANCE SHEET DATA AT YEAR END:
Working capital	$	(152,980	)	$	(19,359	)	$	(18,276	)	$	(12,751	)	$	(5,251	)
Total assets		175,294			139,052			145,693			171,690			184,452
Total long term debt, including current portion		175,832			139,450			138,810			138,467			135,391
Stockholders’ deficit		(70,888	)		(70,416	)		(75,331	)		(67,639	)		(61,285	)

NOTES TO SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (AMOUNTS IN THOUSANDS)

(1)

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. In the fourth quarter of 2005 and in accordance with SFAS 142 and SFAS 144, we recorded an impairment charge related to goodwill, fixed assets and intangible assets acquired in connection with the acquisition of a small Taiwanese manufacturing company that occurred in 2004.

(2)

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.

(3)

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

(4)

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 SFAS No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets”.

(5)

Because the Company’s common stock is not publicly traded, earnings per share information is not presented.

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 a 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 Holding, 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.

As set forth in Part I, Item 1 of this report, we have entered into the merger agreement with ANSYS to sell Holding, the Company, and Fluent to ANSYS and to spin off ATP, AT and Applied, the closing of which, subject to certain conditions, is anticipated to be completed during the second quarter of 2006.

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), console video game systems, 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 other consumer electronics. 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., Mexico, U.K., Italy, Taiwan 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 five years has been challenging due to periods of global economic slowdown experienced by the electronics industry and intense competition. We have adjusted to these conditions through significant cost cutting and consolidation of manufacturing operations that occurred over the period of 2000 through 2002. Additionally, on January 5, 2006 we announced our decision to close our Woodbridge, Canada manufacturing facility by April 30, 2006. On January 18, 2006, we also announced our decision to significantly reduce manufacturing operations at our Swindon, UK facility. The reduction of manufacturing operations at the Swindon facility is expected to be completed sometime in the first half of 2006. We believe that this additional consolidation of our manufacturing activities in Europe and North America along with continued growth of our Asian manufacturing capabilities will enable us to remain cost competitive into the future.

In 2005, Aavid Thermalloy achieved revenue growth of approximately 9.8% when compared with 2004 while keeping its operating expenses as a percentage of revenue consistent with 2004 levels, allowing us to maintain positive cash flows from the Aavid Thermalloy operating unit.

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 16% each of the last two years. The nature of Fluent’s products allow for a consistent recurring revenue base and associated cash flows. 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 2005, Fluent achieved revenue growth of 16.8% when compared with 2004, while keeping operating expenses as a percentage of revenues below 2004 levels, allowing us to improve cash flows.

As set forth in Part I, Item I, Business, Company Introduction, on February 15, 2006, the Company entered into the Merger Agreement, and on March 21, 2006 the Company entered into the Supplemental Indenture.

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.

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.


	YEAR ENDED DECEMBER 31,
	2003			2004			2005
Net sales		100.0	%		100.0	%		100.0	%
Cost of goods sold		51.6			49.4			49.6

Gross profit		48.4			50.6			50.4
Selling, general and administrative expenses		33.2			30.4			28.9
Research and development		8.0			7.3			7.3
Asset impairment charges		—			—			0.7

Income from operations		7.2			12.9			13.5
Interest expense, net		(9.6	)		(7.9	)		(7.1	)
Other income(expense), net		1.3			0.5			(0.1	)

Income (loss) before income taxes		(1.1	)		5.5			6.3
Provision for income taxes		(0.8	)		(2.1	)		(3.2	)

Net income (loss)		(1.9	)%		3.4	%		3.1	%

2005 COMPARED WITH 2004


	YEAR ENDED
	DECEMBER 31,
NET SALES (DOLLARS IN MILLIONS)	2004		2005		CHANGE
Computer, Networking and Industrial Electronics	$	121.6	$	133.1		9.5	%
Consulting and Design (Applied)		1.1		1.6		36.9	%

Total Aavid Thermalloy		122.7		134.7		9.8	%
Total Fluent		104.3		121.7		16.8	%
Total Enductive Solutions		0.1		0.1		—

Total Aavid Thermal Technologies	$	227.1	$	256.5		12.9	%

Net sales for 2005 were $256.5 million, an increase of $29.4 million, or 12.9%, compared with $227.1 million for 2004. The overall increase in sales was a combination of increasing revenues at both Aavid Thermalloy and Fluent.

Aavid Thermalloy’s net sales were $134.7 million for 2005, an increase of $12.0 million, or 9.8%, compared with $122.7 million for 2004. The increase was primarily the result of a moderate improvement in the semiconductor and electronics industries in 2005.

Fluent’s net sales were $121.7 million for 2005, an increase of $17.4 million, or 16.8%, over $104.3 million for 2004. 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 57.9% of net sales for the year ended December 31, 2005 as compared with 56.4% of net sales for the year ended December 31, 2004.

Our gross profit in 2005 was $129.2 million, an increase of $14.3 million, or 12.4% higher than 2004 gross profit of $114.9 million. Our gross margin in 2005 was 50.4%, which compares with 50.6%, in 2004. Aavid Thermalloy experienced a decrease in gross margin in 2005 as much of the revenue growth experienced in 2005 came from the lower margin computer industry. Fluent’s revenue and gross profit remained a large percentage of the Company’s overall revenue and gross profit in 2005 which helped to neutralize the gross margin decrease experienced at Aavid Thermalloy.

Our selling, general and administrative expenses, excluding amortization of intangibles, were $73.1 million, or 28.5% of sales for 2005, as compared $68.1 million, or 30.0% of sales for 2004. Aavid Thermalloy’s 2005 S,G&A expenses were down $0.4 million from 2004 levels. Fluent’s 2005 S,G&A increased $5.7 million from 2004 levels as Fluent continued to enhance its sales and support infrastructure to support its revenue growth. Lastly, the Company’s corporate offices experienced a $0.3 million increase in administrative costs.

In 2005, the Company recognized $1.9 million in impairment losses on goodwill, fixed assets and certain identified intangible assets that were being amortized relating to a small Taiwanese manufacturing company originally acquired in 2004 as projected future cash flows from this acquired company were determined to be less than the carrying value of the acquired company’s long-lived assets. A breakout of this impairment charge by asset type follows:


(DOLLARS IN MILLIONS)	2005
Goodwill	$	0.6
Developed technology		1.1
Non-compete agreements		0.1
Fixed assets		0.1

Total	$	1.9

Intangible asset amortization of $0.9 million was recorded in 2005 and 2004. 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 $18.6 million, or 7.3% of net sales, which compares with $16.7 million, or 7.3% of net sales, in 2004. 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 operations in 2005 was $34.7 million, an increase of $5.4 million over 2004 income from operations of $29.3 million. Aavid Thermalloy had operating income of $3.0 million in 2005 compared with operating income of $5.0 million in 2004. This decrease stemmed primarily from the impairment charge of $1.9 million recorded in 2005 related to intangible assets and fixed assets pertaining to a small Taiwanese manufacturing company as discussed above. Fluent’s operating income increased to $32.0 million in 2005, compared with an operating income of $25.1 million in 2004. 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 losses were $0.4 million in 2005 compared with foreign exchange gains of $0.9 million in 2004. Foreign exchange losses occurred in 2005 due to a moderate strengthening of the U.S. Dollar versus the Euro, British Pound, and Canadian Dollar experienced over the course of 2005. 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 and losses recorded in 2005 and 2004. Should the U.S. dollar continue to strengthen in 2006, it is likely that the Company will realize additional foreign currency losses associated with these inter-company notes.

Our net interest charges were $18.3 million in 2005, compared with $17.9 million in 2004 as interest rates in 2005 increased from 2004 levels. The company reduced its borrowings under its Senior credit facility by approximately $4.2 million in 2005.

