SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


Form
10-K


(Mark One)


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


SECURITIES
EXCHANGE ACT OF 1934





For
the fiscal year-ended December 31, 2007





OR





[  ]       TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For the
transition period from __________ to __________


Commission
file number:  333-126389





NTK
      Holdings, Inc.(exact
      name of registrant as specified in its charter)Delaware
            20-1934298(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification Number)50
      Kennedy Plaza
              Providence,
      Rhode Island
            02903-2360(Address
      of principal executive offices)
            (zip
      code)Registrant’s
      Telephone Number, Including Area Code:
              (401)
      751-1600Securities
      registered pursuant to Section 12(b) 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 [_]   No
[X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.   Yes [X]   No
[_]





Indicate
by check mark whether 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 and (2) has been subject to such filing requirements for the
past 90 days.   Yes [_]   No [X]





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company (as
defined in Rule 12b-2 of the Act).





Large
      accelerated filer [_]
            Accelerated
      filer [_]
            Non-accelerated
      filer [X]
            Smaller
      reporting company [_]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes
[_]                      No
[X]





There
is no established public trading market for any of the common stock of the
Company.  The aggregate market value of voting stock held by
non-affiliates is zero.





The
number of shares of Common Stock outstanding as of April 11, 2008 was
3,000.




NTK
HOLDINGS, INC. AND SUBSIDIARIES
 December
31, 2007


PART
I





Item
1.  Business.




NTK
Holdings, Inc. (the “Company” or “NTK Holdings”) is a Delaware corporation that
was formed to hold the capital stock of Nortek Holdings, Inc. (“Nortek
Holdings”).  NTK Holdings became the parent company of Nortek Holdings
on February 10, 2005.





General





The
Company is a leading diversified manufacturer of innovative, branded residential
and commercial products, operating within three reporting segments:





·
            the
      Residential Ventilation Products, or RVP,
  segment,





·
            the
      Home Technology Products, or HTP, segment,
and





·
            the
      Air Conditioning and Heating Products, or HVAC,
  segment.





Through
these segments, the Company manufactures and sells, primarily in the United
States, Canada and Europe, a wide variety of products for the professional
remodeling and replacement markets, the residential and commercial construction
markets, the manufactured housing market and the do-it-yourself, or DIY,
market.





The
levels of residential replacement and remodeling, new residential construction
and non-residential construction significantly impact the Company’s
performance.  Interest rates, seasonality, inflation, consumer
spending habits and unemployment are factors that affect these
levels.





As used
in this report, the terms “Company” and “NTK Holdings” refer to NTK Holdings,
Inc., together with its subsidiaries, unless the context indicates
otherwise.  Such terms as “Company” and “NTK Holdings” are used for
convenience only and are not intended as a precise description of any of the
separate corporations, each of which manages its own affairs.





Additional
information concerning the Company’s business is set forth in Management’s
Discussion and Analysis of Financial Condition and Results of Operations, Item 7
of Part II of this report, incorporated herein by
reference.  Additional information on foreign and domestic operations
is set forth in Note 9 of the Notes to the Consolidated Financial Statements,
Item 8 of Part II of this report, incorporated herein by reference.





Our
Business Segments





Residential
Ventilation Products Segment





The
Company’s Residential Ventilation Products segment primarily manufactures and
distributes room and whole house ventilation products and other products
primarily for the professional remodeling and replacement markets, residential
new construction market and DIY market.  The principal products of the
segment, which are sold under the Broan®, NuTone®, Venmar®, Best® and Zephyr®
brand names, among others, are:





·
            kitchen
      range hoods,


·
            exhaust
      fans (such as bath fans and fan, heater and light combination units),
      and


·
            indoor
      air quality products.





The
Company is one of the world’s largest suppliers of residential range hoods and
exhaust fans, and is the largest supplier of these products in North
America.  The Company is also one of the leading suppliers in Europe
of luxury “Eurostyle” range hoods.  The Company’s kitchen range hoods
expel grease, smoke, moisture and odors from the cooking area and are offered
under an array of price points and styles from economy to upscale
models.  The exhaust fans the Company offers are primarily used in
bathrooms to remove odors and humidity and include combination units, which may
have lights, heaters or both.  The Company’s range hood and exhaust
fan products are differentiated on the basis of air movement as measured in
cubic feet per minute and sound output as measured in sones.  The Home
Ventilating Institute in the United States certifies the Company’s range hood
and exhaust fan products, as well as its indoor air quality
products.





The
Company’s sales of kitchen range hoods and exhaust fans accounted for
approximately 18.3% and 12.9%, respectively, of the Company’s consolidated net
sales in 2007, approximately 17.9% and 14.6%, respectively, of the Company’s
consolidated net sales in 2006 and approximately 18.3% and 15.8%, respectively,
of the Company’s consolidated net sales in 2005.





The
Company is one of the largest suppliers in North America of indoor air quality
products, which include air exchangers, as well as heat or energy recovery
ventilators (HRVs or ERVs, respectively) that provide whole house
ventilation.  These systems bring in fresh air from the outdoors while
exhausting stale air from the home.  Both HRVs and ERVs moderate the
temperature of the fresh air by transferring heat from one air stream to the
other.  In addition, ERVs also modify the humidity content of the
fresh air.  The Company also sells powered attic ventilators, which
alleviate heat built up in attic areas and reduce deterioration of roof
structures.





Since
the late 1970s, homes have been built more airtight and insulated in order to
increase energy efficiency.  According to published studies, this
trend correlates with an increased incidence of respiratory problems such as
asthma and allergies in individuals.  In addition, excess moisture,
which may be trapped in a home, has the potential to cause significant
deterioration to the structure and interiors of the home.  Proper
intermittent ventilation in high concentration areas such as kitchens and baths
as well as whole house ventilation will mitigate these problems.





The
Company sells other products in this segment, including among others, door
chimes, medicine cabinets, trash compactors, ceiling fans and central vacuum
systems, by leveraging its strong brand names and distribution
network.





The
Company sells the products in its RVP segment to distributors and dealers of
electrical and lighting products, kitchen and bath dealers, retail home centers
and original equipment manufacturers under the Broan®, NuTone®, Venmar®, Best®
and Zephyr® brand names, among others.  Private label customers
accounted for approximately 24.5% of the net sales of this segment in
2007.





A key
component of the Company’s operating strategy for this segment is the
introduction of new products and innovations, which capitalize on the strong
brand names and the extensive distribution system of the segment’s
businesses.  These include the new QT series of ultra-quiet exhaust
fans with new grille styles, decorative and recessed fan/light combination
units, as well as high performance range hoods used in today’s “gourmet” kitchen
environments.  The Company believes that its variety of product
offerings and new product introductions help it to maintain and improve its
market position for its principal products.  At the same time, the
Company believes that its status as a low-cost producer provides the segment
with a competitive advantage.





The
Company’s primary residential ventilation products compete with many domestic
and international suppliers in various markets.  The Company competes
with suppliers of competitive products primarily on the basis of quality,
distribution, delivery and price.  Although the Company believes it
competes favorably with other suppliers of residential ventilation products,
some of the Company’s competitors have greater financial and marketing resources
than this segment of the Company’s business.





Product
manufacturing in the RVP segment generally consists of fabrication from coil and
sheet steel and formed metal utilizing stamping, pressing and welding methods,
assembly with components and subassemblies purchased from outside sources
(principally motors, fan blades, heating elements, wiring harnesses, controlling
devices, glass, mirrors, lighting fixtures and polyethylene components and
electronic components) and painting, finishing and packaging.





The
Company is in the process of moving production of certain of its product lines
from its facilities in the U.S., Canada and Italy to facilities in regions with
lower labor costs.  The Company has moved and is continuing to move
the production of certain bath fan and other products to its facility in China,
which it acquired in late 2005.  In addition, the Company is in the
process of moving certain range hood and motor production from its facilities in
Italy to its facilities in Poland and in 2007 built a new facility for the
production of range hoods in Mexico, which commenced operations in the first
quarter of 2008.  The Company is also in the process of consolidating
its production of medicine cabinets from its facilities in Los Angeles,
California and Union, Illinois to its facility in Cleburne, Texas (previously
used to manufacture range hoods).  As a result of these production
moves, the Company has closed its operations in Los Angeles, CA and Cincinnati,
Ohio, as well as certain operations in Italy.





The
Company’s RVP segment had 15 manufacturing plants and employed approximately
3,000 full-time people as of December 31, 2007, of which approximately 363 are
covered by collective bargaining agreements which expired in 2007 and
approximately 12 are covered by collective bargaining agreements which expire in
2008.  See “Employees” for more information regarding the Company’s
collective bargaining agreements which expired in 2007.





Home
Technology Products Segment





The
Company’s Home Technology Products segment manufactures and distributes a broad
array of products designed to provide convenience and security for residential
and certain commercial applications.  The principal products the
Company sells in this segment are:





·
            audio/video
      distribution and control equipment,


·
            speakers
      and subwoofers,


·
            security
      and access control products,


·
            power
      conditioners and surge protectors,


·
            audio/video
      wall mounts and fixtures,


·
            lighting
      and home automation controls, and


·
            structured
      wiring.





The
segment’s audio/video distribution and control equipment products include
multi-room/multi-source amplifiers, home theatre receivers, intercom systems,
hard disk media servers and control devices such as keypads, remote controls and
volume controls.  The segment’s speakers are primarily built-in
(in-wall or in-ceiling) and are primarily used in multi-room or home theatre
applications.  These products are sold under the Niles®,
IntelliControl® ICS, Elan®, Via®, HomeLogic®, ATONTM, SpeakerCraft®, JobSite®,
Proficient Audio Systems®, Sunfire®, Imerge®, Xantech®, M&S Systems® and
Channel Plus® brand names.





Through
its 2007 acquisition of Home Logic, LLC, the segment has expanded its offering
of control equipment to include software and hardware that facilitates the
control of third party residential subsystems such as home theatre, whole-house
audio, climate control, lighting, security and irrigation.  These
products are being sold under the Home Logic® brand name and are now being
offered in conjunction with Elan®’s product offerings.





The
segment’s security and access control products include residential and certain
commercial intrusion protection systems, components for closed circuit
television systems (cameras and housings), garage and gate operators and devices
to gain entry to buildings and gated properties such as radio transmitters and
contacts, keypads and telephone entry systems.  These products are
sold under the Linear®, GTO/PRO®, Mighty Mule®, OSCO®, Aigis®, AllStar®, IEI®
and other private label brand names, as well as Westinghouse®, which is
licensed.





Other
products in this segment include power conditioners and surge protectors sold
under the Panamax® and Furman® brand names, audio/video wall mounts and fixtures
sold under the OmniMount® brand name, structured wiring products sold under the
OpenHouse® and Channel Plus® brand names, audio/video products distributing,
extending and converting signals to multiple display screens under the MagentaTM
and Gefen® brand names, radio frequency control products and accessories sold
under the iJet® brand name for use with Apple’s iPod® brand products and
lighting control products sold under the Litetouch® brand name (which was
acquired in 2007).





The
Company sells the products in its HTP segment to distributors, professional
installers, electronics retailers and original equipment
manufacturers.  The Company believes approximately 40% of the products
sold by this segment are sold to customers in the new construction
market.  The remaining sales of this segment are driven by replacement
applications, new installations in existing properties and the purchases of
high-priced audio/video equipment such as flat panel televisions and
displays.  In addition, a portion of the sales of this segment is sold
to customers in the non-residential market.  The penetration of
audio/video distribution and control systems in the United States housing stock
is relatively low and is believed to be growing in the long-term.  In
addition, the demand for security and access control products in the United
States is also believed to be growing due to homeowners’ security
concerns.





A key
component to the Company’s growth of this segment has been strategic
acquisitions of companies with similar or complementary products and
distribution channel strengths.  There have been 18 acquisitions
within the segment since December 31, 2003.  Post-acquisition savings
and synergies have been realized in the areas of manufacturing, sourcing and
distribution as well as in the administrative, engineering and sales and
marketing areas.





The
segment offers a broad array of products under widely-recognized brand names
with various features and price points, which the Company believes allows it to
expand its distribution in the professional installation and retail
markets.  Another key component of the Company’s operating strategy is
the introduction of new products and innovations, which capitalize on the
Company’s well-known brand names and strong customer relationships.





The
segment’s primary products compete with many domestic and international
suppliers in various markets.  In the access control market, the
segment’s primary competitor is Chamberlain Corporation (a subsidiary of
Duchossois Industries, Inc.).  The segment competes with suppliers of
competitive products primarily on the basis of quality, distribution, delivery
and price.  Although the Company believes it competes favorably with
other suppliers of home technology products, some of the Company’s competitors
have greater financial and marketing resources than this segment of the
Company’s business.





The
Company has several administrative and distribution facilities in the United
States in this segment and a significant amount of its products are manufactured
in its facility located in China.  In addition, certain products are
sourced from low cost Asian suppliers based on our
specifications.  The Company believes that its Asian operations
provide the Company with a competitive cost advantage.





The
Company’s HTP segment had 9 manufacturing plants and employed approximately
2,600 full-time people as of December 31, 2007.  The Company believes
that its relationships with its employees in this segment are
satisfactory.





Air
Conditioning and Heating Products Segment





The
Company’s Air Conditioning and Heating Products segment manufactures and sells
heating, ventilating and air conditioning, or HVAC, systems and products for
site-built residential and manufactured housing structures, custom-designed
commercial applications and standard light commercial applications.





Residential
HVAC Products





The
segment principally manufactures and sells split-system air conditioners, heat
pumps, air handlers, furnaces and related equipment, accessories and parts for
the residential and certain commercial markets.  For site-built homes
and certain commercial structures, the segment markets its products under the
licensed names Frigidaire®, Tappan®, Philco®, Kelvinator®, Gibson®,
Westinghouse® and Maytag®.  The segment also supplies products to
certain of its customers under the Broan®, NuTone®, Mammoth® and several private
label names.  Within the residential market, the Company is one of the
largest suppliers of HVAC products for manufactured homes in the United States
and Canada.  In the manufactured housing market, the segment markets
its products under the Intertherm® and Miller® brand names.





Demand
for replacing and modernizing existing equipment, the level of housing starts
and manufactured housing shipments are the principal factors that affect the
market for the segment’s residential HVAC products.  The Company
anticipates that the demand by the replacement market will continue to exceed
the demand for products by the new installation market as a large number of
previously installed heating and cooling products become outdated or reach the
end of their useful lives.  The market for residential cooling
products, including those the segment sells into, which excludes window air
conditioners, is affected by spring and summer temperatures.  The
window air conditioner market is highly seasonal and significantly impacted by
spring and summer temperatures.  The Company believes that its ability
to offer both heating and cooling products helps offset the effects of
seasonality on this segment’s sales.





The
segment sells its manufactured housing products to builders of manufactured
housing and, through distributors, to manufactured housing retailers and
owners.  The majority of sales to builders of manufactured housing
consist of furnaces designed and engineered to meet or exceed certain standards
mandated by the U.S. Department of Housing and Urban Development, or HUD, and
other federal agencies.  These standards differ in several important
respects from the standards for furnaces used in site-built residential
homes.  The aftermarket channel of distribution includes sales of both
new and replacement air conditioning units and heat pumps and replacement
furnaces.  The Company believes that it has one major competitor in
the manufactured housing furnace market, York International Corporation (a
subsidiary of Johnson Controls, Inc.) which markets its products primarily under
the “Coleman” name.  The segment competes with most major industry
manufacturers in the manufactured housing air conditioning market.





The
segment sells residential HVAC products for use in site-built homes through
independently owned distributors who sell to HVAC contractors.  The
site-built residential HVAC market is very competitive.  In this
market, the segment competes with, among others, Carrier Corporation (a
subsidiary of United Technologies Corporation), Rheem Manufacturing Company,
Lennox Industries, Inc., Trane, Inc. (formerly American Standard Companies
Inc.), York International Corporation (a subsidiary of Johnson Controls, Inc.)
and Goodman Global, Inc.  In 2007, the Company estimates that between
approximately 55% and 60% of this segment’s sales of residential HVAC products
were attributable to the replacement market, which tends to be less cyclical
than the new construction market.





The
segment competes in both the site-built and manufactured housing markets on the
basis of breadth and quality of its product line, distribution, product
availability and price.  Although the Company believes that it
competes favorably with respect to certain of these factors, most of the
segment’s competitors have greater financial and marketing resources and the
products of certain competitors may enjoy greater brand awareness than the
Company’s residential HVAC products.





Commercial
HVAC Products





The
segment also manufactures and sells HVAC systems that are custom-designed to
meet customer specifications for commercial offices, manufacturing and
educational facilities, hospitals, retail stores, clean rooms and governmental
buildings.  These systems are designed primarily to operate on
building rooftops (including large self-contained walk-in-units), or on
individual floors within a building, and to have cooling capacities ranging from
40 tons to 600 tons.  The segment markets its commercial HVAC products
under the Governair®, Mammoth®, Temtrol®, Venmar CESTM, Ventrol®, WebcoTM,
Huntair® and CleanpakTM brand names.  The Company’s subsidiary,
Eaton-Williams Group Limited, manufactures and markets custom and standard air
conditioning and humidification equipment throughout Western Europe under the
Vapac®, Cubit®, Qualitair®, Edenaire®, ColmanTM and ModucelTM brand
names.