The Company recorded a tax provision of $8.3 million in 2005 compared to a tax provision of $4.8 million in 2004. The Company incurred a tax provision in 2005 and 2004 despite having operating losses in the United States 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 $46.4 million in 2005 compared with $44.4 million in 2004. 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 Fixed Charge Coverage Ratio financial covenant utilized by our lenders. A reconciliation of net income to EBITDA is as follows:


	FOR THE YEAR ENDED
	DECEMBER 31,		DECEMBER 31,
(DOLLARS IN MILLIONS)	2005		2004
Net income (loss)	$	7.9	$	7.7
Cash interest expense		16.7		16.5
Bond discount amortization		0.9		0.8
Deferred financing fee amortization		1.1		1.0
Provision for income taxes		8.3		4.8
Depreciation		6.8		7.3
Intangible asset amortization		0.9		0.8
Deferred revenue change during period (1)		1.7		5.5
Loss on disposal of fixed assets		0.2		0.0
Asset impairment charge		1.9		—

EBITDA	$	46.4	$	44.4


(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.

Under the terms of our Loan and Security Agreement, we cannot permit the ratio of EBITDA to Fixed Charges to be less than 1.0 to 1.0, as measured at the end of each fiscal month. If this ratio falls below 1.0 to 1.0, this would constitute an Event of Default. If such a default occurs, the lenders under the Loan and Security Agreement will be entitled to accelerate the amounts due under the Loan and Security Agreement and may require all such amounts to be immediately paid in full. The lenders under the Loan and Security Agreement may also take all remedies permitted to be taken by a secured creditor under the security documents entered into to secure the Loan and Security Agreement and the Uniform Commercial Code. The Company was in compliance with all financial covenants under its Loan and Security Agreement for the years ended December 31, 2005 and 2004, respectively.

2004 COMPARED WITH 2003


	YEAR ENDED
	DECEMBER 31,
NET SALES (DOLLARS IN MILLIONS)	2003		2004		CHANGE
Computer, Networking and Industrial Electronics	$	100.5	$	121.6		21.0	%
Consulting and Design (Applied)		1.1		1.1		—

Total Aavid Thermalloy		101.6		122.7		20.8	%
Total Fluent		86.5		104.3		20.6	%
Total Enductive Solutions		0.1		0.1		—

Total Aavid Thermal Technologies	$	188.2	$	227.1		20.7	%

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.

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 had operating income of $5.0 million in 2004 compared with an operating loss of $0.1 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 increased to $25.1 million in 2004, compared with an operating income of $14.7 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.

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.

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 in the United States 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 the Fixed Charge Coverage Ratio financial covenant utilized by our lenders. A reconciliation of net income to EBITDA is as follows:


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

EBITDA	$	44.4	$	35.7


(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 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 fiscal years beginning after June 15, 2005. 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 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 L 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.

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.

The Company’s cash and cash equivalents increased to $41.0 million as of December 31, 2005, an increase of $12.7 million from the balance as of December 31, 2004 of $28.3 million. Net cash provided by operating activities for the year ended December 31, 2005 was $23.4 million compared to $24.9 million provided by operating activities for the year ended December 31, 2004. We had $5.3 million in negative working capital as of December 31, 2005 compared with $12.8 million in negative working capital at December 31, 2004. Deferred revenue recorded as a currently liability on the balance sheet was $44.9 million at December 31, 2005, compared to $43.1 million at December 31, 2004. At December 31, 2005 and 2004, accounts receivable days sales outstanding (“DSO”) were 68.7 days. In the fourth quarter of 2005, inventory turns were 8.5, compared to 8.1 during the fourth quarter of 2004.

During the year ended December 31, 2005, we made capital expenditures of $4.4 million compared with $5.4 million in 2004. In addition, $1.0 million and $1.7 million of assets were acquired under capital leases in 2005 and 2004, respectively.

On August 1, 2002, the Company entered into a new credit facility (the “Loan and Security Agreement”) consisting of 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, 2005, the interest rates on the Loan and Security Agreement ranged from 6.89% to 7.75%. Total availability under the line of credit at December 31, 2005 was $20.2 million, of which $7.7 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 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 $0.3 million at December 31, 2005; 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:


	PAYMENTS DUE BY PERIOD ($ IN THOUSANDS)
			LESS THAN
CONTRACTUAL OBLIGATIONS	TOTAL		1 YEAR		1-3 YRS		4-5 YRS		5+ YRS
Long-term debt and capital leases	$	135,391	$	11,480	$	123,437	$	132	$	342
Operating leases		16,802		6,284		5,782		2,600		2,136

Total contractual obligations	$	152,193	$	17,764	$	129,219	$	2,732	$	2,478

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.

On January 5, 2006 the Company announced its decision to close its Woodbridge, Canada manufacturing facility by April 30, 2006. On January 18, 2006, the Company also announced its decision to significantly reduce its manufacturing operations at its Swindon, UK facility. The reduction of manufacturing operations at the Swindon facility is expected to be completed sometime in the first half of 2006. In connection with these restructuring activities, the Company expects to record restructuring charges totaling approximately $1.8 million within its statement of operations during the first half of 2006.

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 2005 effective interest rates would have an approximate $0.1 million impact on our earnings for 2006, based on debt composition and rates in effect at December 31, 2005.

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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements and supplementary data required pursuant to this Item begin on page 50 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, 2005, 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 31, 2006, their ages, the year in which each became a director and their principal occupations during the past five years:


			YEAR
			FIRST
			BECAME		PRINCIPAL OCCUPATION
NAME	AGE		DIRECTOR		DURING THE PAST FIVE YEARS
Bharatan R. Patel		57		1996	Mr. Patel has been the Chief Executive Officer of the Company since January 1, 2000. He served as President and Chief Operating Officer of the Company from October 1997 to December 1999 and the President until 1998 and Chief Executive Officer of Fluent, Inc., a subsidiary of the Company (“Fluent”), since 1988, when Fluent was formed as a subsidiary of Creare Inc. (“Creare”), an engineering consulting firm; various capacities at Creare since 1976, including principal engineer and vice president, and established the Fluent division upon its formation in 1983; senior engineer from 1971 to 1976 in the Power Systems Group of Westinghouse Electric Corporation.

Daniel H. Blumenthal		42		2000	Mr. Blumenthal became a director upon consummation of the Merger on February 2, 2000. Mr. Blumenthal has been a managing director of Willis Stein & Partners since its inception in 1994. Prior to that time, he served as vice president of Continental Illinois Venture Corporation, or CIVC, a private equity investment firm, from 1993 to 1994. From 1988 to 1993 he was a corporate tax attorney with Latham & Watkins, a national law firm. Mr. Blumenthal currently serves as a director of several companies, including Ziff Davis Holdings, Inc. and other Willis Stein portfolio companies.

John R. Willis		56		2001	Mr. Willis became a director in October, 2001. Mr. Willis has been a managing director of Willis Stein & Partners since its inception in 1994. Prior to that time, he served as the president and a director of CIVC, a private equity investment firm from 1989 to 1994. In 1988, he founded Continental Mezzanine Investment Group, and was its Manager through 1990. From 1974 until 1988, Mr. Willis held various management positions at Continental Bank. He currently serves as a director of several companies, including Roundy’s Inc., Ziff Davis Holdings, Inc. and other Willis Stein portfolio companies.

Christopher G. Boehm		33		2003	Mr. Boehm became a director in October, 2003 and also serves as a director of several other Willis Stein portfolio companies. Prior to joining Willis Stein & Partners in 1996, Mr. Boehm was in the investment banking division at Salomon Brothers Inc, where he was involved with a variety of mergers and acquisitions and corporate finance transactions. Mr. Boehm received an M.B.A. from Harvard University’s Graduate School of Business Administration and holds a B.S. in Finance and Accountancy from Miami University.


			YEAR
			FIRST
			BECAME		PRINCIPAL OCCUPATION
NAME	AGE		DIRECTOR		DURING THE PAST FIVE YEARS
Charles A. Dickinson		82		1997	Mr. Dickinson has twice served as chairman of the board of Solectron Corporation, from 1986 to 1990 and from 1993 to 1996, where he has been a director since 1984; from 1991 until February 1996, he was responsible for establishing Solectron Europe. Mr. Dickinson has held various management positions in manufacturing and technology companies. From 1986 until 1990 he served as chief executive officer and chairman of Vermont Microsystems; prior thereto he was chief executive officer and president of Data Products Corporation, having been promoted from vice president of operations, a position he had held since 1978.

David R. A. Steadman		67		1994	Mr. Steadman served as Chairman of the Board from February 1995 until October 1996; Director of Tech/Ops Sevcon, Inc., a manufacturing company; Chairman of Visibility, Inc., a software company, from November 1996 until July, 2000; Chairman of Brookwood Companies Incorporated, a textile converter, dyer and finisher, since March 1989; chairman of Technology Service Group, Inc., a manufacturer of coin-operated telephones, from November 1994 to December 1997; president of Atlantic Management Associates, Inc., a management services and investment group, since November 1988; chairman and chief executive officer of Integra-A Hotel and Restaurant Company from July 1990 to March 1994; chairman and chief executive officer of GCA Corporation from 1987 to July 1990; various positions within the Raytheon Company from 1975 to 1978 and 1980 to 1987; and Mr. Steadman served as chairman of a group of subsidiaries of EMI Ltd. in the United Kingdom, Australia and the United States from 1978 to 1980.

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, 2005, our Board of Directors held 5 formal meetings. Each director attended at least 75% of the meetings of the Board of Directors held during 2005.

BOARD COMMITTEES

Our Board of Directors formed an audit committee in 2002. The committee is now comprised of Daniel Blumenthal, Christopher Boehm 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:


NAME	AGE		POSITION
Bharatan R. Patel		57	Chairman of the Board, President and Chief Executive Officer, Aavid Thermal Technologies, Inc. and Aavid Thermalloy; Chief Executive Officer, Fluent; Director
Brian A. Byrne		58	Vice President and Chief Financial Officer
John W. Mitchell		57	Vice President and General Counsel, Aavid
H. Ferit Boysan		58	President and Chief Operating Officer, Fluent
Peter L. Christie		60	Vice President and Chief Financial Officer of Fluent

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.

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


	COMPENSATION
			ANNUAL
NAME AND PRINCIPAL POSITION	FISCAL YEAR		SALARY		BONUS
Bharatan R. Patel		2005	$	446,250	$	199,251
Chief Executive Officer		2004	$	438,584	$	312,092
		2003	$	425,000	$	239,700

Brian A. Byrne		2005	$	262,500	$	70,324
Vice President and Chief Financial Officer		2004	$	256,747	$	110,315
		2003	$	250,000	$	84,000

H. Ferit Boysan		2005	$	215,000	$	168,122
President and Chief Operating Officer of Fluent		2004	$	215,000	$	170,125
		2003	$	214,600	$	158,309

John W. Mitchell		2005	$	262,500	$	78,060
Vice President, General Counsel and Secretary		2004	$	259,900	$	122,266
		2003	$	250,000	$	93,060

Peter L. Christie		2005	$	161,893	$	126,176
Chief Financial Officer of Fluent		2004	$	156,805	$	126,921
		2003	$	152,000	$	117,781

EMPLOYMENT AGREEMENTS

In connection with the Merger Agreement, on February 16, 2006, AT entered into a new employment agreement with Bharatan Patel, ATTI’s and AT’s Chief Executive Officer, which will become effective upon consummation of the mergers. The term of the new agreement will extend until July 1, 2008 and will provide for a base salary of at least $342,850 per annum and a bonus of up to 50% of base salary. The agreement includes a two year noncompete agreement by Mr. Patel. The foregoing description of the agreement does not purport to be complete and is qualified in its entirety by reference to the form of agreement filed as Exhibit 10.1 to Form 8-K dated February 22, 2006, and incorporated by reference.

In connection with the Merger Agreement, on February 16, 2006, AT also entered into an amendment to ATTI’s and AT’s employment agreement with John Mitchell, ATTI’s and AT’s Vice President and General Counsel. Pursuant to the terms of the amendment, the term of Mr. Mitchell’s employment will extend until July 1, 2008. The amendment provides for a lump sum payment equal to 50% of his then base salary, which is currently $271,500 per annum, for two years in connection with the consummation of the mergers. Following consummation of the mergers, Mr. Mitchell will be employed by AT on a half-time basis and receive a base salary of 50% of his then current base salary and a bonus of up to 1/3 of base salary. The foregoing description of the amendment does not purport to be complete and is qualified in its entirety by reference to the form of agreement filed as Exhibit 10.2 to Form 8-K dated February 22, 2006 and incorporated by reference.

In addition, in connection with the Merger Agreement, on February 16, 2006, AT entered into an amendment to ATTI’s and AT’s employment agreement with Brian Byrne, ATTI’s and AT’s Chief Financial Officer. Pursuant to the terms of the amendment, the term of Mr. Byrne’s employment will extend until July 1, 2008. The amendment provides for a lump sum payment equal to 24% of his then base salary, which is currently $271,500 per annum, for two years in connection with the consummation of the mergers. Following consummation of the mergers, Mr. Byrne will receive from AT a base salary of 76% of his then current base salary, and a bonus of up to 30% of base salary. The foregoing description of the amendment does not purport to be complete and is qualified in its entirety by reference to the form of agreement filed as Exhibit 10.3 to Form 8-K dated February 22, 2006 and incorporated by reference.

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.

The following table sets forth certain information regarding the beneficial ownership of the issued and outstanding stock of Holdings as of March 1, 2006.

BENEFICIAL OWNERSHIP(1)


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

Total		6,532,500.79		100.00	%		1,424,146.27		100.00	%


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

Total		512,805.48		100.00	%		9,308,001.11		100.00	%


(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.


(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.


(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:


	2005		2004
Audit fees	$	0.7	$	0.7
Tax fees		0.7		0.3

Total fees	$	1.4	$	1.0

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 2004 or 2005.

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 2005 audit fees. The audit committee also approved non-audit fees totaling $348 for 2005 and $200 for 2006. None of the fees paid in 2003 to the Company’s principal accountants were pre-approved by the audit committee.

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 50. 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 and 5.45.


NO.		DESCRIPTION
2.1		Agreement and Plan of Merger, dated as of February 15, 2006, by and among ANSYS, Inc., ANSYS XL, LLC, BEN I, Inc., HINES II, Inc., Heat Holdings Corp., Aavid Thermal Technologies, Inc., TROY III, Inc., Fluent, Inc., Principal Stockholders and Stockholders’ Representative. (1)

3.1		Certificate of Incorporation (2)

3.2		By-laws(2)

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

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

4.3		Third Supplemental Indenture, dated as of March 21, 2006, among Aavid Thermal Technologies, Inc., the Guarantors and Deutsche Bank Trust Company Americas. (7)

5.15		Executive Employment Agreement dated as of February 16, 2006 by and between Aavid Thermalloy, LLC and Bharatan R. Patel.(1)

5.25		Amendment to Executive Employment Agreement dated as of February 16, 2006 among Aavid Thermal Technologies, Inc. and John W. Mitchell.(1)

5.35		Amendment to Executive Employment Agreement dated as of February 16, 2006 among Aavid Thermal Technologies, Inc. and Brian A. Byrne.(1)

5.45		Executive Employment Agreement dated August 31, 2005 between Aavid Thermalloy, LLC and Michael P. Flanders. (6)


NO.		DESCRIPTION
10.5		Form of indemnification agreement for the Company’s officers and directors(4)

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

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

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

21.0		Subsidiaries of Registrant(2)

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

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

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

32.2		CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)

Incorporated by reference to Exhibits to the Company’s Current Report on Form 8-K dated February 22, 2006.