The
market for commercial HVAC equipment is divided into standard and
custom-designed equipment.  Standard equipment can be manufactured at
a lower cost and therefore offered at substantially lower initial prices than
custom-designed equipment.  As a result, standard equipment suppliers
generally have a larger share of the overall commercial HVAC market than
custom-designed equipment suppliers, such as the Company.  However,
because of certain building designs, shapes or other characteristics, the
Company believes there are many applications for which custom-designed equipment
is required or is more cost effective over the life of the
building.  Unlike standard equipment, the segment’s commercial HVAC
equipment can be designed to match a customer’s exact space, capacity and
performance requirements.  The segment’s packaged rooftop and
self-contained walk-in equipment rooms maximize a building’s rentable floor
space because this equipment is located outside the building.  In
addition, the manner of construction and timing of installation of commercial
HVAC equipment can often favor custom-designed over standard
systems.  As compared with site-built and factory built HVAC systems,
the segment’s systems are factory assembled according to customer specifications
and then installed by the customer or third parties, rather than assembled on
site, permitting extensive testing prior to shipment.  As a result,
the segment’s commercial systems can be installed later in the construction
process than site-built systems, thereby saving the owner or developer
construction and labor costs.  The segment sells its commercial HVAC
products primarily to contractors, owners and developers of commercial office
buildings, manufacturing and educational facilities, hospitals, retail stores,
clean rooms and governmental buildings.  The segment seeks to maintain
strong relationships nationwide with design engineers, owners and developers,
and the persons who are most likely to value the benefits and long-term cost
efficiencies of its custom-designed equipment.





In
2007, the Company estimates that between approximately 25% and 30% of its air
conditioning and heating product commercial sales came from replacement and
retrofit activity, which typically is less cyclical than new construction
activity and generally commands higher margins.  The segment continues
to develop product and marketing programs to increase penetration in the growing
replacement and retrofit market.





The
segment’s commercial HVAC products are marketed through independently owned
manufacturers’ representatives and approximately 320 sales, marketing and
engineering professionals as of December 31, 2007.  The independent
representatives are typically HVAC engineers, a factor which is significant in
marketing the segment’s commercial products because of the design intensive
nature of the market segment in which it competes.





The
Company believes that it is among the largest suppliers of custom-designed
commercial HVAC products in the United States.  The segment’s four
largest competitors in the commercial HVAC market are Carrier Corporation, York
International, McQuay International (a subsidiary of OYL Corporation) and Trane,
Inc.  The segment competes primarily on the basis of engineering
support, quality, design and construction flexibility and total installed system
cost.  Although the Company believes that it competes favorably with
respect to some of these factors, most of its competitors have greater financial
and marketing resources than this segment of the Company’s business and enjoy
greater brand awareness.  However, the Company believes that its
ability to produce equipment that meets the performance characteristics required
by the particular product application provides it with advantages that some of
its competitors do not enjoy.





The
Company’s HVAC segment had 17 manufacturing plants and employed approximately
4,200 full-time people as of December 31, 2007, of which approximately 105 are
covered by collective bargaining agreements which expire in 2008 and
approximately 125 are covered by collective bargaining agreements which expire
in 2009.  See “Employees” for more information regarding the Company’s
collective bargaining agreements which expired in 2007.





Backlog





Backlog
expected to be filled within the next twelve months as of December 31, 2007 was
approximately $263.1 million and was approximately $275.8 million as of December
31, 2006.  The decrease in backlog from December 31, 2006 to December
31, 2007 primarily reflects a reduction in the backlog for residential
ventilation and commercial HVAC products.





Backlog
is not regarded as a significant factor for operations where orders are
generally for prompt delivery.  While backlog stated for all periods
is believed to be firm, as all orders are supported by either a purchase order
or a letter of intent, the possibility of cancellations makes it difficult to
assess the firmness of backlog with certainty, and therefore there can be no
assurance that the Company’s backlog will result in actual
revenues.





Raw
Materials





The
Company purchases raw materials and most components used in its various
manufacturing processes.  The principal raw materials the Company
purchases are rolled sheet steel, formed and galvanized steel, copper, aluminum,
plate mirror glass, various chemicals, paints and plastics.





The
materials, molds and dies, subassemblies and components purchased from other
manufacturers, and other materials and supplies used in manufacturing processes
have generally been available from a variety of sources.  From time to
time increases in raw material costs can affect future supply availability due
in part to raw material demands by other industries.  Whenever
practical, the Company establishes multiple sources for the purchase of raw
materials and components to achieve competitive pricing, ensure flexibility and
protect against supply disruption.  The Company employs a company-wide
procurement strategy designed to reduce the purchase price of raw materials and
purchased components.  The Company believes that the use of these
strategic sourcing procurement practices will continue to enhance its
competitive position by reducing costs from its vendors and limiting cost
increases for goods and services in sectors experiencing rising
prices.





The
Company is subject to significant market risk with respect to the pricing of its
principal raw materials.  If prices of these raw materials were to
increase dramatically, the Company may not be able to pass such increases on to
its customers and, as a result, gross margins could decline
significantly.





Research
and Development





The
Company’s research and development activities are principally new product
development and represent approximately 2.4%, 2.0% and 1.9% of the Company’s
consolidated net sales in 2007, 2006 and 2005, respectively.





Trademarks
and Patents





The
Company owns or licenses numerous trademarks that it uses in the marketing of
its products.  Certain of the trademarks the Company owns, including
Broan® and NuTone®, are particularly important in the marketing of its
products.  The Company also holds numerous design and process patents,
but no single patent is material to the overall conduct of the Company’s
business.  It is the Company’s policy to obtain and protect patents
whenever such action would be beneficial to it.





Environmental
and Regulatory Matters





The
Company is subject to numerous federal, state, local and foreign laws and
regulations, relating to protection of the environment, including those that
impose limitations on the discharge of pollutants into the air and water,
establish standards for the use, treatment, storage and disposal of solid and
hazardous materials and wastes and govern the cleanup of contaminated
sites.  The Company believes that it is in substantial compliance with
the material laws and regulations applicable to it.  The Company is
involved in current, and may become involved in future, remedial actions under
federal and state environmental laws and regulations which impose liability on
companies to clean up, or contribute to the cost of cleaning up, sites currently
or formerly owned or operated by such companies or sites at which their
hazardous wastes or materials were disposed of or released.  Such
claims may relate to properties or business lines acquired by the Company after
a release has occurred.  In other instances, the Company may be
partially liable under law or contract to other parties that have acquired
businesses or assets from the Company for past practices relating to hazardous
materials or wastes.  Expenditures in 2007, 2006 and 2005 to evaluate
and remediate such sites were not material.  While the Company is able
to reasonably estimate its losses, the Company is unable to estimate with
certainty its ultimate financial exposure in connection with identified or yet
to be identified remedial actions due, among other reasons, to: (i)
uncertainties surrounding the nature and application of current or future
environmental regulations, (ii) the Company’s lack of information about
additional sites to which it may be listed as a potentially responsible party,
or PRP, (iii) the level of clean-up that may be required at specific sites and
choices concerning the technologies to be applied in corrective actions and (iv)
the time periods over which remediation may occur.  Furthermore, since
liability for site remediation may be joint and several, each PRP is potentially
wholly liable for other PRPs that become insolvent or bankrupt.  Thus,
the solvency of other PRPs could directly affect the Company’s ultimate
aggregate clean-up costs.  In certain circumstances, the Company’s
liability for clean-up costs may be covered in whole or in part by insurance or
indemnification obligations of third parties.





The
Company’s HVAC products must be designed and manufactured to meet various
regulatory standards.  The United States and other countries have
implemented a protocol on ozone-depleting substances that limits its ability to
use HCFCs, a refrigerant used in air conditioning and heat pump
products.  In addition, the Company’s residential HVAC products are
subject to federal minimum efficiency standards, which increased to 13 SEER in
2006.  The Company’s residential HVAC products for manufactured
housing include furnaces which must be designed and engineered to meet certain
standards required by the U.S. Department of Housing and Urban Development and
other federal agencies.  The Company must continue to improve its
products to meet these and other applicable standards as they develop and become
more stringent over time.





Employees





The
Company employed approximately 9,800 full time persons as of December 31,
2007.





A work
stoppage at one of the Company’s facilities that lasts for a significant period
of time could cause the Company to lose sales, incur increased costs and
adversely affect its ability to meet customers’ needs.  A plant
shutdown or a substantial modification to a collective bargaining agreement
could result in material gains or losses or the recognition of an asset
impairment.  As agreements expire and until negotiations are
completed, the Company does not know whether it will be able to negotiate
collective bargaining agreements on the same or more favorable terms as the
current agreements or at all and without production interruptions, including
labor stoppages.





In late
June 2006, the Company informed the union located at the Cincinnati, OH location
of its subsidiary NuTone, that the Company would close the manufacturing
operations at the facility on or about August 30, 2006.  As a result
of this closure, the Company, through its RVP segment, recorded an approximate
$3.5 million charge to operations in 2006 (of which approximately $1.8 million
was recorded in cost of goods sold and approximately $1.7 million was recorded
in selling, general and administrative expense, net) consisting of severance of
approximately $2.2 million and write-offs related to equipment sales and
disposals of approximately $1.3 million.





During
the year ended December 31, 2007, the Company recorded liabilities and expensed
into selling, general and administrative expense, net approximately $1.8 million
in the accompanying consolidated statement of operations related to the closure
of its NuTone Cincinnati, OH facility and the relocation of such operations to
certain other subsidiaries of the Company within the RVP segment.  The
NuTone facility was shutdown in the third quarter of 2007 and approximately 59
employees were terminated.  Prior to August 2006, this facility
supported manufacturing, warehousing and distribution activities for
NuTone.





During the second quarter of 2007, after
meeting and negotiating with the bargaining committee of the Teamsters Local
970, representing approximately 127 union employees of the Company’s
wholly-owned subsidiary Mammoth, Inc. (“Mammoth”) located in Chaska, Minnesota,
it was decided to shut down manufacturing operations at the Chaska plant and
relocate such operations to other manufacturing facilities within the Commercial
HVAC Group.  During the second quarter of 2007, Mammoth finalized its
negotiations with the union over the severance benefits associated with the
shutdown and approximately $0.3 million was paid related to severance to the
union employees.  In addition to the severance paid in the second
quarter of 2007 related to the union employees, the Company recorded
approximately $3.4millionin selling, general and administrative,
netduring the year ended December 31,
2007related to shutdown
costs and asset write-offs associated with the anticipated cessation of
manufacturing operations at Chaska during the fourth quarter of
2007.It is
estimated that an additional approximate $0.8 million will be expensed in 2008
related to this shutdown.





On August 8, 2007, after negotiating
with the bargaining committee of the Steel, Paper House, Chemical Drivers and
Helpers, Local No. 578, which represented approximately 64 union employees
located at the Vernon, CA manufacturing facility of the Company’s wholly-owned
subsidiary Jensen, Inc. (“Jensen”),the decision was madeto shut down manufacturing operations
and relocate such operations to other manufacturing facilities within the RVP
segment.  Additionally, on such date, Jensen finalized its
negotiations with the union over the severance benefits associated with this
shutdown.During
the year ended December 31, 2007, the Company recorded in selling, general and
administrative expense, net approximately $0.8 million related tothe shutdown, including severance,
relocation expenses, facility lease costs and asset write-offsand expensed an additional $0.3 million
to cost of products sold related to severance associated with the
shutdown.  The Company does not anticipate recording any further
expenses associated with this shutdown in 2008.





Working
Capital





The
carrying of inventories to support customers and to permit prompt delivery of
finished goods requires substantial working capital.  Substantial
working capital is also required to carry receivables.  The demand for
the Company’s products is seasonal, particularly in the Northeast and Midwest
regions of the United States and in Canada where inclement weather during the
winter months usually reduces the level of building and remodeling activity in
both the home improvement and new construction markets.  Certain of
the residential product businesses in the Air Conditioning and Heating Products
Segment have in the past been more seasonal in nature than the Company’s other
businesses’ product categories.  As a result, the demand for working
capital of the Company’s subsidiaries is greater from late in the first quarter
until early in the fourth quarter.  See “Liquidity and Capital
Resources” in Management’s Discussion and Analysis of Financial Condition and
Results of Operations, Item 7 of Part II of this report, incorporated herein by
reference.





Website





The
Company’s periodic and current reports are available on its website,
www.nortek-inc.com, free of charge, as soon as reasonably practicable after such
materials are filed with, or furnished to the Securities and Exchange Commission
(“SEC”).





Item
1A.  Risk Factors.





The
Company’s business is dependent upon the levels of remodeling and replacement
activity and new construction activity which have been negatively impacted by
the economic downturn and the instability of the credit markets.





Critical
factors in the level of the Company’s sales, profitability and cash flows are
the levels of residential remodeling and replacement activity and new
residential and non-residential construction activity.  The level of
new residential and non-residential construction activity and, to a lesser
extent, the level of residential remodeling and replacement activity are
affected by seasonality and cyclical factors such as interest rates, inflation,
consumer spending habits, employment levels and other macroeconomic factors,
over which the Company has no control.  Any decline in economic
activity as a result of these or other factors typically results in a decline in
new construction and, to a lesser extent, residential remodeling and replacement
purchases, which would result in a decrease in the Company’s sales,
profitability and cash flows.  For example, reduced levels of home
sales and housing starts and other softening in the housing markets in 2007
negatively affected the Company’s results of operations in 2007 and these
factors are expected to continue to negatively affect the Company’s results of
operations in 2008.





In
addition, uncertainties due to the significant instability in the mortgage
markets and the resultant impact on the overall credit market could continue to
adversely impact the Company’s business.  The tightening of credit
standards is expected to result in a decline in consumer spending for home
remodeling and replacement projects which could adversely impact the Company’s
operating results.  Additionally, increases in the cost of home
mortgages and the difficulty in obtaining financing for new homes could continue
to materially impact the sales of the Company’s products in the residential
construction market.





Fluctuations
in the cost or availability of raw materials and components and increases in
freight and other costs could have an adverse effect on the Company’s
business.





The
Company is dependent upon raw materials and purchased components, including,
among others, steel, motors, compressors, copper, packaging material, aluminum,
plastics, glass and various chemicals and paints that it purchases from third
parties.  As a result, the Company’s results of operations, cash flows
and financial condition may be adversely affected by increases in costs of raw
materials or components, or in limited availability of raw materials or
components.  The Company does not typically enter into long-term
supply contracts for raw materials and components.  In addition, the
Company generally does not hedge against its supply
requirements.  Accordingly, the Company may not be able to obtain raw
materials and components from its current or alternative suppliers at reasonable
prices in the future, or may not be able to obtain raw materials and components
on the scale and within the time frames the Company
requires.  Further, if the Company’s suppliers are unable to meet the
Company’s supply requirements, the Company could experience supply interruptions
and/or costs increases which (to the extent the Company was unable to find
alternate suppliers or pass along these additional costs to its customers) could
adversely affect the Company’s results of operations, cash flows and financial
condition.





For
example, during 2005 through 2007, the Company experienced significant increases
in the prices it paid for steel, copper, aluminum and steel fabricated
parts.  In addition, the Company has experienced and may continue to
experience an increase in freight and other costs due to rising oil and other
energy prices.  While the Company was able to offset a portion of
these cost increases in these periods by raising prices to its customers for
some products, as well as through strategic sourcing initiatives and
improvements in manufacturing efficiency, there can be no assurance that the
Company will be able to offset all material cost increases in 2008 or in any
future periods.





The availability of certain raw materials and
component parts from sole or limited sources of supply may have an adverse
effect on the Company’s business.





Sources of raw materials or component
parts for certain of the Company’s operations may be dependent upon limited or
sole sources of supply which may impact the Company’s ability to manufacture
finished product.  While the Company continually reviews alternative
sources of supply, there can be no assurance that the Company will not face
disruptions in sources of supply which could adversely affect the Company’s
results of operations, cash flows and financial position.





Weather
fluctuations may negatively impact the Company’s business.





Weather
fluctuations may adversely affect the Company’s operating results and its
ability to maintain sales volume.  In the Company’s HVAC segment,
operations may be adversely affected by unseasonably warm weather in the months
of November to February and unseasonably cool weather in the months of May to
August, which has the effect of diminishing customer demand for heating and air
conditioning products.  In all of the Company’s segments, adverse
weather conditions at any time of the year may negatively affect overall levels
of new construction and remodeling and replacement activity, which in turn may
lead to a decrease in sales.  Many of the Company’s operating expenses
are fixed and cannot be reduced during periods of decreased demand for its
products.  Accordingly, the Company’s results of operations and cash
flows will be negatively impacted in quarters with lower sales due to weather
fluctuations.





If
the Company fails to identify suitable acquisition candidates, or to integrate
the businesses it has acquired or will acquire in the future, it could
negatively impact the Company’s business.





Historically,
the Company has engaged in a significant number of acquisitions, and those
acquisitions have contributed significantly to the Company’s growth in sales and
profitability, particularly in the HTP segment.  The Company believes
that acquisitions will continue to be a key component of its growth
strategy.  However, the Company cannot assure that it will continue to
locate and secure acquisition candidates on terms and conditions that are
acceptable to the Company.  If the Company is unable to identify
attractive acquisition candidates, its growth, particularly in the HTP segment,
could be impaired.





There
are several risks in acquisitions, including:





·
            the
      difficulty and expense that the Company incurs in connection with the
      acquisition,


·
            the
      difficulty and expense that the Company incurs in the subsequent
      assimilation of the operations of the acquired company into the Company’s
      operations,


·
            adverse
      accounting consequences of conforming the acquired company's accounting
      policies to the Company’s,


·
            the
      difficulties and expense of developing, implementing and monitoring
      systems of internal controls at acquired companies, including disclosure
      controls and procedures and internal controls over financial
      reporting,


·
            the
      difficulty in operating acquired
businesses,


·
            the
      diversion of management's attention from the Company’s other business
      concerns,


·
            the
      potential loss of customers or key employees of acquired
      companies,


·
            the
      impact on the Company’s financial condition due to the timing of the
      acquisition or the failure to meet operating expectations for the acquired
      business, and


·
            the
      assumption of unknown liabilities of the acquired
  company.





The
Company cannot assure that any acquisition it has made or may make will be
successfully integrated into the Company’s on-going operations or that the
Company will achieve any expected cost savings from any
acquisition.  If the operations of an acquired business do not meet
expectations, the Company’s profitability and cash flows may be impaired and the
Company may be required to restructure the acquired business or write-off the
value of some or all of the assets of the acquired business.





Because
the Company competes against competitors with substantially greater resources,
the Company faces external competitive risks that may negatively impact its
business.





The
Company’s RVP and HTP segments compete with many domestic and international
suppliers in various markets.  The Company competes with suppliers of
competitive products primarily on the basis of quality, distribution, delivery
and price.  Some of the Company’s competitors in these markets have
greater financial and marketing resources than the Company does.





In the
HVAC segment, the Company’s residential HVAC products compete in both the
site-built and manufactured housing markets on the basis of breadth and quality
of product line, distribution, product availability and price. Most of the
Company’s residential HVAC competitors have greater financial and marketing
resources and the products of certain of the Company’s competitors may enjoy
greater brand awareness than the Company’s residential HVAC
products.  The Company’s commercial HVAC products compete primarily on
the basis of engineering support, quality, design and construction flexibility
and total installed system cost.  Most of the Company’s competitors in
the commercial HVAC market have greater financial and marketing resources and
enjoy greater brand awareness than the Company does.





Competitive
factors could require the Company to reduce prices or increase spending on
product development, marketing and sales, either of which could adversely affect
its operating results.





Fluctuations
in currency exchange rates could adversely affect the Company’s revenues,
profitability and cash flows.





The
Company’s foreign operations expose the Company to fluctuations in currency
exchange rates and currency devaluations.  The Company reports its
financial results in U.S. dollars, but a portion of its sales and expenses are
denominated in Euros, Canadian Dollars and other currencies.  As a
result, changes in the relative values of U.S. dollars, Euros, Canadian Dollars
and other currencies will affect the Company’s levels of revenues and
profitability.  If the value of the U.S. dollar increases relative to
the value of the Euro, Canadian Dollars and other currencies, the Company’s
levels of revenue and profitability will decline since the translation of a
certain number of Euros or units of such other currencies into U.S. dollars for
financial reporting purposes will represent fewer U.S.
dollars.  Conversely, if the value of the U.S. dollar decreases
relative to the value of the Euro, Canadian Dollars and other currencies, the
Company’s levels of revenue and profitability will increase since the
translation of a certain number of Euros or units of such other currencies into
U.S. dollars for financial reporting purposes will represent additional U.S.
dollars.  In addition, in the case of sales to customers in certain
locations, the Company’s sales are denominated in U.S. dollars, Euros or
Canadian Dollars but all or a substantial portion of the Company’s associated
costs are denominated in a different currency.  As a result, changes
in the relative values of U.S. dollars, Euros and Canadian Dollars and any such
different currency will affect the Company’s profitability and cash
flows.





Because
the Company has substantial operations outside the United States, the Company is
subject to the economic and political conditions of foreign
nations.





The
Company has manufacturing facilities in several countries outside of the United
States.  In 2007, the Company sold products in approximately 100
countries other than the United States.  Foreign net sales, which are
attributed based upon the location of the Company’s subsidiary responsible for
the sale, were approximately 19.5% and 21.5% of consolidated net sales for the
years ended December 31, 2006 and 2007, respectively.  The Company’s
foreign operations are subject to a number of risks and uncertainties, including
risks that:





·
            foreign
      governments may impose limitations on the Company’s ability to repatriate
      funds,


·
            foreign
      governments may impose withholding or other taxes on remittances and other
      payments to the Company, or the amount of any such taxes may
      increase,


·
            an
      outbreak or escalation of any insurrection, armed conflict or act of
      terrorism, or another form of political instability, may
      occur,


·
            natural
      disasters may occur, and local governments may have difficulties in
      responding to these events,


·
            foreign
      governments may nationalize foreign assets or engage in other forms of
      government protectionism,


·
            foreign
      governments may impose or increase investment barriers, customs or tariffs
      or other restrictions affecting the Company’s business,
  and


·
            development,
      implementation and monitoring of systems of internal controls of the
      Company’s international operations, including disclosure controls and
      procedures and internal controls over financial reporting, may be
      difficult and expensive.





The
occurrence of any of these conditions could disrupt the Company’s business in
particular countries or regions of the world, or prevent the Company from
conducting business in particular countries or regions, which could reduce sales
and adversely affect profitability.  In addition, the Company relies
on dividends and other payments or distributions from its subsidiaries to meet
its debt obligations.  If foreign governments impose limitations on
the Company’s ability to repatriate funds or impose or increase taxes on
remittances or other payments to the Company, the amount of dividends and other
distributions the Company receives from its subsidiaries could be reduced, which
could reduce the amount of cash available to the Company to meet its debt
obligations.





Varying
international business practices.





The
Company currently purchases raw materials, components and finished products from
various foreign suppliers.  To the extent that any such foreign
supplier utilizes labor or other practices that vary from those commonly
accepted in theUnited
States, the Company’s
business and reputation could be adversely affected by any resulting litigation,
negative publicity, political pressure or otherwise.





A
decline in the Company’s relations with its key distributors and dealers or loss
of major customers may negatively impact the Company’s business.





The
Company’s operations depend upon its ability to maintain relations with its
independent distributors and dealers and the Company does not typically enter
into long-term contracts with them.  If the Company’s key distributors
or dealers are unwilling to continue to sell the Company’s products or if any of
them merge with or are purchased by a competitor, the Company could experience a
decline in sales.  If the Company is unable to replace such
distributors or dealers or otherwise replace the resulting loss of sales, the
Company’s business, results of operations and cash flows could be adversely
affected.  For the year ended December 31, 2007, approximately 54% of
the Company’s consolidated net sales were made through its independent
distributors and dealers, and the Company’s largest distributor or dealer
accounted for approximately 4.9% of consolidated net sales for the year ended
December 31, 2007.





In
addition, the loss of one or more of the Company’s other major customers, or a
substantial decrease in such customers' purchases from the Company, could have a
material adverse effect on results of operations and cash
flows.  Because the Company does not generally have binding long-term
purchasing agreements with its customers, there can be no assurance that the
Company’s existing customers will continue to purchase products from the
Company.  The Company’s largest customer (other than a distributor or
dealer) accounted for approximately 4.9% of consolidated net sales for the year
ended December 31, 2007.





Labor
disruptions or cost increases could adversely affect the Company’s
business.





A work
stoppage at one of the Company’s facilities that lasts for a significant period
of time could cause the Company to lose sales, incur increased costs and
adversely affect its ability to meet customers' needs.  A plant
shutdown or a substantial modification to employment terms (including the
collective bargaining agreements affecting the Company’s unionized employees)
could result in material gains or losses or the recognition of an asset
impairment.  As collective bargaining agreements expire and until
negotiations are completed, it is not known whether the Company will be able to
negotiate collective bargaining agreements on the same or more favorable terms
as the current agreements or at all without production interruptions, including
labor stoppages.  At December 31, 2007, approximately 6.2% of the
Company’s employees are unionized, and from time to time the Company experiences
union organizing efforts directed at the Company’s non-union
employees.  The Company may also experience labor cost increases or
disruptions in its non-union facilities in circumstances where the Company must
compete for employees with necessary skills and experience or in tight labor
markets.





The
Company must continue to innovate and improve its products to maintain its
competitive advantage.





The
Company’s ability to maintain and grow its market shares depends on the ability
to continue to develop high quality, innovative products.  An
important part of the Company’s competitive strategy includes leveraging its
distributor and dealer relationships and its existing brands to introduce new
products.  In addition, some of the Company’s HVAC products are
subject to federal minimum efficiency standards and/or protocols concerning the
use of ozone-depleting substances that have and are expected to continue to
become more stringent over time.  The Company cannot assure that its
investments in product innovation and technological development will be
sufficient or that it will be able to create and market new products to enable
the Company to successfully compete with new products or technologies developed
by the Company’s competitors or meet heightened regulatory requirements in the
future.





The
Company could incur substantial costs, including cleanup costs, fines and civil
or criminal sanctions, as a result of violations of or liabilities under
environmental laws.





The
Company’s operations are subject to numerous federal, state, local and foreign
laws and regulations relating to protection of the environment, including those
that impose limitations on the discharge of pollutants into the air and water,
establish standards for the use, treatment, storage and disposal of solid and
hazardous materials and wastes and govern the cleanup of contaminated
sites.  The Company has used and continues to use various substances
in its products and manufacturing operations, and has generated and continues to
generate wastes, which have been or may be deemed to be hazardous or
dangerous.  As such, the Company’s business is subject to and may be
materially and adversely affected by compliance obligations and other
liabilities under environmental, health and safety laws and
regulations.  These laws and regulations affect ongoing operations and
require capital costs and operating expenditures in order to achieve and
maintain compliance.  For example, the United States and other
countries have established programs for limiting the production, importation and
use of certain ozone depleting chemicals, including hydrochlorofluorocarbons, or
HCFCs, a refrigerant used in the Company’s air conditioning and heat pump
products.  Some of these chemicals have been banned completely, and
others are currently scheduled to be phased out in the United States by the year
2010.  Modifications to the design of the Company’s products may be
necessary in order to utilize alternative refrigerants.





In
addition, the Company could incur substantial costs, including cleanup costs,
fines and civil or criminal sanctions, and third party property damage or
personal injury claims, as a result of violations of or liabilities under
environmental laws or non-compliance with environmental permits required at its
facilities.  Certain environmental laws and regulations also impose
liability, without regard to knowledge or fault, relating to the existence of
contamination at or associated with properties used in the Company’s current and
former operations or those of the Company’s predecessors, or at locations to
which current or former operations or those of the Company’s predecessors have
shipped waste for disposal.  Contaminants have been detected at
certain of the Company’s former sites, and the Company has been named as a
potentially responsible party at several third-party waste disposal
sites.  While the Company is not currently aware of any such sites as
to which material outstanding claims or obligations exist, the discovery of
additional contaminants or the imposition of additional cleanup obligations at
these or other sites could result in significant liability.  In
addition, the Company cannot be certain that identification of presently
unidentified environmental conditions, more vigorous enforcement by regulatory
agencies, enactment of more stringent laws and regulations, or other
unanticipated events will not arise in the future and give rise to material
environmental liabilities, which could have a material adverse effect on the
Company’s business, financial condition, results of operations and cash
flows.





The
Company faces risks of litigation and liability claims on product liability,
workers’ compensation and other matters, the extent of which exposure can be
difficult or impossible to estimate and which can negatively impact the
Company’s business, financial condition, results of operations and cash
flows.





The
Company is subject to legal proceedings and claims arising out of its businesses
that cover a wide range of matters, including contract and employment claims,
product liability claims, warranty claims and claims for modification,
adjustment or replacement of component parts of units sold.  Product
liability and other legal proceedings include those related to businesses the
Company has acquired or properties it has previously owned or
operated.





The
development, manufacture, sale and use of the Company’s products involve risks
of product liability and warranty claims, including personal injury and property
damage arising from fire, soot, mold and carbon monoxide.  The Company
currently carries insurance and maintains reserves for potential product
liability claims.  However, the Company’s insurance coverage may be
inadequate if such claims do arise and any liability not covered by insurance
could have a material adverse effect on the Company’s business.  The
accounting for self-insured plans requires that significant judgments and
estimates be made both with respect to the future liabilities to be paid for
known claims and incurred but not reported claims as of the reporting
date.  To date, the Company has been able to obtain insurance in
amounts it believes to be appropriate to cover such
liability.  However, the Company’s insurance premiums may increase in
the future as a consequence of conditions in the insurance business generally or
the Company’s situation in particular.  Any such increase could result
in lower profits or cause the need to reduce the Company’s insurance
coverage.  In addition, a future claim may be brought against the
Company which would have a material adverse effect on the
Company.  Any product liability claim may also include the imposition
of punitive damages, the award of which, pursuant to certain state laws, may not
be covered by insurance.  The Company’s product liability insurance
policies have limits that if exceeded, may result in material costs that would
have an adverse effect on future profitability.  In addition, warranty
claims are generally not covered by the Company’s product liability
insurance.  Further, any product liability or warranty issues may
adversely affect the Company’s reputation as a manufacturer of high-quality,
safe products and could have a material adverse effect on its
business.





Product
recalls or reworks may adversely affect the Company’s business.





In the
event the Company produces a product that is alleged to contain a design or
manufacturing defect, the Company could be required to incur costs involved to
recall or rework that product.  While the Company has undertaken
several voluntary product recalls and reworks over the past several years,
additional product recalls and reworks could result in material
costs.  Many of the Company’s products, especially certain models of
bath fans, range hoods and residential furnaces and air conditioners, have a
large installed base, and any recalls and reworks related to products with a
large installed base could be particularly costly.  The costs of
product recalls and reworks are not generally covered by
insurance.  In addition, the Company’s reputation for safety and
quality is essential to maintaining its market share and protecting its
brands.  Any recalls or reworks may adversely affect the Company’s
reputation as a manufacturer of high-quality, safe products and could have a
material adverse effect on its financial condition, results of operations and
cash flows.





The
Company’s business operations could be significantly disrupted if it lost
members of its management team.





The
Company’s success depends to a significant degree upon the continued
contributions of its executive officers and key employees and consultants, both
individually and as a group.  The Company’s future performance will be
substantially dependent on its ability to retain and motivate
them.  The loss of the services of any of these executive officers or
key employees and consultants, particularly the Company’s chairman and chief
executive officer, Richard L. Bready, and the Company’s other executive
officers, could prevent the Company from executing its business
strategy.





The
Company’s business operations could be negatively impacted if it fails to
adequately protect its intellectual property rights, if it fails to comply with
the terms of its licenses or if third parties claim that the Company is in
violation of its intellectual property rights.





The
Company is highly dependent on certain of the brand names under which it sells
its products, including Broan® and NuTone®.  Failure to protect these
brand names and other intellectual property rights or to prevent their
unauthorized use by third parties could adversely affect the Company’s
business.  The Company seeks to protect its intellectual property
rights through a combination of trademark, copyright, patent and trade secret
laws, as well as confidentiality agreements.  These protections may
not be adequate to prevent competitors from using the Company’s brand names and
trademarks without authorization or from copying the Company’s products or
developing products equivalent to or superior to the Company’s.  The
Company licenses several brand names from third parties.  In the event
the Company fails to comply with the terms of these licenses, the Company could
lose the right to use these brand names.  In addition, the Company
faces the risk of claims that the Company is infringing third parties'
intellectual property rights.  Any such claim, even if it is without
merit, could be expensive and time-consuming; could cause the Company to cease
making, using or selling certain products that incorporate the disputed
intellectual property; could require the Company to redesign its products, if
feasible; could divert management time and attention; and could require the
Company to enter into costly royalty or licensing arrangements.





The
Company’s substantial debt could negatively impact its business, prevent the
Company from fulfilling its outstanding debt obligations and adversely affect
its financial condition.





The
Company has a substantial amount of debt.  As of December 31, 2007,
the Company had approximately $2,017.9 million of total debt outstanding and a
debt to equity ratio of approximately 22.7:1.  The terms of the
Company’s outstanding debt, including NTK Holdings’ 10 3/4% senior discount
notes, NTK Holdings’ senior unsecured loan facility, Nortek's 8 1/2% senior
subordinated notes and Nortek's senior secured credit facility limit, but do not
prohibit, the Company from incurring additional debt.





At December 31, 2007, Nortek had
approximately $35.0 million outstanding (with an interest rate of
approximately 7.45%) and approximately $133.4 million of
available borrowing capacity under theU.S.revolving portion of its senior secured
credit facility, with approximately $21.6 million in outstanding letters of
credit.  Borrowings under the revolving portion of the senior secured
credit facility are usedfor general corporate purposes, including
borrowings to fund working capital requirements.  Under the Canadian revolving portion of
its senior secured credit facility, Nortek had no outstanding borrowings and
approximately $10.0 million of available borrowing
capacity.  Letters of credit have been issued under Nortek’s
revolving credit facility as additional security for (1) approximately $17.2
million relating to certain of the Company’s insurance programs, (2)
approximately $3.6 million relating to leases outstanding for certain of the
Company’s manufacturing facilities and (3) approximately $0.8 million relating
to certain of the subsidiaries’ purchases and other
requirements.  Letters of credit reduce borrowing availability under
Nortek’s revolving credit facility on a dollar for dollar
basis.  If additional
debt is added to current debt levels, the related risks described below could
intensify. See also the
discussion in risk factors and Management’s Discussion and Analysis of Financial
Condition and Results of Operations, “Liquidity and Capital Resources”
concerning the terms and conditions of the Company’s debt covenants included
elsewhere herein.