(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 Current Report on Form 8-K dated August 31, 2005.

(7)

Incorporated by reference to Exhibits to the Company’s Current Report on form 8-K dated March 21, 2006.

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, 2005 and 2004, 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, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aavid Thermal Technologies, Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

MANCHESTER, NEW HAMPSHIRE
February 17, 2006

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


	December 31,			December 31,
	2005			2004
Assets
Cash and cash equivalents	$	40,968		$	28,312
Accounts receivable-trade, less allowance for doubtful accounts		53,972			48,234
Inventories		13,132			12,745
Refundable taxes		937			380
Deferred income taxes		1,013			1,062
Prepaid and other current assets		5,781			5,375

Total current assets		115,803			96,108
Property, plant and equipment, net		25,669			28,296
Goodwill		39,433			40,026
Developed technology		451			2,242
Deferred financing fees		1,308			2,451
Deferred income taxes		—			434
Other assets, net		1,788			2,133

Total assets	$	184,452		$	171,690


Liabilities, Minority Interest And Stockholders’ Deficit
Accounts payable-trade	$	26,292		$	19,657
Current portion of long term debt obligations		11,480			8,948
Income taxes payable		8,345			6,411
Restructuring charges		121			163
Deferred revenue		44,858			43,136
Accrued expenses and other current liabilities		29,958			30,544

Total current liabilities		121,054			108,859
Long-term debt obligations, net of current portion		123,911			129,519
Deferred income taxes		187			366

Total liabilities		245,152			238,744
Commitments and contingencies (Note J)
Minority interest in consolidated subsidiaries		585			585
Stockholders’ deficit
Series A Preferred Stock, $.0001 par value; authorized 100 shares; 67.71 shares issued and outstanding (Liquidation value of $7,997 at December 31, 2005)		—			—
Series B Preferred Stock, $.0001 par value; authorized 100 shares; 67.71 shares issued and outstanding (Liquidation value of $7,997 at December 31, 2005)		—			—
Class A Common Stock, $.0001 par value; authorized 1,400 shares; 1,018.87 shares issued and outstanding		—			—
Class B Common Stock, $.0001 par value; authorized 1,400 shares; 1,078.87 shares issued and outstanding		—			—
Class H Common Stock, $.0001 par value; authorized 200 shares; 40 shares issued and outstanding		—			—
Warrants to purchase 49.52 shares of Class A common stock and 49.52 shares of Class H common stock		3,764			3,764
Additional paid-in capital		188,007			188,007
Cumulative translation adjustment		(2,576	)		(1,066	)
Accumulated deficit		(250,480	)		(258,344	)

Total stockholders’ deficit		(61,285	)		(67,639	)

Total liabilities, minority interest and stockholders’ deficit	$	184,452		$	171,690

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

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


	Year Ended			Year Ended			Year Ended
	December 31,			December 31,			December 31,
	2005			2004			2003
Cash flows provided by operating activities:
Net income (loss)	$	7,864		$	7,653		$	(3,654	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		6,812			7,256			7,996
Amortization and accretion		2,932			2,680			5,103
Bad debt provision		(87	)		1,008			289
Loss on sale of property, plant and equipment		191			5			225
Deferred income tax provision (benefit)		304			237			(114	)
Asset impairment charge		1,861			—			—
Restructuring credits		—			(6	)		(90	)
Changes in assets and liabilities:
Accounts receivable-trade		(8,578	)		(7,523	)		(4,701	)
Inventories		(865	)		(2,743	)		(2,283	)
Refundable taxes		(556	)		(220	)		33
Prepaid and other current assets		(1,071	)		1,076			(491	)
Notes receivable		—			—			82
Other long-term assets		(24	)		(324	)		16
Accounts payable-trade		6,896			6,270			1,002
Income taxes payable		2,427			2,457			(99	)
Deferred revenue		4,925			4,210			5,327
Accrued expenses and other current liabilities		410			2,892			2,406

Total adjustments		15,577			17,275			14,701

Net cash provided by operating activities		23,441			24,928			11,047

Cash flows used in investing activities:
Proceeds from sale of property, plant and equipment		40			48			188
Purchases of property, plant and equipment		(4,443	)		(5,440	)		(4,009	)
Payment for acquisition, net of cash acquired		—			(3,041	)		—

Net cash used in investing activities		(4,403	)		(8,433	)		(3,821	)

Cash flows used in financing activities:
Advances (repayments) of line of credit, net		1,221			(538	)		(157	)
Advances under debt obligations		547			—			178
Principal payments under debt obligations		(6,569	)		(2,396	)		(2,141	)

Net cash used in financing activities		(4,801	)		(2,934	)		(2,120	)

Foreign exchange effect on cash and cash equivalents		(1,581	)		(480	)		(2,172	)


Net increase in cash and cash equivalents		12,656			13,081			2,934
Cash and cash equivalents, beginning of year		28,312			15,231			12,297

Cash and cash equivalents, end of year	$	40,968		$	28,312		$	15,231


Supplemental disclosure of cash flow information:
Interest paid	$	16,686		$	16,537		$	16,656

Income taxes paid	$	6,579		$	1,517		$	1,850


Supplemental disclosure of non-cash investing activities:
Reconciliation of assets acquired and liabilities assumed in acquisition:
Fair value of assets acquired	$	—		$	3,130		$	—
Cash paid for assets		—			(3,088	)		—

Liabilities assumed	$	—		$	42		$	—

Capital lease obligations incurred for purchases of new equipment	$	945		$	1,730		$	558

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

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”, “Aavid” or “ATTI”) is a leading global provider of thermal management solutions for electronic products and a 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. (“Holding”), a corporation formed by Willis Stein & Partners II, L.P and other investors (the “Merger”). Heat Holdings II Corp.(“Holdings II”), an affiliate of Holding, owns 89% of the common equity of Aavid Thermalloy LLC (“AT”), the thermal management hardware business. The Company controls AT through a preferred equity interest and holds a 5% common equity interest and, thus, consolidates AT in its results within the accompanying financial statements. The investment by Holdings II 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, 2005 and 2004, 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 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.

Advertising

Advertising costs are expensed in the period incurred. Amounts charged to expense were approximately $1,439, $1,064 and $990 for the years ended December 31, 2005, 2004 and 2003, respectively.

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 $126,749 at December 31, 2005 and $134,952 at December 31, 2004.

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 prior years, 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.

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 to 10 years; and vehicles – 3 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 L. 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:


Intangible Assets	Years
Developed technology		4 to 7
Non-compete agreements		2
Deferred financing fees		4 to 7

Information regarding intangible assets at December 31 follows:


	2005					2004
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Amortized intangible assets:
Developed technology	$	8,056	$	(7,605	)	$	9,556	$	(7,314	)
Non-compete agreements		—		—			252		(53	)
Deferred financing fees		7,463		(6,155	)		7,463		(5,012	)

Total amortized intangible assets	$	15,519	$	(13,760	)	$	17,271	$	(12,379	)

Unamortized intangible assets:
Goodwill	$	39,433				$	40,026

Aggregate amortization expense for the year ended December 31, 2005, 2004 and 2003, was $2,022, $1,880 and $4,399, respectively. Amortization expense for the remaining years is estimated as follows.