The
substantial amount of the Company’s debt could have important consequences,
including the following:





·
            the
      Company’s ability to obtain additional financing for working capital,
      capital expenditures, acquisitions, refinancing indebtedness, or other
      purposes could be impaired,


·
            a
      substantial portion of the Company’s cash flow from operations will be
      dedicated to paying principal and interest on its debt, thereby reducing
      funds available for expansion or other
purposes,


·
            the
      Company may be more leveraged than some of its competitors, which may
      result in a competitive
disadvantage,


·
            the
      Company may be vulnerable to interest rate increases, as certain of its
      borrowings, including those under the Nortek senior secured credit
      facility, are at variable rates,


·
            the
      Company’s failure to comply with the restrictions in its financing
      agreements would have a material adverse effect on the
      Company,


·
            the
      Company’s significant amount of debt could make it more vulnerable to
      changes in general economic
conditions,


·
            the
      Company may be restricted from making strategic acquisitions, investing in
      new products or capital assets or taking advantage of business
      opportunities, and


·
            the
      Company may be limited in its flexibility in planning for, or reacting to,
      changes in its business and the industries in which it
      operates.





The
Company believes that it will need to access the capital markets in the future
to raise the funds to repay its debt that remains outstanding at December 31,
2007.  The Company has no assurance that it will be able to complete a
refinancing or that it will be able to raise any additional financing,
particularly in view of the Company’s anticipated high levels of debt and the
restrictions under its current debt agreements.  If the Company is
unable to satisfy or refinance its current debt as it comes due, the Company may
default on its debt obligations.  If the Company defaults on NTK
Holdings’ 10 3/4% senior discount notes, NTK Holdings’ senior unsecured loan
facility, Nortek’s senior secured credit facility or Nortek’s 8 1/2% senior
subordinated notes then virtually all of the Company’s other debt would become
immediately due and payable.  Any default on the Company’s debt
obligations or the acceleration of its debt will likely have a substantial
adverse effect on the Company’s financial condition, results of operations and
cash flows.





The
terms of the Company’s debt covenants could limit how the Company conducts its
business and its ability to raise additional funds.





The
agreements which govern the terms of the Company’s debt, including the
indentures that govern NTK Holdings’ 10 3/4%
senior discount notes and Nortek's 8 1/2% senior subordinated notes and the
agreements that govern NTK Holdings’ senior unsecured loan facility and Nortek's
senior secured credit facility, contain covenants that restrict the Company’s
ability and the ability of the Company’s subsidiaries to:





·
            incur
      additional indebtedness,


·
            pay
      dividends or make other
distributions,


·
            make
      loans or investments,


·
            incur
      certain liens,


·
            enter
      into transactions with affiliates,
and


·
            consolidate,
      merge or sell assets.





In addition,
Nortek's senior secured credit facility contains two financial maintenance
covenants, which become more restrictive over time, and the Company cannot
assure that these covenants will always be met particularly given the further
deterioration of the new residential construction and repair and remodeling
industries, plus the instability in the overall credit markets.  These
two covenants require that Nortek maintain at the end of each quarter,
calculated based on the last twelve months, a Leverage Ratio and an Interest
Coverage Ratio, each as defined.  The Leverage Ratio must not exceed a
defined ratio amount and the Interest Coverage Ratio must not be less than a
defined ratio amount.  The Leverage Ratio is calculated by dividing
Nortek's total indebtedness, net of cash, (as defined) by EBITDA (as defined)
and the Interest Coverage Ratio is calculated by dividing EBITDA (as defined) by
interest expense, net (as defined).  At December 31, 2007 Nortek was
required to maintain a Leverage Ratio not greater than 5.85:1 and an Interest
Coverage Ratio of not less than 2.10:1.  At December 31, 2007 Nortek
was in compliance with the Leverage Ratio and the Interest Coverage Ratio
covenants.  At December 31, 2007, Nortek’s Leverage Ratio was 5.37:1
and its Interest Coverage Ratio was 2.32:1.  The Leverage Ratio
requirement of 5.85:1 at December 31, 2007 tightens to 5.60:1 at the end of the
second quarter of 2008 and further tightens to 5.25:1 at December 31, 2008,
while the Interest Coverage Ratio requirement of 2.10:1 at December 31, 2007
tightens to 2.20:1 at the end of the first quarter of 2008 through December 31,
2008.  Should Nortek not satisfy either of these covenants, Nortek's
senior secured credit facility allows a cure, whereby a subsequent cash equity
investment equal to the EBITDA shortfall, will be treated as EBITDA for purposes
of the compliance calculations in the current and future periods.  The
senior secured credit facility allows for such a cure to occur twice within a
consecutive twelve-month period.  The Company expects that Nortek’s
financial statements for the first quarter of 2008, which will be filed with its
quarterly report on Form 10-Q on or about May 15, 2008, will indicate that its
EBITDA for such quarter (as calculated in accordance with the senior secured
credit facility) will be below the level necessary to be in compliance with the
Interest Coverage Ratio and the Leverage Ratio covenants as of the end of such
quarter.  Any such shortfall is not expected to be significant and
Nortek plans to utilize the equity cure right under its senior secured credit
facility to avoid any default otherwise arising out of such
shortfall.  The Company expects that Nortek may also encounter events
of non-compliance with the Interest Coverage Ratio and the Leverage Ratio
covenants as of the end of the second quarter of 2008 and anticipates that
Nortek may seek to use the equity cure right again to remedy any such
non-compliance.  Based upon the Company’s current forecast regarding
Nortek’s operating results for the balance of 2008 following the second quarter,
the Company does not anticipate further events of non-compliance with the
Interest Coverage Ratio and Leverage Ratio covenants as of the end of the third
and fourth quarters of 2008.  To the extent Nortek experiences events
of non-compliance with such covenants, which are not resolved through the use of
the equity cure feature or other alternatives, Nortek would need to seek waivers
or amendments from the lenders under its senior secured credit facility or
refinance such facility.  Should an event of non-compliance occur,
Nortek will not be permitted to borrow under its credit facility until such time
that a cure happens.  If these events of non-compliance were to occur,
and were not cured, an event of default would exist under Nortek's senior
secured credit facility and would allow the lenders to accelerate the payment of
indebtedness outstanding.  In addition, an event of default under the
credit facility would result in a cross default under substantially all of the
Company’s other senior and senior subordinated indebtedness.  In light
of the instability and uncertainty that currently exists within the financial
and credit markets and the tightening of credit standards, Nortek may not be
able to obtain any such waivers or amendments or any such refinancing on
acceptable terms.  In addition, any such waivers, amendments or
refinancing may involve terms which would have a further adverse effect on the
future cash flows of the Company.





A
breach of the covenants under the indentures that govern NTK Holdings' 10 3/4%
senior discount notes and Nortek's 8 1/2% senior subordinated notes or under the
agreements that govern NTK Holdings' senior unsecured loan facility and Nortek's
senior secured credit facility could result in an event of default under the
applicable indebtedness.  Such default may allow the creditors to
accelerate the related debt and may result in the acceleration of any other debt
to which a cross-acceleration or cross-default provision applies.  In
addition, an event of default under Nortek's senior secured credit facility
would permit the lenders to terminate all commitments to extend further credit
under that facility.  Furthermore, if Nortek was unable to repay the
amounts due and payable under its senior secured credit facility, those lenders
could proceed against the collateral granted to them to secure that
indebtedness.  In the event the Company’s lenders or noteholders
accelerate the repayment of their borrowings, the Company cannot assure that the
Company and its subsidiaries would have sufficient assets to repay such
indebtedness.  The Company’s future financing arrangements will likely
contain similar or more restrictive covenants.  As a result of these
restrictions, the Company may be:





·
            limited
      in how the Company conducts its
business,


·
            unable
      to raise additional debt or equity financing to operate during general
      economic or business downturns, or


·
            unable
      to compete effectively or to take advantage of new business
      opportunities.





These
restrictions may affect the Company’s ability to grow in accordance with its
plans.  Refer to Note 5 of the Notes to the Consolidated Financial
Statements, Item 8 of Part II of this report, incorporated herein by
reference.





The
Company may be unable to generate sufficient cash to service all of its
indebtedness and may be forced to take other actions to satisfy its obligations
under such indebtedness, which may not be successful.





The
Company’s ability to pay interest, make scheduled payments on or to refinance
its debt obligations depends on the Company’s subsidiaries' financial condition
and operating performance, which is subject to prevailing economic and
competitive conditions and to financial, business and other factors beyond the
Company’s control.  The Company cannot assure that its subsidiaries
will maintain a level of cash flows from operating activities sufficient to
permit the Company to pay interest and pay or refinance its
indebtedness.  If the Company’s subsidiaries' cash flows and capital
resources are insufficient to fund the Company’s debt service obligations, the
Company and its subsidiaries could face substantial liquidity problems and may
be forced to reduce or delay capital expenditures, sell assets, seek additional
capital or restructure or refinance its indebtedness.  These
alternative measures may not be successful and may not permit the Company to
meet its scheduled debt service obligations.





If
the Company is unable to access funds generated by its subsidiaries the Company
may not be able to meet its financial obligations.





Because
the Company conducts all of its operations through its subsidiaries, the Company
depends on those entities for dividends, distributions and other payments to
generate the funds necessary to meet its financial obligations.  Legal
restrictions in the United States and foreign jurisdictions applicable to the
Company’s subsidiaries and contractual restrictions in certain agreements
governing current and future indebtedness of the Company’s subsidiaries, as well
as the financial condition and operating requirements of the Company’s
subsidiaries, may limit the Company’s ability to obtain cash from its
subsidiaries.  All of the Company’s subsidiaries are separate and
independent legal entities and have no obligation whatsoever to pay any
dividends, distributions or other payments to the Company.








Item
1B.  Unresolved Staff Comments.





None.




Item
2.  Properties.





Set
forth below is a brief description of the location and general character of the
principal administrative and manufacturing facilities and other material real
properties of the Company’s continuing operations, all of which the Company
considers to be in satisfactory repair.  All properties are owned,
except for those indicated by an asterisk (*), which are leased under operating
leases and those with a double asterisk (**), which are leased under capital
leases.





ApproximateLocation (1)
            Description
            Square FeetResidential
      Ventilation Products Segment:Union,
      IL
            Manufacturing/Warehouse/Administrative
            197,000
            
            (3)Hartford,
      WI
            Manufacturing/Warehouse/Administrative
            538,000
            
            (3)Hartford,
      WI
            Warehouse
            130,000
            
            *Mississauga,
      ONT, Canada
            Manufacturing/Warehouse/Administrative
            110,000Fabriano,
      Italy
            Manufacturing/Warehouse/Administrative
            178,000Cerreto
      D’Esi, Italy
            Manufacturing/Warehouse/Administrative
            174,000Montefano,
      Italy
            Manufacturing/Warehouse/Administrative
            93,000
            
            (2)Cleburne,
      TX
            Manufacturing/Warehouse/Administrative
            215,000
            
            (3)Drummondville,
      QUE, Canada
            Manufacturing/Warehouse/Administrative
            126,000Chenjian,
      Huizhou, PRC
            Manufacturing/Warehouse/Administrative/Other
            198,000San
      Francisco, CA
            Warehouse/Administrative
            48,000
            
            *Gliwice,
      Poland
            Manufacturing/Warehouse/Administrative
            162,000Tecate,
      Mexico
            Manufacturing/Warehouse/Administrative
            204,000
            
            *Home
      Technology Products Segment:Sylmar,
      CA
            Administrative
            18,000
            
            *Xiang,
      Bao An County, Shenzhen, PRC
            Manufacturing/Warehouse/Administrative/Other
            251,000
            
            *Chaiwan,
      Hong Kong
            Administrative
            15,000
            
            *Lexington,
      KY
            Warehouse/Administrative
            73,000
            
            *Carlsbad,
      CA
            Warehouse/Administrative
            64,000
            
            *Vista,
      CA
            Warehouse
            69,000
            
            *Riverside,
      CA
            Administrative
            82,000
            
            *Casnovia,
      MI
            Manufacturing/Warehouse/Administrative
            28,000
            
            *Phoenix,
      AZ
            Manufacturing/Warehouse/Administrative
            51,000
            
            *Petaluma,
      CA
            Warehouse/Administrative
            26,000
            
            *Miami,
      FL
            Warehouse/Administrative
            62,000
            
            *Cambridge,
      U.K.
            Warehouse/Administrative
            11,000
            
            *Snohomish,
      WA
            Manufacturing/Warehouse/Administrative
            25,000
            
            *Tallahassee,
      FL
            Manufacturing/Warehouse/Administrative
            71,000
            
            (3)Summerville,
      SC
            Warehouse/Administrative
            162,000
            
            *New
      Milford, CT
            Manufacturing/Warehouse/Administrative
            17,000
            
            **Los
      Angeles, CA
            Warehouse/Administrative
            28,000
            
            *Salt
      Lake City, UT
            Manufacturing/Warehouse/Administrative
            25,000
            
            *Winston-Salem,
      NC
            Manufacturing/Warehouse/Administrative
            62,000
            
            *Marblehead,
      MA
            Warehouse/Administrative
            4,000
            
            *Canton,
      MA
            Warehouse/Administrative
            21,000
            
            *Air
      Conditioning and Heating Products Segment:St.
      Leonard d’Aston, QUE, Canada
            Manufacturing/Administrative
            95,000
            
            *Saskatoon,
      Saskatchewan, Canada
            Manufacturing/Administrative
            49,000
            
            *O’Fallon,
      MO
            Warehouse/Administrative
            70,000
            
            *St.
      Louis, MO
            Warehouse
            103,000
            
            *Boonville,
      MO
            Manufacturing
            250,000
            
            (3)Boonville,
      MO
            Warehouse/Administrative
            150,000
            
            (2)Tipton,
      MO
            Manufacturing
            50,000
            
            (3)Poplar
      Bluff, MO
            Manufacturing/Warehouse
            725,000
            
            **Dyersburg,
      TN
            Manufacturing/Warehouse
            368,000
            
            **Holland,
      MI
            Manufacturing/Administrative
            45,000
            
            *Oklahoma
      City, OK
            Manufacturing/Administrative
            127,000
            
            (3)Okarche,
      OK
            Manufacturing/Warehouse/Administrative
            228,000
            
            (3)Springfield,
      MO
            Manufacturing/Warehouse/Administrative
            113,000
            
            *Anjou,
      QUE, Canada
            Manufacturing/Administrative
            122,000
            
            *Edenbridge,
      Kent, U.K.
            Manufacturing/Administrative
            92,000
            
            *Fenton,
      Stoke-on-Trent, U.K.
            Manufacturing/Administrative
            104,000
            
            *Miami,
      FL
            Manufacturing/Warehouse/Administrative
            88,000
            
            *Anji
      County, Zhejiang, PRC
            Manufacturing/Warehouse/Administrative
            202,000
            
            (2)Clackamas,
      OR
            Manufacturing/Warehouse/Administrative
            165,000
            
            *Tualatin,
      OR
            Manufacturing/Warehouse/Administrative
            176,000
            
            *Catano,
      Puerto Rico
            Warehouse
            17,000
            
            *Other:Providence,
      RI
            Administrative
            23,000
            
            *





(1) Certain
locations may represent more than one property and the square footage includes
all properties within that location.





(2)
            These
      facilities are pledged as security under various subsidiary debt
      agreements.





(3)
            These
      facilities are pledged as security under Nortek’s senior secured credit
      facility.








Item
3.  Legal Proceedings.





The
Company and its subsidiaries are subject to numerous federal, state and local
laws and regulations, including environmental laws and regulations that impose
limitations on the discharge of pollutants into the air and water and establish
standards for the treatment, storage and disposal of solid and hazardous
wastes.  The Company believes that it is in substantial compliance
with the material laws and regulations applicable to it.  The Company
is involved in current, and may become involved in future, remedial actions
under federal and state environmental laws and regulations which impose
liability on companies to clean up, or contribute to the cost of cleaning up,
sites at which their hazardous wastes or materials were disposed of or
released.  Such claims may relate to properties or business lines
acquired by the Company after a release has occurred.  In other
instances, the Company may be partially liable under law or contract to other
parties that have acquired businesses or assets from the Company for past
practices relating to hazardous substances management.  The Company
believes that all such claims asserted against it, or such obligations incurred
by it, will not have a material adverse effect upon the Company’s financial
condition or results of operations.  Expenditures in 2007, 2006 and
2005 to evaluate and remediate such sites were not material.  While
the Company is able to reasonably estimate its losses, the Company is unable to
estimate with certainty its ultimate financial exposure in connection with
identified or yet to be identified remedial actions due, among other reasons,
to: (i) uncertainties surrounding the nature and application of environmental
regulations, (ii) the Company’s lack of information about additional sites to
which it may be listed as a potentially responsible part (“PRP”), (iii) the
level of clean-up that may be required at specific sites and choices concerning
the technologies to be applied in corrective actions and (iv) the time periods
over which remediation may occur.  Furthermore, since liability for
site remediation is joint and several, each PRP is potentially wholly liable for
other PRP’s that become insolvent or bankrupt.  Thus, the solvency of
other PRP’s could directly affect the Company’s ultimate aggregate clean-up
costs.  In certain circumstances, the Company’s liability for clean-up
costs may be covered in whole or in part by insurance or indemnification
obligations of third parties.





In
addition to legal matters described above, the Company and its subsidiaries are
named as defendants in a number of legal proceedings, including a number of
product liability lawsuits, incident to the conduct of their
businesses.





The
Company does not expect that any of the above described proceedings will have a
material adverse effect, either individually or in the aggregate, on the
Company’s financial position, results of operations, liquidity or competitive
position.  See Note 8 of the Notes to the Consolidated Financial
Statements, Item 8 of Part II of this report, incorporated herein by
reference.





Item
4.  Submission of Matters to a Vote of Security Holders.





None.





PART
II





Item
5.  Market for Registrant’s Common Stock, Related Stockholder Matters
and Issuer Purchases of Equity Securities.





On November 20, 2002, Nortek reorganized
into a holding company structure and each outstanding share of capital stock of
Nortek was converted into an identical share of capital stock of the former
Nortek Holdings.  The former Nortek Holdings became the successor
public company, and Nortek became a wholly-owned subsidiary of the former Nortek
Holdings.  As of November 20, 2002, there is no established public
trading market for Nortek’s capital stock.





NTK
Holdings was formed to hold the capital stock of Nortek
Holdings.  Prior to February 10, 2005, Nortek Holdings was a direct
wholly-owned subsidiary of THL-Nortek Investors, LLC (“Investors
LLC”).  On February 10, 2005, NTK Holdings issued 3,000 shares of
capital stock to Investors LLC in exchange for Investor LLC’s 3,000 shares of
capital stock of Nortek Holdings.  As of April 11, 2008, there were
3,000 shares of common stock of the Company authorized and outstanding, all of
which are owned by Investors LLC.





On May 5, 2006, the Company filed a
registration statement on Form S-1 (lastamended on September 15, 2006) with the
SEC for an initial public offering of shares of its common
stock.The
Company withdrew its registration statement on Form S-1 in a filing with the SEC
on November 13, 2007 due to the unsettled market conditions.





On May
10, 2006 and February 18, 2005, NTK Holdings paid dividends of approximately
$174.9 million and $187.0 million, respectively, to Investors
LLC.  Additionally, on these same dates, Nortek Holdings made
distributions of approximately $54.0 million and $57.7 million, respectively, to
participants in the 2004 Nortek Holdings, Inc. Deferred Compensation Plan
(including certain of the Company’s executive officers) in accordance with the
terms of that plan.  As a result of these distributions, the holders
of the Class A membership interests in Investors LLC and the participants in the
2004 Nortek Holdings, Inc. Deferred Compensation Plan are not entitled to any
further distributions.





The
terms of the indenture governing the Company’s 10 3/4% senior discount notes and
the agreement governing the Company’s senior unsecured loan facility restrict
the Company’s ability to pay cash dividends, stock purchases or other restricted
distributions.  In addition, since NTK Holdings is a holding company,
substantially all of the assets on its consolidated balance sheet are held by
the Company’s subsidiaries.  Accordingly, the Company’s earnings and
cash flow and the ability to pay dividends are dependent upon the earnings and
cash flows of the Company’s subsidiaries and the distribution and other payment
of such earnings and cash flows to the Company in the form of dividends or other
distributions.  Nortek's senior secured credit facility and the
indenture governing Nortek’s 8 1/2% senior subordinated notes contain
restrictions on its ability to pay dividends or make other distributions in
respect of its capital stock, including to NTK Holdings.  The
agreements governing any future indebtedness incurred by the Company or any of
the Company’s subsidiaries could include additional restrictions.





The
Company and its subsidiaries, affiliates or significant shareholders may from
time to time, in their sole discretion, purchase, repay, redeem or retire any of
the Company’s outstanding debt (including publicly issued debt), in privately
negotiated or open market transactions, by tender offer or otherwise, which may
be subject to restricted payment limitations.





See
Notes 1, 5 and 6 of the Notes to the Consolidated Financial Statements, Item 8
of Part II of this report, incorporated herein by reference.





Item
6.  Consolidated Selected Financial Data.




For the
    PeriodsPre-Post-Acquisition
              
              
              Pre-Acquisition
              
              
              RecapitalizationFor the Years Ended December
      31,
              
              
              Aug. 28, 2004
    -
              
              
              Jan.1, 2004
    -
              
              
              Jan.10, 2003
    -
              
              
              Jan.1, 2003
    -2007
              
              
              2006
              
              
              2005
              
              
              Dec. 31,
    2004
              
              
              Aug. 27,
    2004
              
              
              Dec. 31,
    2003
              
              
              Jan. 9,
2003(In millions except
      ratios)Consolidated Summary of
      Operations:Net sales
              
              $
              2,368.2
              
              
              $
              2,218.4
              
              
              $
              1,959.2
              
              
              $
              561.0
              
              
              $
              1,117.9
              
              
              $
              1,480.6
              
              
              $
              24.8Operating earnings
      (loss)   (1)
              
              
              185.3
              
              
              
              264.5
              
              
              
              236.9
              
              
              
              42.1
              
              
              
              32.6
              
              
              
              159.4
              
              
              
              (81.8
              )(Loss) earnings
      fromcontinuing operations
              
              
              (7.0
              )
              
              
              57.7
              
              
              
              56.9
              
              
              
              (3.6
              )
              
              
              (111.3
              )
              
              
              62.1
              
              
              
              (60.9
              )(Loss) earnings from discontinued
      operations
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              (0.5
              )
              
              
              67.4
              
              
              
              12.1
              
              
              
              (1.0
              )Net (loss)
      earnings
              
              
              (7.0
              )
              
              
              57.7
              
              
              
              56.9
              
              
              
              (4.1
              )
              
              
              (43.9
              )
              
              
              74.2
              
              
              
              (61.9
              )Financial
      Position:Unrestricted cash, investments
      andmarketable
      securities
              
              $
              53.4
              
              
              $
              57.4
              
              
              $
              77.2
              
              
              $
              95.0
              
              
              $
              202.0
              
              
              $
              194.1
              
              
              $
              283.6Working
    capital
              
              
              205.7
              
              
              
              210.2
              
              
              
              283.6
              
              
              
              215.8
              
              
              
              (645.2
              )
              
              
              689.8
              
              
              
              830.0Total
assets
              
              
              2,710.8
              
              
              
              2,635.9
              
              
              
              2,404.6
              
              
              
              2,264.6
              
              
              
              1,730.3
              
              
              
              2,100.0
              
              
              
              1,781.2Total debt
    --Current
              
              
              96.4
              
              
              
              43.3
              
              
              
              19.7
              
              
              
              19.8
              
              
              
              13.4
              
              
              
              15.3
              
              
              
              4.4Long-term
              
              
              1,921.5
              
              
              
              1,883.2
              
              
              
              1,628.7
              
              
              
              1,350.2
              
              
              
              30.4
              
              
              
              1,324.6
              
              
              
              953.7Current
    ratio
              
              1.4:1
              
              
              1.4:1
              
              
              1.8:1
              
              
              1.6:1
              
              
              0.5:1
              
              
              2.7:1
              
              
              2.9:1Debt to equity
      ratio
              
              22.7:1
              
              
              26.5:1
              
              
              8.7:1
              
              
              4.3:1
              
              
              0.4:1
              
              
              6.7:1
              
              
              3.5:1Depreciation and amortization
      expense,including non-cash
      interest
              
              
              132.4
              
              
              
              108.8
              
              
              
              75.8
              
              
              
              26.6
              
              
              
              50.5
              
              
              
              38.2
              
              
              
              0.7Capital expenditures
      (2)
              
              
              36.4
              
              
              
              42.3
              
              
              
              33.7
              
              
              
              15.1
              
              
              
              12.7
              
              
              
              24.7
              
              
              
              0.2Stockholder's
      investment
              
              
              89.0
              
              
              
              72.8
              
              
              
              190.5
              
              
              
              321.9
              
              
              
              114.6
              
              
              
              200.1
              
              
              
              272.1







See the
Notes to the Consolidated Financial Statements and Management’s Discussion and
Analysis of Financial Condition and Results of Operations, included elsewhere
herein regarding the effect on operating results of acquisitions, discontinued
operations and other matters.  See Part II, Item 5 of this report,
incorporated herein by reference, for a discussion on certain Stockholder
Matters.





(1)
            See
      Note 12 of the Notes to the Consolidated Financial Statements included
      elsewhere herein.





(2)
            Includes
      capital expenditures financed under capital leases of approximately $4.8
      million, $1.6 million, $0.9 million and $7.6 million for the year ended
      December 31, 2005 and the periods from August 28, 2004 to December 31,
      2004, from January 1, 2004 to August 27, 2004 and from January 10, 2003 to
      December 31, 2003, respectively.  There were no expenditures
      financed under capital leases for the years ended December 31, 2007 and
      2006 and the period from January 1, 2003 to January 9,
    2003.







NTK
HOLDINGS, INC. AND SUBSIDIARIES
 Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
 December
31, 2007




Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operation.





NTK Holdings, Inc. and its wholly-owned
subsidiaries (individually and collectively the “Company” or “NTK Holdings”) are
diversified manufacturers of innovative, branded residential and commercial
building products, operating within three reporting
segments:





·
            the Residential Ventilation
      Products, or RVP, segment,


·
            the Home Technology Products, or
      HTP, segment, and


·
            the Air Conditioning and Heating
      Products, or HVAC, segment.





Through these segments, the Company
manufactures and sells, primarily in theUnited States,CanadaandEurope, a wide variety of products for the
professional remodeling and replacement markets, the residential and commercial
construction markets, the manufactured housing market and the do-it-yourself
(“DIY”) market.





The Residential Ventilation Products
segment manufactures and sells room and whole house ventilation products and
other products primarily for the professional remodeling and replacement
markets, the residential new construction market and the DIY
market.  The principal products sold by the segment
include:





·
            kitchen range
      hoods,


·
            exhaust fans (such as bath fans
      and fan, heater and light combination units),
  and


·
            indoor air quality
      products.





The Home Technology Products segment
manufactures and sells a broad array of products designed to provide convenience
and security for residential and certain commercial applications.  The
principal products sold by the segment are:





·
            audio / video distribution and
      control equipment,


·
            speakers and
      subwoofers,


·
            security and access control
      products,


·
            power conditioners and surge
      protectors,


·
            audio / video wall mounts and
      fixtures,


·
            lighting and home automation
      controls, and


·
            structured
      wiring.





The Air Conditioning and Heating
Products segment manufactures and sells heating, ventilating and air
conditioning (“HVAC”) systems for site-built residential and manufactured
housing structures, custom-designed commercial applications and standard light
commercial applications.  The principal products sold by the segment
are:





·
            split system air conditioners and
      heat pumps,


·
            furnaces and related
      equipment,


·
            air handlers,
      and


·
            large custom roof top cooling and
      heating products.





In the results of operations presented
below, Unallocated includes corporate related items, intersegment eliminations
and certain income and expense not allocated to its
segments.




Changes in Structure and
Ownership





Over
the past several years, the Company has undergone changes in its structure and
ownership that are useful to an understanding of the Company’s financial results
over this time period.





·
            Nortek
      had been a public company for over thirty-five years until November 2002
      when the former Nortek Holdings was formed to become its holding company
      and successor public company.


·
            The
      former Nortek Holdings was then taken private in an acquisition by
      affiliates and designees of Kelso & Company L.P., together with
      members of the Company’s management, in January
  2003.


·
            Affiliates
      of THL, together with members of the Company’s management, purchased the
      former Nortek Holdings from affiliates and designees of Kelso &
      Company L.P. in August 2004.  The former Nortek Holdings was
      merged out of existence and a newly formed acquisition subsidiary became
      the parent company of Nortek and was renamed Nortek
    Holdings.


·
            NTK
      Holdings, then a newly formed company, became the parent company of Nortek
      Holdings in February 2005 in order to facilitate a financing and related
      dividend.




In connection with
these transactions, the Company has incurred a significant amount of
indebtedness.  For further discussion, see “Liquidity and Capital
Resources”.


NTK
Holdings Formation





NTK
Holdings is a Delaware corporation that was formed to hold the capital stock of
Nortek Holdings in order to facilitate a financing and related
dividend.  NTK Holdings became the parent company of Nortek Holdings
on February 10, 2005.  Nortek Holdings is a wholly-owned subsidiary of
NTK Holdings and Nortek is a wholly-owned subsidiary of Nortek
Holdings.





Financial
Statement Presentation





The
consolidated financial statements presented herein for the period subsequent to
August 27, 2004 and prior to February 10, 2005 reflects the financial position,
results of operations and cash flows of Nortek Holdings, Inc. and all of its
wholly-owned subsidiaries (the successor company and survivor from the mergers
in connection with the THL Transaction) and the periods subsequent to February
9, 2005 reflect the financial position, results of operations and cash flows of
NTK Holdings and all of its wholly-owned subsidiaries (collectively, the
“Consolidated Financial Statements”).





Acquisitions





The
Company accounts for acquisitions under the purchase method of accounting and
accordingly, the results of these acquisitions are included in the Company’s
consolidated results since the date of their acquisition.  The Company
has made the following acquisitions since January 1, 2005:







Acquired Company
            Date
      of
              Acquisition
            Primary
      Business
              of Acquired Company
            Reporting
              SegmentStilpol
      SP. Zo.O.
            September
      18, 2007
            Supply
      various fabricated material components and sub-assemblies used by the
      Company’s Best subsidiaries in the manufacture of kitchen range
      hoods.
            RVPMetaltecnica
      S.r.l.
            September
      18, 2007
            Supply
      various fabricated material components and sub-assemblies used by the
      Company’s Best subsidiaries in the manufacture of kitchen range
      hoods.
            RVPTriangle
            August
      1, 2007
            Manufacture,
      marketing and distribution of bath cabinets and related
      products.
            RVPHome
      Logic, LLC
            July
      27, 2007
            Design
      and sale of software and hardware that facilitates the control of third
      party residential subsystems such as home theatre, whole-house audio,
      climate control, lighting, security and irrigation.
            HTPAigis
      Mechtronics, Inc.
            July
      23, 2007
            Manufacture
      and sale of equipment, such as camera housings, into the close-circuit
      television portion of the global security market.
            HTPInternational
      Electronics, Inc.
            June
      25, 2007
            Design
      and sale of security and access control components and systems for use in
      residential and light commercial applications.
            HTPc.p.
      All Star Corporation
            April
      10, 2007
            Manufacture
      and distribution of residential, commercial and industrial gate operators,
      garage door openers, radio controls and accessory products for the garage
      door and fence industry.
            HTPPar
      Safe / Litewatch
            March
      26, 2007
            Design
      and sale of home safes and solar LED security lawn signs
            HTPLiteTouch,
      Inc.
            March
      2, 2007
            Design,
      manufacture and sale of automated lighting control for a variety of
      applications including residential, commercial, new construction and
      retro-fit.
            HTPGefen,
      Inc.
            December
      12, 2006
            Design
      and sale of audio and video products which extend, switch, distribute and
      convert signals in a variety of formats, including high definition, for
      both the residential and commercial markets.
            HTPZephyr
      Corporation
            November
      17, 2006
            Design
      and sale of upscale range hoods.
            RVPPacific
      Zephyr Range Hood, Inc.
            November
      17, 2006
            Design,
      sale and installation of range hoods and other kitchen products for Asian
      cooking markets in the United States.
            RVPMagenta
      Research, Ltd.
            July
      18, 2006
            Design and sale ofproducts
      that distribute audio and video signals over Category 5 and fiber optic
      cable to multiple display screens.
            HTPSecure
      Wireless, Inc.
            June
      26, 2006
            Design
      and sale of wireless security products for the residential and commercial
      markets.
            HTPAdvanced
      Bridging Technologies, Inc.
            June
      26, 2006
            Design
      and sale of innovative radio frequency control products and
      accessories.
            HTPHuntair,
      Inc.
            April
      14, 2006
            Design,
      manufacture and sale of custom air handlers and related products for
      commercial and clean room applications.
            HVACCleanpak
      International, LLC
            April
      14, 2006
            Design,
      manufacture and sale of custom air handlers and related products for
      commercial and clean room applications.
            HVACFurman
      Sound, Inc.
            February
      22, 2006
            Design
      and sale of audio and video signal processors and innovative power
      conditioning and surge protection products.
            HTPMammoth
      (Zhejiang) EG Air
              Conditioning Ltd. (1)
            January
      25, 2006
            Design,
      manufacture and sale of commercial HVAC products, including water source
      heat pumps.
            HVACShanghai
      Mammoth Air
              Conditioning
      Co., Ltd. (1)
            January
      25, 2006
            Design,
      manufacture and sale of commercial HVAC products, including water source
      heat pumps.
            HVACGTO,
      Inc.
            December
      9, 2005
            Design,
      manufacture and sale of automatic electric gate openers and access control
      devices to enhance the security and convenience of both residential and
      commercial property fences.
            HTPSunfire
      Corporation
            August
      26, 2005
            Design,
      manufacture and sale of home audio and home cinema amplifiers, receivers
      and subwoofers.
            HTPImerge
      Limited
            August
      8, 2005
            Design
      and sale of hard disk media players and multi-room audio
      servers.
            HTPNiles
      Audio Corporation
            July
      15, 2005
            Design,
      manufacture and sale of whole-house audio/video distribution equipment,
      including speakers, receivers, amplifiers, automation devices, controls
      and accessories.
            HTPInternational
      Marketing Supply, Inc.
            June
      13, 2005
            Sale
      of heating, ventilation and air conditioning equipment to customers in
      Latin America and the Caribbean.
            HVACPanamax,
      Inc.
            April
      26, 2005
            Design
      and sale of innovative power conditioning and surge protection products
      that prevent loss or damage of home and small business equipment due to
      power disturbances.
            HTP





(1)
            On
      January 25, 2006, the Company increased its ownership to
      60%.  On June 15, 2007, the Company increased this ownership
      from 60% to 75%.  Prior to January 25, 2006, the Company did not
      have a controlling interest and accounted for these investments under the
      equity method of accounting.