2006	$	1,634
2007		125

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 or 2003. In 2005, the Company recorded an impairment charge of $1,742 to write-off the remaining unamortized balances of intangible assets recorded in connection with the acquisition of a small Taiwanese manufacturing company (see note (N) for further discussion of this acquisition and related impairment charge).

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. In 2005, the Company determined, based on its evaluation, that the carrying value of certain long-lived assets acquired in connection with its acquisition of a small Taiwanese manufacturing company was impaired. The Company recorded a charge of $119 within its statement of operations for 2005 related to this impairment (see note (N) for further discussion of this acquisition and related impairment charge).

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

	-		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.

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.

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.

New accounting pronouncements

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, 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 June 15, 2005. 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.

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 (losses) gains included in the consolidated statement of operations were $(445), $902 and $2,460 for the years ended December 31, 2005, 2004 and 2003, respectively.

C. Accounts Receivable

The components of accounts receivable at December 31, 2005 and 2004 are as follows:


	December 31,
	2005			2004
Accounts receivable	$	56,726		$	50,621
Allowance for doubtful accounts		(2,754	)		(2,387	)

	$	53,972		$	48,234

D. Inventories

The components of inventories at December 31, 2005 and 2004 are as follows:


	December 31,
	2005		2004
Raw materials	$	4,441	$	4,233
Work-in-process		3,197		4,896
Finished goods		5,494		3,616

	$	13,132	$	12,745

G. Debt Obligations

Debt obligations at December 31, 2005 and 2004 consist of the following:


	December 31,
	2005		2004
Term Loans under a Loan and Security Agreement payable in 40 consecutive quarterly installments ranging from $215 to $359 commencing November 1, 2002. At December 31, 2005 the interest rates on the Term Loans ranged from 7.24% to 7.75%	$	2,898	$	8,249

Revolving Loans under a Loan and Security Agreement which matures on July 31, 2006. At December 31, 2005 the interest rate on the Revolving Loans ranged from 6.89% to 7.75%		7,658		6,472

12 3/4% Senior Subordinated Notes due February 1, 2007		122,687		121,777

Term loans payable through 2014 with monthly payments of approximately $6 through 2007 and annual payments of approximately $67 through 2015. At December 31, 2005 the interest rates on the term loans ranged from 1.01% to 3.33%		767		389

Capitalized lease obligations		1,381		1,580

		135,391		138,467

Less current portion		11,480		8,948


Debt Obligations, net of current portion	$	123,911	$	129,519

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, 2005, 2004 and 2003. 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, 2005, the interest rates on the Loan and Security Agreement ranged from 6.89% to 7.75%. Availability under the revolving line of credit was $20,190 at December 31, 2005, of which $7,658 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, 2005, 2004, and 2003.

The Company had no letters of credit outstanding at December 31, 2005 or 2004.

Debt maturities payable for the five years subsequent to December 31, 2005 and thereafter are as follows:


2006	$	11,480
2007		123,212
2008		225
2009		66
2010		66
Thereafter		342

Total	$	135,391

H. 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, 2005, 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 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 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 $15,994 at December 31, 2005. Total cumulative unpaid dividends at December 31, 2005 were $5,738.

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 warrant.

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.


	Aavid Thermalloy Shares				Fluent Shares				Enductive Solutions Shares
			Weighted				Weighted				Weighted
			Average				Average				Average
Restricted	Number Of		Exercise		Number Of		Exercise		Number Of		Exercise
Stock AwardS	Shares		Price		Shares		Price		Shares		Price
Balance at December 31, 2003		32,089	$	10.00		26,347	$	10.00		250	$	10.00

Issued during 2004		—		—		—		—		—		—
Canceled during 2004		—		—		—		—		—		—

Balance at December 31, 2004		32,089	$	10.00		26,347	$	10.00		250	$	10.00

Issued during 2005		—		—		—		—		—		—
Canceled during 2005		—		—		—		—		—		—

Balance at December 31, 2005		32,089	$	10.00		26,347	$	10.00		250	$	10.00

Vested at December 31, 2005		31,526	$	10.00		26,347	$	10.00		200	$	10.00

As of December 31, 2005, 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.

I. Income Taxes

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


	Year Ended December 31,
	2005		2004			2003
Domestic	$	808	$	(4,702	)	$	(6,885	)
Foreign		15,328		17,162			4,858

	$	16,136	$	12,460		$	(2,027	)

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


	Year Ended December 31,
	2005		2004		2003
Federal provision:
Current	$	167	$	—	$	—
Deferred		—		—		—

		167		—		—

State provision:
Current		433		615		504
Deferred		—		—		—

		433		615		504

Foreign provision (benefit):
Current		7,368		3,955		1,237
Deferred		304		237		(114	)

		7,672		4,192		1,123

Total provision	$	8,272	$	4,807	$	1,627

The Company has approximately $73,785 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 at the statutory federal income tax rate to the Company’s actual income tax provision is as follows:


	Year Ended December 31,
	2005			2004			2003
Expected federal tax	$	5,486		$	4,236		$	(689	)
State income taxes, net of federal benefit		286			406			333
Foreign related		4,782			3,386			1,180
(Decrease) increase in valuation allowance		(2,870	)		(3,389	)		743
Other		588			168			60

Total provision for income taxes	$	8,272		$	4,807		$	1,627

The Company is currently operating under a tax holiday at one of its subsidiaries in India. The tax holiday, which expires in 2009, resulted in tax savings of $430 and $420 in 2005 and 2004, respectively.

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 2005, 2004 and 2003, 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:


	December 31,
	2005			2004
Tax credits	$	2,835		$	1,373
Inventory reserves and capitalization		202			638
Accounts receivable reserves		896			643
Vacation and benefit reserves		644			651
Unremitted foreign earnings		(14,903	)		(12,199	)
Restructuring reserves		533			118
Other liabilities and reserves		6,372			6,001
Depreciation		(618	)		(761	)
Net operating loss carryforwards		25,107			27,778
Acquired intangibles		(9,673	)		(9,673	)
Valuation allowance		(10,569	)		(13,439	)

Net deferred tax assets	$	826		$	1,130

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 $10,569 and $13,439 has been established at December 31, 2005 and 2004, respectively.

J. 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:


	Operating		Capital
Years Ending December 31,	Leases		Leases
2006	$	6,284	$	839
2007		3,950		467
2008		1,832		174
2009		1,601		—
2010		999		—
Thereafter		2,136		—

Total minimum lease payments	$	16,802		1,480

Less amount representing interest				99

Present value of total minimum lease payments				1,381
Less current portion				791

Long-term capital lease obligations			$	590

Lease expense was $6,408, $7,397 and $6,723 for the years ended December 31, 2005, 2004 and 2003, 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

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 65 employees on December 31, 2005 and expires in March, 2006. The Company is currently renegotiating this agreement.

K. 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 $785, $729 and $646 for the years ended December 31, 2005, 2004 and 2003, respectively.