Critical
Accounting Policies





The
Company’s discussion and analysis of its financial condition and results of
operations are based upon the Company’s Consolidated Financial Statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles.  (See the Notes to the Consolidated Financial Statements
included elsewhere herein.)  Certain of the Company’s accounting
policies require the application of judgment in selecting the appropriate
assumptions for calculating financial estimates.  By their nature,
these judgments are subject to an inherent degree of uncertainty.  The
Company periodically evaluates the judgments and estimates used for its critical
accounting policies to ensure that such judgments and estimates are reasonable
for its interim and year-end reporting requirements.  These judgments
and estimates are based on the Company’s historical experience, current trends
and other information available, as appropriate.  If different
conditions result from those assumptions used in the Company’s judgments, the
results could be materially different from the Company’s
estimates.  The Company’s critical accounting policies
include:





Revenue
Recognition, Accounts Receivable and Related Expenses





The
Company recognizes sales based upon shipment of products to its customers and
has procedures in place at each of its subsidiaries to ensure that an accurate
cut-off is obtained for each reporting period.





Allowances
for cash discounts, volume rebates, and other customer incentive programs, as
well as gross customer returns, among others, are recorded as a reduction of
sales at the time of sale based upon the estimated future
outcome.  Cash discounts, volume rebates and other customer incentive
programs are based upon certain percentages agreed to with the Company’s various
customers, which are typically earned by the customer over an annual
period.  The Company records periodic estimates for these amounts
based upon the historical results to date, estimated future results through the
end of the contract period and the contractual provisions of the customer
agreements.  For calendar year customer agreements, the Company is
able to adjust its periodic estimates to actual amounts as of December 31 each
year based upon the contractual provisions of the customer
agreements.  For those customers who have agreements that are not on a
calendar year cycle, the Company records estimates at December 31 consistent
with the above described methodology.  As a result, at the end of any
given reporting period, the amounts recorded for these allowances are based upon
estimates of the likely outcome of future sales with the applicable customers
and may require adjustment in the future if the actual outcome
differs.  The Company believes that its procedures for estimating such
amounts are reasonable.





Customer
returns are recorded on an actual basis throughout the year and also include an
estimate at the end of each reporting period for future customer returns related
to sales recorded prior to the end of the period.  The Company
generally estimates customer returns based upon the time lag that historically
occurs between the date of the sale and the date of the return while also
factoring in any new business conditions that might impact the historical
analysis such as new product introduction.  The Company believes that
its procedures for estimating such amounts are reasonable.





Provisions
for the estimated costs for future product warranty claims are recorded in cost
of sales at the time a sale is recorded.  The amounts recorded are
generally based upon historically derived percentages while also factoring in
any new business conditions that might impact the historical analysis such as
new product introduction.  The Company also periodically evaluates the
adequacy of its reserves for warranty recorded in its consolidated balance sheet
as a further test to ensure the adequacy of the recorded
provisions.  Warranty claims can extend far into the
future.  As a result, significant judgment is required by the Company
in determining the appropriate amounts to record and such judgments may prove to
be incorrect in the future.  The Company believes that its procedures
for estimating such amounts are reasonable.





Provisions
for the estimated allowance for doubtful accounts are recorded in selling,
general and administrative expense, net at the time a sale is
recorded.  The amounts recorded are generally based upon historically
derived percentages while also factoring in any new business conditions that
might impact the historical analysis such as changes in economic conditions, past due
and nonperforming accounts,bankruptcies or other events affecting particular
customers.  The Company also periodically evaluates the
adequacy of its allowance for doubtful accounts recorded in its consolidated
balance sheet as a further test to ensure the adequacy of the recorded
provisions.  The analysis for allowance for doubtful accounts often
involves subjective analysis of a particular customer’s ability to
pay.  As a result, significant judgment is required by the Company in
determining the appropriate amounts to record and such judgments may prove to be
incorrect in the future.  The Company believes that its procedures for
estimating such amounts are reasonable.





Inventory
Valuation





The
Company values inventories at the lower of the cost or market with approximately
35.5% of the Company’s inventory as of December 31, 2007 valued using the
last-in, first-out (“LIFO”) method and the remainder valued using the first-in,
first-out (“FIFO”) method.  In connection with both LIFO and FIFO
inventories, the Company will record provisions, as appropriate, to write-down
obsolete and excess inventory to estimated net realizable value.  The
process for evaluating obsolete and excess inventory often requires the Company
to make subjective judgments and estimates concerning future sales levels,
quantities and prices at which such inventory will be able to be sold in the
normal course of business.  Accelerating the disposal process or
incorrect estimates of future sales potential may cause the actual results to
differ from the estimates at the time such inventory is disposed or
sold.  The Company believes that its procedures for estimating such
amounts are reasonable.





Income
Taxes





In June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109)”, (“FIN 48”).  FIN 48
clarifies the criteria that an individual tax position must satisfy for some or
all of the benefits of that position to be recognized in a company’s financial
statements.  FIN 48 prescribes a recognition threshold of
“more-likely-than-not” and a measurement attribute for all tax positions taken
or expected to be taken on a tax return in order for those tax positions to be
recognized in the financial statements.  The Company adopted the
provisions of FIN 48 effective January 1, 2007.  As a result of the
adoption of this standard, the Company recorded a charge to retained earnings of
approximately $3.2 million and also increased goodwill related to
pre-acquisition tax uncertainties by approximately $3.8 million.





As of January 1,
2007, after the adoption of FIN 48, the Company has provided a liability of
approximately $38.2 million for unrecognized tax benefits related to various
federal, foreign and state tax income tax matters.  The amount of
unrecognized tax benefits at December 31, 2007 was approximately $36.3 million,
of which approximately $9.1 million would impact the effective tax
rate.  The difference between the total amount of unrecognized tax
benefits and the amount that would impact the effective rate consists of items
that would adjust deferred tax assets and liabilities of approximately $7.6
million, items that, if recognized prior to January 1, 2009, would result in
adjustments to goodwill of approximately $13.2 million and the federal benefit
of state tax items of approximately $6.4 million.





The
Company accounts for income taxes using the liability method in accordance with
SFAS No. 109 “Accounting for Income Taxes” (“SFAS No. 109”), which requires that
the deferred tax consequences of temporary differences between the amounts
recorded in the Company’s Consolidated Financial Statements and the amounts
included in the Company’s federal, state and foreign income tax returns to be
recognized in the balance sheet.  As the Company generally does not
file their income tax returns until well after the closing process for the
December 31 financial statements is complete, the amounts recorded at December
31 reflect estimates of what the final amounts will be when the actual tax
returns are filed for that fiscal year.  In addition, estimates are
often required with respect to, among other things, the appropriate state income
tax rates to use in the various states that the Company and its subsidiaries are
required to file, the potential utilization of operating and capital loss
carry-forwards and valuation allowances required, if any, for tax assets that
may not be realizable in the future.  The Company requires each of its
subsidiaries to submit year-end tax information packages as part of the year-end
financial statement closing process so that the information used to estimate the
deferred tax accounts at December 31 is reasonably consistent with the amounts
expected to be included in the filed tax returns.  SFAS No. 109
requires balance sheet classification of current and long-term deferred income
tax assets and liabilities based upon the classification of the underlying asset
or liability that gives rise to a temporary difference.  As such, the
Company has historically had prepaid income tax assets due principally to the
unfavorable tax consequences of recording expenses for required book reserves
for such things as, among others, bad debts, inventory valuation, insurance,
product liability and warranty that cannot be deducted for income tax purposes
until such expenses are actually paid.  The Company believes that the
amounts recorded as prepaid income tax assets will be recoverable through future
taxable income generated by the Company, although there can be no assurance that
all recognized prepaid income tax assets will be fully recovered.  The
Company believes the procedures and estimates used in its accounting for income
taxes are reasonable and in accordance with established tax law.  The
income tax estimates used have historically not resulted in material adjustments
to income tax expense in subsequent periods when the estimates are adjusted to
the actual filed tax return amounts, although there may be reclassifications
between the current and long-term portion of the deferred tax
accounts.





Goodwill
and Other Long-Lived Assets





The
Company accounts for acquired goodwill and intangible assets in accordance with
SFAS No. 141, “Business Combinations” (“SFAS No. 141”) which involves judgment
with respect to the determination of the purchase price and the valuation of the
acquired assets and liabilities in order to determine the final amount of
goodwill.  The Company believes that the estimates that it has used to
record its acquisitions are reasonable and in accordance with SFAS No.
141.





The
Company accounts for acquired goodwill and goodwill impairment in accordance
with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) (see
Note 1 of the Notes to the Consolidated Financial Statements included elsewhere
herein) which requires considerable judgment in the valuation of acquired
goodwill and the ongoing evaluation of goodwill impairment.  The
Company primarily utilizes a discounted cash flow approach in order to value the
Company’s reporting units required to be tested for impairment by SFAS No. 142,
which requires that the Company forecast future cash flows of the reporting
units and discount the cash flow stream based upon a weighted average cost of
capital that is derived from comparable companies within similar
industries.  The discounted cash flow calculations also include a
terminal value calculation that is based upon an expected long-term growth rate
for the applicable reporting unit.  The Company believes that its
procedures for applying the discounted cash flow methodology, including the
estimates of future cash flows, the weighted average cost of capital and the
long-term growth rate, are reasonable and consistent with market conditions at
the time of the valuation.  The Company has evaluated the carrying
value of reporting unit goodwill and determined that no impairment existed at
either the date of its annual evaluation date of October 1, 2007 or December 31,
2007 in accordance with SFAS No. 142.  Accordingly, no adjustments
were required to be recorded in the Company’s Consolidated Financial
Statements.




Goodwill is
considered to be potentially impaired when the net book value of a reporting
unit exceeds its estimated fair value as determined in accordance with the
Company’s valuation procedures.  The Company believes that its
assumptions used to determine the fair value for the respective reporting units
are reasonable.  If different assumptions were to be used,
particularly with respect to estimating future cash flows, there could be the
potential that an impairment charge could result.  Actual operating
results and the related cash flows of the reporting units could differ from the
estimated operating results and related cash flows.


The
Company performs an annual evaluation, and more frequently if impairment
indicators are identified, for the impairment of long-lived assets, other than
goodwill, based on expectations of non-discounted future cash flows compared to
the carrying value of the subsidiary in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No.
144”).  The Company’s cash flow estimates are based upon historical
cash flows, as well as future projected cash flows received from subsidiary
management in connection with the annual Company wide planning process, and
include a terminal valuation for the applicable subsidiary based upon a multiple
of earnings before interest expense, net, depreciation and amortization expense
and income taxes (“EBITDA”).  The Company estimates the EBITDA
multiple by reviewing comparable company information and other industry
data.  The Company believes that its procedures for estimating gross
futures cash flows, including the terminal valuation, are reasonable and
consistent with current market conditions.  The Company historically
has not had any material impairment adjustments.





Pensions
and Post Retirement Health Benefits





The
Company’s accounting for pensions, including supplemental executive retirement
plans, and post retirement health benefit liabilities requires the estimating of
such items as the long-term average return on plan assets, the discount rate,
the rate of compensation increase and the assumed medical cost inflation
rate.  The Company
utilizes long-term investment-grade bond yields as the basis for selecting a
discount rate by which plan obligations are measured.  An analysis of
projected cash flows for each plan is performed in order to determine
plan-specific duration.  Discount rates are selected based on high
quality corporate bond yields of similar durations.These
estimates require a significant amount of judgment as items such as stock market
fluctuations, changes in interest rates, plan amendments and curtailments can
have a significant impact on the assumptions used and therefore on the ultimate
final actuarial determinations for a particular year.  The Company
believes the procedures and estimates used in its accounting for pensions and
post retirement health benefits are reasonable and consistent with acceptable
actuarial practices in accordance with U.S. generally accepted accounting
principles.





On
December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (“SFAS No.
158”).SFAS No.
158 requires the Company to: (a) recognize the over-funded or under-funded
status of its defined benefit post-retirement plans as an asset or liability in
its statement of financial position; (b) recognize changes in the funded status
in the year in which the changes occur through comprehensive income and (c)
measure plan assets and benefitobligations as of the date of the
employer’s fiscal year-end.  The Companywasrequired to initially recognize the
funded status of its defined benefit plans and to provide the required
disclosures for the fiscal year ended December 31, 2006.  The
requirement to measure benefit obligations as of the date of the employer’s
fiscal year-end statement of financial position is effective for the Company for
the fiscal year ended December 31, 2008.See Notes 1 and 7 of the
Notes to the Consolidated Financial Statements included elsewhere
herein.





Warranty,
Product Recalls and Safety Upgrades





The
Company sells a number of products and offers a number of warranties including
in some instances, extended warranties for which the Company receives
proceeds.  The specific terms and conditions of these warranties vary
depending on the product sold and the country in which the product is
sold.  The Company estimates the costs that may be incurred under its
warranties, with the exception of extended warranties, and records a liability
for such costs at the time of sale.  Deferred revenue from extended
warranties is recorded at the estimated fair value and is amortized over the
life of the warranty and reviewed to ensure that the amount recorded is equal to
or greater than estimated future costs.  Factors that affect the
Company’s warranty liability include the number of units sold, historical and
anticipated rates of warranty claims, cost per claim and new product
introduction.  The Company periodically assesses the adequacy of its
recorded warranty claims and adjusts the amounts as necessary.





Insurance
Liabilities, including Product Liability





The
Company records insurance liabilities and related expenses for health, workers
compensation, product and general liability losses and other insurance reserves
and expenses in accordance with either the contractual terms of its policies or,
if self-insured, the total liabilities that are estimable and probable as of the
reporting date.  Insurance liabilities are recorded as current
liabilities to the extent payments are expected to be made in the succeeding
year by the Company with the remaining requirements classified as long-term
liabilities.  The accounting for self-insured plans requires that
significant judgments and estimates be made both with respect to the future
liabilities to be paid for known claims and incurred but not reported claims as
of the reporting date.  The Company considers historical trends when
determining the appropriate insurance reserves to record in the consolidated
balance sheet.  In certain cases where partial insurance coverage
exists, the Company must estimate the portion of the liability that will be
covered by existing insurance policies to arrive at the net expected liability
to the Company.  The Company believes that its procedures for
estimating such amounts are reasonable.





Contingencies





The
Company is subject to contingencies, including legal proceedings and claims
arising out of its business that cover a wide range of matters, including, among
others, environmental matters, contract and employment claims, worker
compensations claims, product liability, warranty and modification, adjustment
or replacement of component parts of units sold, which may include product
recalls.  Product liability, environmental and other legal proceedings
also include matters with respect to businesses previously owned.





The
Company provides accruals for direct costs associated with the estimated
resolution of contingencies at the earliest date at which it is deemed probable
that a liability has been incurred and the amount of such liability can be
reasonably estimated.  Costs accrued have been estimated based upon an
analysis of potential results, assuming a combination of litigation and
settlement strategies and outcomes.





While
it is impossible to ascertain the ultimate legal and financial liability with
respect to contingent liabilities, including lawsuits, the Company believes that
the aggregate amount of such liabilities, if any, in excess of amounts provided
or covered by insurance, will not have a material adverse effect on the
consolidated financial position or results of operations of the
Company.  It is possible, however, that future results of operations
for any particular future period could be materially affected by changes in our
assumptions or strategies related to these contingencies or changes out of the
Company’s control.




Overview




Our principal
sources of liquidity are our cash flow from subsidiaries, our ability to borrow
under the terms of Nortek’s revolving credit facility and our unrestricted cash
and cash equivalents.
 
 Our ability to pay
interest on or to refinance indebtedness depends on our future performance,
working capital levels and capital structure, which are subject to general
economic, financial, competitive, legislative, regulatory and other factors
which may be beyond our control.  Critical factors in the level of our
sales, profitability and cash flows are the levels of residential remodeling and
replacement activity and new residential and non-residential construction
activity.  The level of new residential and non-residential
construction activity and, to a lesser extent, the level of residential
remodeling and replacement activity are affected by seasonality and cyclical
factors such as interest rates, inflation, consumer spending habits, employment
levels and other macroeconomic factors, over which we have no
control.  Any decline in economic activity as a result of these or
other factors typically results in a decline in new construction and, to a
lesser extent, residential remodeling and replacement purchases, which would
result in a decrease in our sales, profitability and cash
flows.  Reduced levels of home sales and housing starts and other
softening in the housing markets in 2007 negatively affected our results of
operations in 2007 and our cash flow and these factors are expected to continue
to negatively affect our results of operations and its cash flow in
2008.
 