L. 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.

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

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

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

The following summarizes the operations of each reportable segment for the years ended December 31, 2005, 2004 and 2003:


	Revenues From					Depreciation		Restructuring
	External		Interest			And		Charges			Impairment
	Customers		Expense, Net			Amortization (1)		(Credits)			Charge
2005
Thermal Products	$	134,650	$	15,495		$	4,712	$	—		$	1,861
CFD Software		121,838		2,059			2,976		—			—
Corporate Office		—		707			3		—			—

Total	$	256,488	$	18,261		$	7,691	$	—		$	1,861
2004
Thermal Products	$	122,726	$	13,938		$	5,121	$	(6	)	$	—
CFD Software		104,405		3,978			2,982		—			—
Corporate Office		—		24			3		—			—

Total	$	227,131	$	17,940		$	8,106	$	(6	)	$	—
2003
Thermal Products	$	101,583	$	13,274		$	6,252	$	(90	)	$	—
CFD Software		86,584		5,824			5,204		—			—
Corporate Office		—		(961	)		10		—			—

Total	$	188,167	$	18,137		$	11,466	$	(90	)	$	—

(1)

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


	Income Tax			Income			Assets (Net Of
	Provision			(Loss) Before			Intercompany			Capital
	(Benefit)			Income Taxes			Balances)			Expenditures
2005
Thermal Products	$	1,400		$	(13,155	)	$	67,776		$	2,268
CFD Software		10,895			29,810			120,917			2,175
Corporate Office		(4,023	)		(519	)		(4,241	)		—

Total	$	8,272		$	16,136		$	184,452		$	4,443
2004
Thermal Products	$	1,548		$	(7,852	)	$	66,831		$	2,010
CFD Software		5,856			20,493			119,457			3,427
Corporate Office		(2,597	)		(181	)		(14,598	)		3

Total	$	4,807		$	12,460		$	171,690		$	5,440
2003
Thermal Products	$	861		$	(12,253	)	$	54,374		$	929
CFD Software		2,886			9,181			103,271			3,078
Corporate Office		(2,120	)		1,045			(11,952	)		2

Total	$	1,627		$	(2,027	)	$	145,693		$	4,009

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


	Year Ended December 31,
	2005						2004						2003
	Long-Lived						Long-Lived						Long-Lived
	Assets			Net Sales			Assets			Net Sales			Assets			Net Sales
United States	$	57,653		$	122,687		$	60,664		$	114,629		$	61,815		$	104,735
Taiwan		1,328			22,035			3,460			19,814			618			12,428
China		962			43,384			980			28,480			848			25,750
United Kingdom		1,406			30,305			2,411			24,273			2,434			22,153
Italy		1,848			20,117			2,241			22,572			2,609			15,428
Japan		1,638			23,699			1,686			17,606			1,455			12,955
Singapore		159			17,879			125			9,360			78			7,527
Mexico		183			7,823			322			9,120			548			8,772
Other International		3,830			46,929			4,051			42,054			3,459			35,514
Intercompany eliminations		(358	)		(78,370	)		(358	)		(60,777	)		(358	)		(57,095	)

Consolidated	$	68,649		$	256,488		$	75,582		$	227,131		$	73,506		$	188,167

There were no individual customers who made up more than 10% of consolidated revenues for the years ended December 31, 2005, 2004 or 2003.

M. 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, 2005 and 2004:


			Cash Charges Against
			Reserves For The			Restructuring
	Restructuring		Year Ended			Reserves Balance
	Reserves Balance At		December 31,			At December 31,
	January 1, 2005		2005			2005
Employee separation	$	160	$	(40	)	$	120

Total	$	160	$	(40	)	$	120


			Cash Charges Against
			Reserves For The			Restructuring
	Restructuring		Year Ended			Reserves Balance
	Reserves Balance At		December 31,			At December 31,
	January 1, 2004		2004			2004
Lease terminations and leasehold improvements reserve	$	2	$	(2	)	$	—
Employee separation		200		(40	)		160

Total	$	202	$	(42	)	$	160

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, 2005 and 2004:


			Restructuring		Cash Charges Against			Restructuring
			Credits For		Reserves For The Year			Reserves
	Restructuring		The Year Ended		Ended			Balance At
	Reserves Balance		December 31,		December 31,			December 31,
	At January 1, 2005		2005		2005			2005
Facility costs and lease terminations	$	3	$	—	$	(2	)	$	1

Total	$	3	$	—	$	(2	)	$	1


			Restructuring			Cash Charges Against		Restructuring
			Credits For			Reserves For The Year		Reserves
	Restructuring		The Year Ended			Ended		Balance At
	Reserves Balance		December 31,			December 31,		December 31,
	At January 1, 2004		2004			2004		2004
Fixed asset reserves	$	6	$	(6	)	$	—	$	—
Facility costs and lease terminations		3		—			—		3

Total	$	9	$	(6	)	$	—	$	3

N. 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

In 2005, the Company recognized a $1,861 impairment charge on goodwill, fixed assets and certain identified intangible assets that were being amortized relating to the above acquisition as the present value of projected future cash flows from this acquired company were determined to be less than the carrying value of the acquired company’s long-lived assets. A breakout of this impairment charge by asset type follows:


Goodwill	$	593
Developed technology		1,075
Non-compete agreements		74
Fixed assets		119

Total	$	1,861

O. Subsequent events

On February 15, 2006, the Company entered into a definitive merger agreement (the “ANSYS Merger Agreement”) with ANSYS, Inc. (“ANSYS”). Pursuant to the ANSYS Merger Agreement and through a series of mergers, ANSYS shall acquire directly or indirectly all of the outstanding stock of Holding, ATTI and Fluent (“the Selling Companies”).

Following the mergers, the Selling Companies shall be indirect subsidiaries of ANSYS. Pursuant to the terms of the ANSYS Merger Agreement, ANSYS will issue 6,000,000 shares of its common stock and pay approximately $300 million in net cash, subject to certain adjustments at closing, to acquire the Selling Companies.

Prior to and in connection with the consummation of the mergers, ATTI and Holding will spin-off to stockholders ATTI’s thermal management products operating segment, which includes Aavid Thermal Products, Inc., AT and Applied Thermal Technologies, Inc.(“Applied”).

On January 5, 2006, the Company announced its decision to close its Woodbridge, Canada manufacturing facility by April 30, 2006. On January 18, 2006, the Company also announced its decision to significantly reduce manufacturing operations at its Swindon, UK facility. The reduction of manufacturing operations at the Swindon facility is expected to be completed sometime in the first half of 2006. In connection with these restructuring activities, the Company expects to record restructuring charges totaling approximately $1.8 million within its statement of operations during the first half of 2006.

P. quarterly data (unaudited)

Following is a summary of the quarterly results of continuing operations for the years ended December 31, 2005 and 2004:


	FISCAL QUARTER
	FIRST		SECOND		THIRD		FOURTH		TOTAL
2005
Net sales	$	60,578	$	64,192	$	63,590	$	68,128	$	256,488
Gross profit		31,404		32,263		31,225		34,265		129,157
Net income		1,742		456		2,734		2,932		7,864
2004
Net sales	$	55,617	$	56,538	$	55,711	$	59,265	$	227,131
Gross profit		27,829		27,916		28,209		30,945		114,899
Net income		1,733		1,712		1,368		2,840		7,653

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. 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.


	CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2005
				U.S. GUARANTOR			NON-GUARANTOR
	PARENT			SUBSIDIARIES			SUBSIDIARIES		ELIMINATIONS			CONSOLIDATED
ASSETS
Cash and cash equivalents	$	5,957		$	5,544		$	29,467	$	—		$	40,968
Accounts receivable-trade, net		—			17,637			36,326		9			53,972
Inventories		—			4,760			8,547		(175	)		13,132
Due (to) from affiliate, net		102,958			(129,664	)		38,505		(11,799	)		—
Refundable taxes		(348	)		—			1,105		180			937
Deferred income taxes		(2,826	)		11,782			1,013		(8,956	)		1,013
Prepaid and other current assets		66			1,296			4,419		—			5,781

Total current assets		105,807			(88,645	)		119,382		(20,741	)		115,803
Property, plant and equipment, net		4			15,041			10,520		104			25,669
Investment in subsidiaries		(37,196	)		8,768			—		28,428			—
Deferred taxes		282			—			—		(282	)		—
Other assets, net		1,747			40,382			835		16			42,980