 In addition,
uncertainties due to the significant instability in the mortgage markets and the
resultant impact on the overall credit market could continue to adversely impact
our business.  The tightening of credit standards is expected to
result in a decline in consumer spending for home remodeling and replacement
projects which could adversely impact our operating results and the cash flow
from subsidiaries.  Additionally, increases in the cost of home
mortgages and the difficulty in obtaining financing for new homes could continue
to materially impact the sales of our products in the residential construction
market.
 
 There can be no
assurance that we will generate sufficient cash flow from the operation of our
subsidiaries or that future financings will be available on acceptable terms or
in amounts sufficient to enable us to service or refinance indebtedness, or to
make necessary capital expenditures.  See “Liquidity and Capital Resources”
included elsewhere herein.


We are
a leading diversified manufacturer of innovative, branded residential and
commercial products, operating within three reporting segments: the Residential
Ventilation Products, or RVP, segment, the Home Technology Products, or HTP,
segment, and the Air Conditioning and Heating Products, or HVAC,
segment.  Through these segments, we manufacture and sell, primarily
in the United States, Canada and Europe, a wide variety of products for the
professional remodeling and replacement markets, the residential and commercial
construction markets, the manufactured housing market and the do-it-yourself, or
DIY, market.  We manufacture a broad array of residential and
commercial products for a wide range of end markets and many of our products
have leading market positions.  We are one of the world's largest
suppliers of residential range hoods and exhaust fans, and are the largest
supplier of these products in North America.  We are also one of the
leading suppliers in Europe of luxury “Eurostyle” range hoods and one of the
largest suppliers in North America of residential indoor air quality
products.  Within the residential market, we are one of the largest
suppliers of HVAC products for manufactured homes in the United States and
Canada and are among the largest suppliers of custom designed commercial HVAC
products in the United States.





In
2007, approximately 54% of consolidated net sales were made through
distributors, wholesalers and similar channels, approximately 18% were to
commercial HVAC markets, approximately 14% were through retail distributors (of
which 9% of consolidated net sales were sold through the four largest home
center retailers), approximately 9% were private label sales and approximately
5% were to manufactured housing original equipment manufacturers and aftermarket
dealers.





Principal
RVP products include kitchen range hoods, exhaust fans (such as bath fans and
fan, heater and light combination units) and indoor air quality products where
we have large market shares in North America.  Principal HTP products
include audio/video distribution and control equipment, speakers and subwoofers
and security and access control products.  The markets for HTP
products are highly fragmented and, in part as a result of such fragmentation,
we do not have a large share of these markets.  Principal HVAC
products include split system air conditioners and heat pumps, furnaces, air
handlers and large custom roof top cooling and heating products.





For the
year ended December 31, 2007, the RVP segment accounted for approximately 35.0%
of consolidated net sales and 48.9% of operating earnings before unallocated
expense, the HTP segment accounted for approximately 24.1% of consolidated net
sales and 36.3% of operating earnings before unallocated expense and the HVAC
segment accounted for approximately 40.9% of consolidated net sales and 14.8% of
operating earnings before unallocated expense.





From 2003 through 2007, our net sales
grew at a Compound Annual Growth Rate (“CAGR”) of approximately 12.0%, and our
operating earnings grew at a CAGR of approximately 24.3%.  Our net
sales increased by approximately 6.8% and our operating earnings decreased by
approximately 29.9% for 2007 ascompared to 2006.  For 2007, operating
earnings includea gain of
approximately $6.7 million related to the Company’s revised estimate of reserves
provided in 2006 for certain suppliers in Italy and Poland, offset byapproximately $18.2million of net other expense items
included in cost of products sold and selling, general and administrative
expense, net(see Note 12
of the Notes to the Consolidated Financial Statements included elsewhere
herein).  For
2006, operating earnings include an approximate $35.9 million gain from
curtailment of post-retirement medicaland life insurancebenefits, partially offset by
approximately $20.2million of net other expense items
included in cost of products sold and selling, general and administrative
expense, net(see Note 12
of the Notes to the Consolidated Financial Statements included elsewhere
herein).  Our
EBITDA marginswere
approximately 10.6%, 14.7% and 14.4% for the years ended December 31, 2007, 2006
and 2005, respectively,while capital expenditures have averaged
approximately 2% of net
salesduring this
period.  The
resultingnetcash flow has given us the ability to
reinvest in our business, through both acquisitions and new product
development.
 
 We achievedsalesgrowth inthe past several yearsthrough a focus on our operating
strategy and through acquisitions.Our operations are managed by an
experienced management team at both the corporate and divisional
levels.  Our management team hasgrownour business organically,whilereducing overhead, rationalizing costs
and integrating acquisitions through market cycles and under ahighlyleveraged capital
structure.  Also, we have identified, acquired and integrated25companies sinceDecember 31,2004, across all of our business
segments.In addition to integrating theseacquisitions, we have reducedcertaincosts, in many cases byrelocatingproduction or sourcing of materialsand component partsto manufacturing
operationsin lower cost
countries includingChinaandPoland.





In particular, we have created a Home
Technology Products segment which has generatednet salesand operating earnings CAGR’s of
approximately40.1% and28.7%, respectively, from 2004through 2007.  Growth in this segment has
been driven by both organic growth and acquisitions of companies with similar or
complementary products and distribution channels which allows us to leverage our
dealer and distributor relationships to generate additional organic
growth.  We continually evaluate a wide variety of acquisition
opportunities, which can provide scale, enhance product offerings,expand our geographic presence, obtain
cost savings and generate other synergies.





We have a history of developing and
branding new products and marketing them to customers. Across our segments we
have employed a strategy of using well-recognized brand names (most of which are
owned, such as Broan® and NuTone®, and several of which arelicensed, such as Frigidaire®,
Westinghouse® and Maytag®) and have introduced new products and made selected
acquisitions to improve growth and profitability.  Approximately 26%
of net sales in 2007 for the RVP segment were derived from products that were
introduced or enhanced in the last three years.  We have been able to
recognize market needs and create products that address these
opportunities.





Our
products are marketed through our portfolio of brand names that facilitate the
introduction of new products and extend existing product
lines.  Additionally, we continue to capitalize on our dealers’ and
distributors’ desire to carry many of our leading branded products, and are able
to drive additional product lines through our distribution channels and sell a
wider portfolio of products to our customers.





Our
manufacturing strategy focuses on providing quality products at low
costs.  We source an increasing amount of our raw materials and
components from lower cost regions.  The Company is in the process of
moving production of certain of its product lines from its facilities in the
U.S., Canada and Italy to facilities in regions with lower labor
costs.  The Company has moved and is continuing to move the production
of certain bath fan and other products to its facility in China, which it
acquired in late 2005.  In addition, the Company is in the process of
moving certain range hood and motor production from its facilities in Italy to
its facilities in Poland and in 2007 built a new facility for the production of
range hoods in Mexico, which commenced operations in the first quarter of
2008.  The Company is also in the process of consolidating its
production of medicine cabinets from its facilities in Los Angeles, California
and Union, Illinois to its facility in Cleburne, Texas (previously used to
manufacture range hoods).  As a result of these production moves, the
Company has closed its operations in Los Angeles, CA and Cincinnati, Ohio, as
well as certain operations in Italy.  In order to reduce overhead and
labor costs in the commercial portion of the HVAC segment, the Company ceased
manufacturing operations at its 200,000 sq. foot facility in Chaska, MN in 2007
and absorbed the production into other existing facilities, primarily its
Springfield, MO facility, which it moved into in 2006.





Additionally,
we continue to implement Demand Flow Technology practices at a number of our
manufacturing facilities.  This program allows us to manufacture
products according to actual demand, rather than manufacturing to forecast,
providing us with improved product quality, increased manufacturing efficiency
and flexibility, improved response time to our customers and lower working
capital needs.





Sales
of our products are affected by the level of residential improvement and repair
activity, the level of new residential construction and to a lesser extent the
level of private non-residential construction spending and manufactured housing
shipments.  A little more than half of the products we sell are
believed to be used in the remodeling and replacement markets and the balance
serves the new construction market.  The operating results of the
Company were impacted in 2007 by a decline in sales volume in residential
ventilation and residential air conditioning products as the housing market
continued to weaken.  Higher material costs, which were partially
offset by continued strategic sourcing initiatives as well as sales price
increases, also adversely impacted results for the year ended December 31,
2007.  The Company expects these trends to continue in
2008.  Additionally, we believe that declines in existing home sales
will have a negative impact on remodeling spending in 2008, which will have an
adverse effect on the Company’s operating results. The level of business
activity in the manufactured housing industry has been weak in recent years and
in 2007 became weaker and is expected to continue into 2008.  Although
the level of business activity in the private non-residential construction
industry has improved over the past several years, our HVAC business has grown
mostly through acquisitions.  As we entered 2008, our backlog of
commercial HVAC product was approximately $172.7 million as compared to
approximately $193.9 million at December 31, 2006 and approximately $87.8
million at December 31, 2005.





Key
industry activity affecting our businesses in the United States for the past
three years was as follows:





%
      Increase (Decrease)Sourceof data
            
            
            2007
            
            
            2006
            
            
            2005Private
      residential construction spending
            
            
            1
            
            
            
            (18
            )%
            
            
            ---
            %
            
            
            14
            %Total
      housing starts
            
            
            1
            
            
            
            (25
            )%
            
            
            (13
            )%
            
            
            6
            %New
      home sales
            
            
            1
            
            
            
            (26
            )%
            
            
            (18
            )%
            
            
            7
            %Existing
      home sales
            
            
            3
            
            
            
            (13
            )%
            
            
            (8
            )%
            
            
            4
            %Residential
      improvement spending
            
            
            1
            
            
            
            ---
            %
            
            
            7
            %
            
            
            9
            %Central
      air conditioning and heat pump shipments
            
            
            2
            
            
            
            (9
            )%
            
            
            (18
            )%
            
            
            16
            %Private
      non-residential construction spending
            
            
            1
            
            
            
            18
            %
            
            
            15
            %
            
            
            8
            %Manufactured
      housing shipments
            
            
            1
            
            
            
            (18
            )%
            
            
            (20
            )%
            
            
            12
            %





Source
of data:


(1) U.S.
Census Bureau


(2) Air
Conditioning and Refrigeration Institute
 (3) National Associationof Realtors





Our
manufactured housing business for the year ended December 31, 2007 was
approximately 4.7% of consolidated net sales versus approximately 13% in the
year 2000.  Our HVAC business serving the commercial construction
market was approximately 19% and 18% of consolidated net sales for the years
ended December 31, 2007 and 2006, respectively, versus approximately 14% of
consolidated net sales in 2005.  The increase in the commercial HVAC
business in 2007 is primarily as a result of acquisitions in 2006.





Although
a significant majority of our manufacturing activity and customers are located
in the United States, we do have manufacturing activity and sell products to
customers in Canada, Latin America, Europe and China.  Our foreign net
sales, which are attributed based on the location of the Company's subsidiary
responsible for the sale, were approximately 21.5%, 19.5% and 18.5% of
consolidated net sales for the years ended December 31, 2007, 2006 and 2005,
respectively, and principally relate to our Canadian and European
operations.  Our Chinese operations primarily manufacture products for
sale by our other subsidiaries.  Our Canadian operations include RVP
and HVAC facilities and our European operations include RVP facilities in Italy
and Poland and HVAC and HTP facilities in the United Kingdom.  A
significant majority of our current Chinese operations relate to our HTP segment
although we also have both RVP and HVAC facilities in China and, as discussed
below, we are continuing to make additional investments to expand these
operations.  Both our foreign operations and our U.S. operations sell
to customers located in all parts of the world, particularly Canada, Europe and
the Far East.  Foreign operations generate proportionately lower
operating earnings from their sales volume due primarily to the mix of products
sold by the foreign operations and, in part, the impact of foreign currency
exchange.  We expect the overall percentage of our net sales and
operating earnings from foreign operations to remain relatively consistent for
the foreseeable future, although our foreign operations are subject to the risks
of currency fluctuations, which could negatively impact such net sales and
operating earnings.





In
2008, we expect to continue our brand strategy for residential site-built HVAC
products with a view to gaining market share.  In HTP in 2008, we will
continue the integration of our recent acquisitions in this segment, which we
expect will contribute to the profitability of this segment.  In 2008
we plan to achieve further cost reductions in raw material and purchased
components in all our businesses through our strategic sourcing initiatives and
engineering cost reductions. During 2005 through 2007 we experienced significant
increases in the prices we pay for steel, copper, aluminum and fabricated
parts.  We also buy some component parts from suppliers that use
steel, copper and aluminum in their manufacturing process.  Our
operating margins continue to be challenged by higher commodity costs which have
only been partially offset by our strategic cost reduction
initiatives.  While we have had some success in raising prices to our
customers for some products as a result of higher material costs, there is no
assurance that we will be able to offset all material cost increases in
2008.  We also rely on our strategic sourcing initiatives to mitigate
the effect of higher material costs.  Material cost as a percentage of
net sales has been fairly stable reflecting higher material costs, partially
offset by sales price increases and benefits realized from our strategic
sourcing initiatives, and were approximately 45% in both 2005 and 2006 and 47%
in 2007.





During
the past three years, the following have been our major purchases (on a
consolidated basis), expressed as a percentage of consolidated net sales, of raw
materials and purchased components:





For the year ended December
    31,2007
            
            
            2006
            
            
            2005Steel
            
            
            6
            %
            
            
            6
            %
            
            
            6
            %Motors
            
            
            5
            %
            
            
            5
            %
            
            
            6
            %Compressors
            
            
            3
            %
            
            
            3
            %
            
            
            3
            %Copper
            
            
            2
            %
            
            
            2
            %
            
            
            2
            %Electrical
            
            
            2
            %
            
            
            2
            %
            
            
            2
            %Plastics
            
            
            1
            %
            
            
            1
            %
            
            
            2
            %Aluminum
            
            
            1
            %
            
            
            1
            %
            
            
            1
            %Packaging
            
            
            1
            %
            
            
            1
            %
            
            
            1
            %Fans
      & Blowers
            
            
            1
            %
            
            
            1
            %
            
            
            1
            %





The
results of operations for the year 2007 as compared to the year 2006 and the
year 2006 as compared to the year 2005 include a significant number of factors
that affected our operations including, among others, the
following:





·
            the
      effect of a troubled housing market together with a difficult mortgage
      industry that resulted in the significant industry wide decline in new
      housing activity and consumer spending on home remodeling and
      repair,


·
            the
      effect of acquisitions in all three reporting
  segments,


·
            the
      effect of higher material costs


·
            the
      effect of the closures of certain facilities in the RVP and HVAC
      segments,


·
            the
      effect of product safety upgrades in the RVP and HTP
    segments,


·
            the
      effect of changes in foreign currency exchange
  rates,


·
            the
      effect of the curtailment gain related to the NuTone, Inc. post-retirement
      medical and life
      insurance benefits in 2006,
and


·
            gains
      and losses as a result that
      certain suppliers to our kitchen range hood subsidiaries based in Italy
      and Poland were unable to repay advances and amounts due under other
      arrangements,





In
2007, we spent approximately $36.4 million on capital
expenditures.  In 2008, we expect to spend between approximately $30
million and $35 million on capital expenditures.  A portion of these
capital expenditures together with cash investments in foreign subsidiaries in
2007 and 2008 will allow our businesses to expand their manufacturing capacity,
manufacture products at lower costs and broaden our markets
served.  In 2008, the Company signed an agreement with a Mexican
entity located in Tecate, Mexico, establishing manufacturing services to certain
of the Company’s subsidiaries in the RVP segment.  This agreement adds
an additional approximate 204,000 square feet of manufacturing capabilities to
the Company’s RVP segment.  Among other expenditures, our RVP Segment
acquired an approximate 198,000 square foot manufacturing facility in Chenjian,
Huizhou, The Peoples Republic of China (“PRC”) in late 2005 and began the
construction of a 150,000 square foot manufacturing facility in Gliwice, Poland
which was completed in mid 2006.  In 2007, the Company acquired an
additional 12,000 square foot manufacturing facility, adjacent to its Polish
plant, in connection with the acquisition of Stilpol.  The Company
also expanded manufacturing capability in Italy in 2007 with its acquisition of
Metaltecnica.  From 2005 to 2007, the Company’s HTP Segment expanded
its Shenzhen PRC manufacturing facilities from 72,000 square feet to 251,000
square feet of leased space to support future growth.  In 2007 and
2006, the Company’s HVAC business (for commercial products) made further
investments in its Anji, PRC operations and relocated its operations into a
202,000 square foot manufacturing facility in 2006.





Our
outlook for 2008 is for the challenging market conditions to
continue.  Additionally, the instability in the mortgage market is
expected to impact consumer confidence and their spending on home remodeling and
repair expenditures.  We are looking at our business with the
long-term view and a continued focus on our low-cost country sourcing strategy
and cost reduction initiatives.  Balance sheet management is an
extremely important priority for all our businesses so we can maximize our cash
flow from operating activities.  During this challenging environment,
we will only fund necessary capital investments that will improve our business
operations.