Total assets	$	70,644		$	(24,454	)	$	130,737	$	7,525		$	184,452

LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ DEFICIT
Accounts payable-trade	$	—		$	2,620		$	23,702	$	(30	)	$	26,292
Current portion of debt obligations		—			8,315			3,165		—			11,480
Income taxes payable		2,853			(556	)		5,385		663			8,345
Deferred revenue		—			21,299			23,559		—			44,858
Accrued expenses and other current liabilities		7,359			10,232			12,750		(262	)		30,079

Total current liabilities		10,212			41,910			68,561		371			121,054

Debt obligations, net of current portion		122,687			554			670		—			123,911
Deferred income taxes		(1,557	)		6,193			187		(4,636	)		187

Total liabilities		131,342			48,657			69,418		(4,265	)		245,152

Commitments and contingencies
Minority interests		587			—			—		(2	)		585
Stockholders’ deficit
Common stock		—			3			6,396		(6,399	)		—
Preferred stock		—			97,288			8,837		(106,125	)		—
Warrants		3,764			—			—		—			3,764
Additional paid-in capital		188,007			134,479			10,556		(145,035	)		188,007
Cumulative translation adjustment		(2,576	)		996			2,499		(3,495	)		(2,576	)
Accumulated deficit		(250,480	)		(305,877	)		33,031		272,846			(250,480	)

Total stockholders’ equity (deficit)		(61,285	)		(73,111	)		61,319		11,792			(61,285	)

Total liabilities, minority interests and stockholders’ (deficit) equity	$	70,644		$	(24,454	)	$	130,737	$	7,525		$	184,452


	CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2004
				U.S. GUARANTOR			NON-GUARANTOR
	PARENT			SUBSIDIARIES			SUBSIDIARIES		ELIMINATIONS			CONSOLIDATED
ASSETS
Cash and cash equivalents	$	601		$	3,910		$	23,801	$	—		$	28,312
Accounts receivable-trade, net		—			18,383			29,860		(9	)		48,234
Inventories		—			5,666			7,338		(259	)		12,745
Due (to) from affiliate, net		103,066			(95,776	)		29,627		(36,917	)		—
Refundable taxes		(348	)		—			548		180			380
Deferred income taxes		(4,168	)		13,124			1,062		(8,956	)		1,062
Prepaid and other current assets		75			1,253			4,047		—			5,375

Total current assets		99,226			(53,440	)		96,283		(45,961	)		96,108
Property, plant and equipment, net		7			16,559			11,626		104			28,296
Investment in subsidiaries		(38,833	)		6,925			—		31,908			—
Deferred taxes		282			—			434		(282	)		434
Other assets, net		2,689			40,930			3,217		16			46,852

Total assets	$	63,371		$	10,974		$	111,560	$	(14,215	)	$	171,690

LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ DEFICIT
Accounts payable-trade	$	203		$	2,666		$	16,788	$	—		$	19,657
Current portion of debt obligations		—			7,036			1,912		—			8,948
Income taxes payable		3,172			(210	)		4,567		(1,118	)		6,411
Deferred revenue		—			21,247			21,889		—			43,136
Accrued expenses and other current liabilities		7,565			11,260			12,086		(204	)		30,707

Total current liabilities		10,940			41,999			57,242		(1,322	)		108,859

Debt obligations, net of current portion		121,777			7,400			342		—			129,519
Deferred income taxes		(2,294	)		6,930			366		(4,636	)		366

Total liabilities		130,423			56,329			57,950		(5,958	)		238,744

Commitments and contingencies
Minority interests		587			—			—		(2	)		585
Stockholders’ deficit
Common stock		—			3			6,267		(6,270	)		—
Preferred stock		—			86,222			8,837		(95,059	)		—
Warrants		3,764			—			—		—			3,764
Additional paid-in capital		188,007			126,192			8,715		(134,907	)		188,007
Cumulative translation adjustment		(1,066	)		548			8,574		(9,122	)		(1,066	)
Accumulated deficit		(258,344	)		(258,320	)		21,217		237,103			(258,344	)

Total stockholders’ equity (deficit)		(67,639	)		(45,355	)		53,610		(8,255	)		(67,639	)

Total liabilities, minority interests and stockholders’ (deficit) equity	$	63,371		$	10,974		$	111,560	$	(14,215	)	$	171,690


	CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
	FOR THE YEAR ENDED DECEMBER 31, 2005
				U.S. GUARANTOR			NON-GUARANTOR
	PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
Net sales	$	—		$	123,819		$	212,171		$	(79,502	)	$	256,488
Cost of goods sold		—			54,107			123,033			(49,809	)		127,331

Gross profit		—			69,712			89,138			(29,693	)		129,157
Selling, general and administrative expenses		(185	)		38,575			45,470			(9,886	)		73,974
Research and development		—			17,741			20,760			(19,898	)		18,603
Asset impairment charge		—			—			1,861			—			1,861

Income from operations		185			13,396			21,047			91			34,719
Interest expense, net		(711	)		(17,265	)		(278	)		(7	)		(18,261	)
Other income (expense), net		3			3,201			1,644			(5,170	)		(322	)
Equity in income of subsidiaries		4,364			—			—			(4,364	)		—

Income (loss) before income taxes		3,841			(668	)		22,413			(9,450	)		16,136
Income tax benefit (expense)		4,023			(4,287	)		(6,449	)		(1,559	)		(8,272	)

Net income (loss)	$	7,864		$	(4,955	)	$	15,964		$	(11,009	)	$	7,864


	CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
	FOR THE YEAR ENDED DECEMBER 31, 2004
				U.S. GUARANTOR			NON-GUARANTOR
	PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
Net sales	$	—		$	115,984		$	173,280		$	(62,133	)	$	227,131
Cost of goods sold		—			53,209			95,385			(36,362	)		112,232

Gross profit		—			62,775			77,895			(25,771	)		114,899
Selling, general and administrative expenses		182			37,627			39,934			(8,819	)		68,924
Restructuring charges		—			—			(6	)		—			(6	)
Research and development		—			16,214			17,311			(16,867	)		16,658

Income (loss) from operations		(182	)		8,934			20,656			(85	)		29,323
Interest income (expense) net		(27	)		(17,283	)		(676	)		46			(17,940	)
Other income (expense), net		25			1,915			(76	)		(787	)		1,077
Equity in income of subsidiaries		5,240			—			—			(5,240	)		—

Income (loss) before income taxes		5,056			(6,434	)		19,904			(6,066	)		12,460
Income tax benefit (expense)		2,597			(3,211	)		(4,224	)		31			(4,807	)

Net income (loss)	$	7,653		$	(9,645	)	$	15,680		$	(6,035	)	$	7,653


	CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
	FOR THE YEAR ENDED DECEMBER 31, 2003
				U.S. GUARANTOR			NON-GUARANTOR
	PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
Net sales	$	—		$	106,207		$	140,528		$	(58,568	)	$	188,167
Cost of goods sold		—			47,036			82,197			(32,172	)		97,061

Gross profit		—			59,171			58,331			(26,396	)		91,106
Selling, general and administrative expenses		(42	)		37,988			33,724			(9,105	)		62,565
Restructuring charges		—			(375	)		285			—			(90	)
Intangible asset impairment charge		—			(854	)		854			—			—
Research and development		—			15,182			17,314			(17,492	)		15,004

Income from operations		42			7,230			6,154			201			13,627
Interest income (expense) net		961			(18,744	)		(336	)		(18	)		(18,137	)
Other income (expense), net		41			2,202			1,565			(1,325	)		2,483
Equity in income of subsidiaries		(6,819	)		—			—			6,819			—

Income (loss) before income taxes		(5,775	)		(9,312	)		7,383			5,677			(2,027	)
Income tax benefit (expense)		2,121			(2,115	)		(1,633	)		—			(1,627	)

Net income (loss)	$	(3,654	)	$	(11,427	)	$	5,750		$	5,677		$	(3,654	)


	CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
	FOR THE YEAR ENDED DECEMBER 31, 2005
				U.S. GUARANTOR			NON-GUARANTOR
	PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
Net cash provided by operating activities	$	6,866		$	8,765		$	13,437		$	(5,627	)	$	23,441
Cash flows used in investing activities:
Proceeds from sale of fixed assets		—			5			35			—			40
Purchases of property, plant and equipment		—			(1,077	)		(3,366	)		—			(4,443	)

Net cash used in investing activities		—			(1,072	)		(3,331	)		—			(4,403	)
Cash flows provided by (used in) financing activities:
(Repayments of) advances on line of credit, net		—			(26	)		1,247			—			1,221
Advances under debt obligations		—			—			547			—			547
Principal payments under debt obligations		—			(6,482	)		(87	)		—			(6,569	)

Net cash (used in) provided by financing activities		—			(6,508	)		1,707			—			(4,801	)
Foreign exchange effect on cash and cash equivalents		(1,510	)		448			(6,146	)		5,627			(1,581	)

Net increase in cash and cash equivalents		5,356			1,633			5,667			—			12,656
Cash and cash equivalents, beginning of year		601			3,910			23,801			—			28,312

Cash and cash equivalents, end of year	$	5,957		$	5,543		$	29,468		$	—		$	40,968


	CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
	FOR THE YEAR ENDED DECEMBER 31, 2004
				U.S. GUARANTOR			NON-GUARANTOR
	PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
Net cash provided by operating activities	$	468		$	6,828		$	14,390		$	3,242		$	24,928
Cash flows used in investing activities:
Proceeds from sale of fixed assets		—			19			29			—			48
Purchases of property, plant and equipment		(3	)		(2,476	)		(2,961	)		—			(5,440	)
Payment for acquisition, net of cash acquired		—			(3,088	)		47			—			(3,041	)

Net cash used in investing activities		(3	)		(5,545	)		(2,885	)		—			(8,433	)
Cash flows provided by (used in) financing activities:
(Repayments of) advances on line of credit, net		—			(487	)		(51	)		—			(538	)
Principal payments under other debt obligations		—			(2,182	)		(214	)		—			(2,396	)

Net cash used in financing activities		—			(2,669	)		(265	)		—			(2,934	)
Foreign exchange effect on cash and cash equivalents		39			215			2,508			(3,242	)		(480	)

Net increase (decrease) in cash and cash equivalents		504			(1,171	)		13,748			—			13,081
Cash and cash equivalents, beginning of year		97			5,081			10,053			—			15,231

Cash and cash equivalents, end of year	$	601		$	3,910		$	23,801		$	—		$	28,312


	CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
	FOR THE YEAR ENDED DECEMBER 31, 2003
				U.S. GUARANTOR			NON-GUARANTOR
	PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
Net cash provided by (used in) operating activities	$	(61	)	$	7,394		$	667		$	3,047		$	11,047
Cash flows used in investing activities:
Proceeds from sale of fixed assets		—			—			188			—			188
Purchases of property, plant and equipment		(2	)		(828	)		(3,179	)		—			(4,009	)

Net cash used in investing activities		(2	)		(828	)		(2,991	)		—			(3,821	)
Cash flows provided by (used in) financing activities:
Advances under other debt obligations		—			—			178			—			178
Principal payments on other debt obligations		—			(1,900	)		(241	)		—			(2,141	)
(Repayments of) advances on line of credit, net		—			(484	)		327			—			(157	)

Net cash provided by (used in) financing activities		—			(2,384	)		264			—			(2,120	)
Foreign exchange effect on cash and cash equivalents		(1,262	)		(1,541	)		3,678			(3,047	)		(2,172	)

Net increase (decrease) in cash and cash equivalents		(1,325	)		2,641			1,618			—			2,934
Cash and cash equivalents, beginning of year		1,422			2,440			8,435			—			12,297

Cash and cash equivalents, end of year	$	97		$	5,081		$	10,053		$	—		$	15,231


	AAVID THERMAL TECHNOLOGIES, INC.
	By:	/s/ Bharatan R. Patel
		Bharatan R. Patel, President and
		Chief Executive Officer April 14, 2006


SIGNATURE	TITLE	DATE

/s/ Bharatan R. Patel Bharatan R. Patel	Director, President and CEO (Principal Executive Officer)	April 14, 2006
/s/ Brian A. Byrne Brian A. Byrne	Chief Financial Officer (Principal Financial and Accounting Officer)	April 14, 2006
/s/ John R. Willis John R. Willis	Director	April 14, 2006
/s/ Daniel H. Blumenthal Daniel H. Blumenthal	Director	April 14, 2006
/s/ Christopher G. Boehm Christopher G. Boehm	Director	April 14, 2006


	PAGE
Report of Independent Registered Public Accounting Firm		51
Consolidated Balance Sheets as of December 31, 2005 and 2004		52
Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003		53
Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2005, 2004 and 2003		54
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		57
Notes to Consolidated Financial Statements		58
Schedule II — Valuation and Qualifying Accounts		85


	Class B				Class H						Additional
	Common Stock				Common Stock						Paid-In
	Shares		Amount		Shares		Amount		Warrants		Capital
Balance, December 31, 2002		1,079	$	—		40	$	—	$	3,764	$	188,007

Comprehensive loss:
Net loss		—	$	—		—	$	—	$	—	$	—
Cumulative translation adjustment		—		—		—		—		—		—
Comprehensive loss		—		—		—		—		—		—

Balance, December 31, 2003		1,079	$	—		40	$	—	$	3,764	$	188,007

Comprehensive income:
Net income		—	$	—		—	$	—	$	—	$	—
Cumulative translation adjustment		—		—		—		—		—		—
Comprehensive income		—		—		—		—		—		—

Balance, December 31, 2004		1,079	$	—		40	$	—	$	3,764	$	188,007

Comprehensive income:
Net income		—	$	—		—	$	—	$	—	$	—
Cumulative translation adjustment		—		—		—		—		—		—
Comprehensive income		—		—		—		—		—		—

Balance, December 31, 2005		1,079	$	—		40	$	—	$	3,764	$	188,007


				Cumulative
	Comprehensive			Translation			Accumulated
	Income (Loss)			Adjustment			Deficit			Total
Balance, December 31, 2002				$	156		$	(262,343	)	$	(70,416	)

Comprehensive loss:
Net loss	$	(3,654	)	$	—		$	(3,654	)	$	(3,654	)
Cumulative translation adjustment		(1,261	)		(1,261	)		—			(1,261	)

Comprehensive loss	$	(4,915	)		—			—			—

Balance, December 31, 2003				$	(1,105	)	$	(265,997	)	$	(75,331	)

Comprehensive income:
Net income	$	7,653		$	—		$	7,653		$	7,653
Cumulative translation adjustment		39			39			—			39

Comprehensive income	$	7,692			—			—			—

Balance, December 31, 2004				$	(1,066	)	$	(258,344	)	$	(67,639	)

Comprehensive income:
Net income	$	7,864		$	—		$	7,864		$	7,864
Cumulative translation adjustment		(1,510	)		(1,510	)		—			(1,510	)

Comprehensive income	$	6,354			—			—			—

Balance, December 31, 2005				$	(2,576	)	$	(250,480	)	$	(61,285	)


	BALANCE AT		PROVISIONS/			WRITE-OFF/			BALANCE AT
	BEGINNING OF YEAR		(CREDITS)			(RECOVERIES)			END OF YEAR
2005	$	2,387	$	(87	)	$	(454	)	$	2,754
2004	$	2,201	$	1,008		$	822		$	2,387
2003	$	3,194	$	289		$	1,282		$	2,201