Results
of Operations





The
following table presents the financial information for the Company’s reporting
segments for the years ended December 31, 2007, 2006 and 2005:




Net ChangeFor the Years Ended December
      31,
              
              
              2007 to
2006
              
              
              2006 to
20052007
              
              
              2006
              
              
              2005
              
              
              $
              
              
              
              %
              
              
              $
              
              
              
              %Net sales:
              
              (Dollar amounts in
      millions)Residential ventilation
      products
              
              $
              828.8
              
              
              $
              821.0
              
              
              $
              794.7
              
              
              $
              7.8
              
              
              
              1.0
              %
              
              $
              26.3
              
              
              
              3.3
              %Home technology
      products
              
              
              570.2
              
              
              
              484.5
              
              
              
              354.8
              
              
              
              85.7
              
              
              
              17.7
              
              
              
              129.7
              
              
              
              36.6Air conditioning and heating
      products
              
              
              969.2
              
              
              
              912.9
              
              
              
              809.7
              
              
              
              56.3
              
              
              
              6.2
              
              
              
              103.2
              
              
              
              12.7Consolidated
      net sales
              
              $
              2,368.2
              
              
              $
              2,218.4
              
              
              $
              1,959.2
              
              
              $
              149.8
              
              
              
              6.8
              %
              
              $
              259.2
              
              
              
              13.2
              %Operating earnings
      (loss):Residential ventilation products
      (1)
              
              $
              102.9
              
              
              $
              139.5
              
              
              $
              123.9
              
              
              $
              (36.6
              )
              
              
              (26.2
              )%
              
              $
              15.6
              
              
              
              12.6
              %Home technology products
      (2)
              
              
              76.3
              
              
              
              83.9
              
              
              
              71.0
              
              
              
              (7.6
              )
              
              
              (9.1
              )
              
              
              12.9
              
              
              
              18.2Air conditioning and heating
      products (3)
              
              
              31.1
              
              
              
              64.9
              
              
              
              66.3
              
              
              
              (33.8
              )
              
              
              (52.1
              )
              
              
              (1.4
              )
              
              
              (2.1
              )Subtotal
              
              
              210.3
              
              
              
              288.3
              
              
              
              261.2
              
              
              
              (78.0
              )
              
              
              (27.1
              )
              
              
              27.1
              
              
              
              10.4Unallocated:Stock-based compensation
      charges
              
              
              (0.3
              )
              
              
              (0.3
              )
              
              
              (0.3
              )
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---Foreign exchange gains (losses)
      ontransactions,
      including intercompany debt
              
              
              0.4
              
              
              
              1.2
              
              
              
              (0.9
              )
              
              
              (0.8
              )
              
              
              (66.7
              )
              
              
              2.1
              
              
              
              *Expenses of a terminated
      IPO
              
              
              ---
              
              
              
              (2.5
              )
              
              
              ---
              
              
              
              2.5
              
              
              
              100.0
              
              
              
              (2.5
              )
              
              
              *Compensation reserve
      adjustment
              
              
              ---
              
              
              
              3.5
              
              
              
              ---
              
              
              
              (3.5
              )
              
              
              (100.0
              )
              
              
              3.5
              
              
              
              *Gain on legal
      settlement
              
              
              ---
              
              
              
              ---
              
              
              
              1.4
              
              
              
              ---
              
              
              
              ---
              
              
              
              (1.4
              )
              
              
              (100.0
              )Unallocated,
      net
              
              
              (25.1
              )
              
              
              (25.7
              )
              
              
              (24.5
              )
              
              
              0.6
              
              
              
              2.3
              
              
              
              (1.2
              )
              
              
              (4.9
              )Consolidated operating
      earnings
              
              $
              185.3
              
              
              $
              264.5
              
              
              $
              236.9
              
              
              $
              (79.2
              )
              
              
              (29.9
              )%
              
              $
              27.6
              
              
              
              11.7
              %Depreciation and amortization
      expense:Residential ventilation products
      (4)
              
              $
              20.6
              
              
              $
              19.3
              
              
              $
              19.5
              
              
              $
              1.3
              
              
              
              6.7
              %
              
              $
              (0.2
              )
              
              
              (1.0
              )%Home technology products
      (5)
              
              
              19.1
              
              
              
              15.8
              
              
              
              9.9
              
              
              
              3.3
              
              
              
              20.9
              
              
              
              5.9
              
              
              
              59.6Air conditioning and heating
      products (6)
              
              
              24.2
              
              
              
              24.9
              
              
              
              15.3
              
              
              
              (0.7
              )
              
              
              (2.8
              )
              
              
              9.6
              
              
              
              62.7Unallocated
              
              
              1.2
              
              
              
              1.2
              
              
              
              1.2
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              ---$
              65.1
              
              
              $
              61.2
              
              
              $
              45.9
              
              
              $
              3.9
              
              
              
              6.4
              %
              
              $
              15.3
              
              
              
              33.3
              %Operating earnings
      margin:Residential ventilation products
      (1)
              
              
              12.4
              %
              
              
              17.0
              %
              
              
              15.6
              %Home technology products
      (2)
              
              
              13.4
              
              
              
              17.3
              
              
              
              20.0Air conditioning and heating
      products (3)
              
              
              3.2
              
              
              
              7.1
              
              
              
              8.2Consolidated
              
              
              7.8
              %
              
              
              11.9
              %
              
              
              12.1
              %Depreciation and amortization
      expenseas a % of net
      sales:Residential ventilation products
      (4)
              
              
              2.5
              %
              
              
              2.4
              %
              
              
              2.5
              %Home technology products
      (5)
              
              
              3.3
              
              
              
              3.3
              
              
              
              2.8Air conditioning and heating
      products (6)
              
              
              2.5
              
              
              
              2.7
              
              
              
              1.9Consolidated
              
              
              2.7
              %
              
              
              2.8
              %
              
              
              2.3
              %







*
            not
      meaningful








(1)
            The operating
      results of the RVP segment for the year ended December 31, 2007 include a
      favorable adjustment to selling, general and administrative expense, net
      based upon the Company’s revised estimate of reserves provided in 2006 for
      certain suppliers in Italy and Poland of
      approximately $6.7 million, a decrease in product liability expense of
      approximately $1.8 million as compared to the year ended December 31,
      2006, a charge to warranty expense of approximately $0.5 million related
      to a product safety upgrade, an approximate $1.8 million charge related to
      the closure of the Company’s NuTone, Inc. Cincinnati, Ohio facility, an
      approximate $1.1 million charge related to the closure of the Company’s
      Jensen, Inc. Vernon, California facility, legal and other professional
      fees and expenses incurred in connection with matters related to certain
      subsidiaries based in Italy and Poland of approximately $2.1 million, an
      approximate $1.9 million loss related to the settlement of litigation, a
      charge of approximately $0.4 million related to a reserve for amounts due
      from a customer and net foreign exchange losses of approximately $1.0
      million related to transactions, including intercompany debt not
      indefinitely invested in the Company’s
  subsidiaries.





The operating
results of the RVP segment for the year ended December 31, 2006 include an
approximate $35.9 million curtailment gain related to post-retirement medical
and life insurance benefits, reserves of approximately $16.0 million related to
estimated losses as a result of the unlikelihood that certain suppliers to our
kitchen range hood subsidiaries based in Italy and Poland will be able to repay
advances and amounts due under other arrangements, an approximate $3.5 million
charge related to the closure of the Company’s NuTone, Inc. Cincinnati, Ohio
facility and an increase
in warranty expense in the first quarter of 2006 of approximately $1.5 million
related to a product safety upgrade.





The
operating results of the RVP segment for the year ended December 31, 2005
include a non-cash foreign exchange loss of approximately $1.2 million related
to intercompany debt not indefinitely invested in the Company’s
subsidiaries.





(2)
            The
      operating results of the HTP segment for the year ended December 31, 2007
      include a charge of approximately $0.5 million related to a reserve for
      amounts due from a customer, a reduction in warranty expense of
      approximately $0.7 million related to a product safety upgrade and
      approximately $2.0 million of fees and expenses incurred in connection
      with a dispute with a supplier.





The
operating results of the HTP segment for the year ended December 31, 2006
include an increase in warranty expense of approximately $2.3 million related to
a product safety upgrade.





The
operating results of the HTP segment for the year ended December 31, 2005
include a gain of approximately $1.6 million related to the sale of a corporate
office building of one of the Company’s subsidiaries.





(3)
            The
      operating results of the HVAC segment for the year ended December 31, 2007
      include a charge of approximately $3.7 million related to the planned
      closure of the Company’s Mammoth, Inc. Chaska, Minnesota manufacturing
      facility, a charge of approximately $1.8 million related to reserves for
      amounts due from customers and net foreign exchange losses of
      approximately $2.5 million related to transactions, including intercompany
      debt not indefinitely invested in the Company’s
    subsidiaries.





The
operating results of the HVAC segment for the year ended December 31, 2006
include an approximate $1.6 million gain related to the favorable settlement of
litigation, a charge of approximately $1.2 million, net of minority interest of
approximately $0.8 million, related to a reserve for amounts due from a customer
in China related to a Chinese construction project and net foreign exchange
gains of approximately $0.4 million related to transactions, including
intercompany debt not indefinitely invested in the Company’s
subsidiaries.





(4)
            Includes
      amortization of approximately $0.3 million and $0.4 million for the years
      ended December 31, 2006 and 2005, respectively, of excess purchase price
      allocated to inventory recorded as a non-cash charge to cost of products
      sold.





(5)
            Includes
      amortization of approximately $0.2 million and $0.5 million for the years
      ended December 31, 2006 and 2005, respectively, of excess purchase price
      allocated to inventory recorded as a non-cash charge to cost of products
      sold.





(6)
            Includes
      amortization of approximately $2.8 million for the year ended December 31,
      2006 of excess purchase price allocated to inventory recorded as a
      non-cash charge to cost of products
sold.








The
following table presents financial information for the years ended December 31,
2007, 2006 and 2005:







Percentage
      ChangeFor the Years Ended December
      31,
              
              
              2007 to
              
              2006 to2007
              
              
              2006
              
              
              2005
              
              
              2006
              
              2005(Dollar amounts in
      millions)Net Sales
              
              $
              2,368.2
              
              
              $
              2,218.4
              
              
              $
              1,959.2
              
              
              
              6.8
              %
              
              
              13.2
              %Cost of products sold
      (1)
              
              
              1,679.9
              
              
              
              1,547.3
              
              
              
              1,361.4
              
              
              
              (8.6
              )
              
              
              (13.7
              )Selling, general and
      administrative expense, net (1)
              
              
              475.5
              
              
              
              381.7
              
              
              
              342.6
              
              
              
              (24.6
              )
              
              
              (11.4
              )Amortization of intangible
      assets
              
              
              27.5
              
              
              
              24.9
              
              
              
              18.3
              
              
              
              (10.4
              )
              
              
              (36.1
              )Operating
      earnings
              
              
              185.3
              
              
              
              264.5
              
              
              
              236.9
              
              
              
              (29.9
              )
              
              
              11.7Interest
      expense
              
              
              (183.7
              )
              
              
              (162.9
              )
              
              
              (138.6
              )
              
              
              (12.8
              )
              
              
              (17.5
              )Investment
      income
              
              
              2.0
              
              
              
              2.2
              
              
              
              1.8
              
              
              
              (9.1
              )
              
              
              22.2Earnings before provision for
      income taxes
              
              
              3.6
              
              
              
              103.8
              
              
              
              100.1
              
              
              
              (96.5
              )
              
              
              3.7Provision for income
      taxes
              
              
              10.6
              
              
              
              46.1
              
              
              
              43.2
              
              
              
              77.0
              
              
              
              (6.7
              )Net (loss)
      earnings
              
              $
              (7.0
              )
              
              $
              57.7
              
              
              $
              56.9
              
              
              
              (112.1
              )%
              
              
              1.4
              %
  Percentage of Net
      Sales
                
                
                Change in
      PercentageFor the Years Ended December
      31,
                
                
                2007 to
                
                
                2006 to2007
                
                
                2006
                
                
                2005
                
                
                2006
                
                
                2005Net Sales
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                ---
                %
                
                
                ---
                %Cost of products sold
      (1)
                
                
                70.9
                
                
                
                69.8
                
                
                
                69.5
                
                
                
                (1.1
                )
                
                
                (0.3
                )Selling, general and
      administrative expense, net (1)
                
                
                20.1
                
                
                
                17.2
                
                
                
                17.5
                
                
                
                (2.9
                )
                
                
                0.3Amortization of intangible
      assets
                
                
                1.2
                
                
                
                1.1
                
                
                
                0.9
                
                
                
                0.1
                
                
                
                (0.2
                )Operating
      earnings
                
                
                7.8
                
                
                
                11.9
                
                
                
                12.1
                
                
                
                (3.9
                )
                
                
                (0.2
                )Interest
      expense
                
                
                (7.8
                )
                
                
                (7.3
                )
                
                
                (7.1
                )
                
                
                (0.5
                )
                
                
                (0.2
                )Investment
      income
                
                
                0.1
                
                
                
                0.1
                
                
                
                0.1
                
                
                
                ---
                
                
                
                ---Earnings before provision for
      income taxes
                
                
                0.1
                
                
                
                4.7
                
                
                
                5.1
                
                
                
                (4.4
                )
                
                
                (0.4
                )Provision for income
      taxes
                
                
                0.4
                
                
                
                2.1
                
                
                
                2.2
                
                
                
                1.7
                
                
                
                0.1Net (loss)
      earnings
                
                
                (0.3
                )%
                
                
                2.6
                %
                
                
                2.9
                %
                
                
                (2.7
                )%
                
                
                (0.3
                )%


(1)
            See
      Note 12 of the Notes to the Consolidated Financial Statements included
      elsewhere herein.




Year
ended December 31, 2007 as compared to the year ended December 31,
2006





The
Company’s reporting segments have a significant number of different products
across a wide range of price points and numerous distribution channels that do
not always allow meaningful quantitative analysis to be performed with respect
to the effect on net sales of changes in units sold or the price per unit
sold.  However, whenever the underlying causes of material increases
or decreases in consolidated net sales can be adequately analyzed and
quantified, the Company attempts to make appropriate disclosure of such reasons,
including changes in price, volume and the mix of products sold.





Excluding
the effect of acquisitions and foreign exchange, the operating results of the
Company were adversely impacted in 2007 by a decline in sales volume in
residential ventilation and residential air conditioning products as the housing
market continues to weaken.  Higher material costs, which were
partially offset by continued strategic sourcing initiatives as well as sales
price increases, also adversely impacted the year ended December 31,
2007.  The Company expects these trends to continue in
2008.  Additionally, the Company believes that declines in existing
home sales and the instability in the mortgage market will have a negative
impact on consumer confidence and spending on home remodeling and repair
expenditures in 2008, which will have an adverse effect on the Company’s
operating results.





Net
Sales.Consolidated net sales increased approximately $149.8
million or 6.8% for the year ended December 31, 2007 as compared to the year
ended December 31, 2006 as discussed further in the following
paragraphs.  Acquisitions and the effect of changes in foreign
currency exchange rates contributed approximately $145.4 million and $32.2
million, respectively, to net sales for the year ended December 31,
2007.





In the
RVP segment, net sales increased approximately $7.8 million or 1.0% for the year
ended December 31, 2007 as compared to the year ended December 31,
2006.  Net sales in the RVP segment for the year ended December 31,
2007 reflects an increase of approximately $20.2 million attributable to the
effect of changes in foreign currency exchange rates and includes approximately
$26.6 million attributable to acquisitions.





Excluding
the effect of acquisitions and foreign exchange, net sales in the RVP segment
decreased approximately $39.0 million for the year ended December 31, 2007 as
compared to the year ended December 31, 2006.  The decrease in net
sales in the RVP segment for the year ended December 31, 2007 as compared to
2006 reflects lower sales volume of bathroom exhaust fans and kitchen range
hoods, primarily in the RVP segment’s domestic subsidiaries, partially offset by
higher average unit sales prices of kitchen range hoods and bathroom exhaust
fans.  Higher average unit sales prices of kitchen range hoods and
bathroom exhaust fans reflect, in part, the impact of the sale of new products
with higher price points and an increase in the relative percentage of products
sold with higher sales price points as compared to 2006.  Kitchen
range hoods and bathroom exhaust fans are the largest product category sold in
the RVP segment, accounting for approximately 80.4% of the total RVP segment’s
gross sales for the year ended December 31, 2007.  Excluding the
effect of acquisitions and foreign currency exchange rates, sales of range hoods
and bathroom exhaust fans decreased approximately 4.8% in the year ended
December 31, 2007 for the RVP segment’s domestic subsidiaries and increased
approximately 0.1% in the year ended December 31, 2007 for the RVP segment’s
foreign subsidiaries.





In the
HTP segment, net sales increased approximately $85.7 million or 17.7% for the
year ended December 31, 2007 as compared to the year ended December 31,
2006.  Net sales in the HTP segment for the year ended December 31,
2007 includes approximately $84.7 million attributable to acquisitions and
reflects an increase of approximately $0.4 million attributable to the effect of
changes in foreign currency exchange rates.  The remaining increase in
net sales for the year ended December 31, 2007 in the HTP segment is due to
increased sales of audio and video distribution equipment and speakers,
partially offset by a decline in sales of certain security and access control
products.





In the
HVAC segment, net sales increased approximately $56.3 million or 6.2% for the
year ended December 31, 2007 as compared to the year ended December 31,
2006.  Net sales in the HVAC segment for the year ended December 31,
2007 includes approximately $34.1 million attributable to acquisitions and
reflects an increase of approximately $11.6 million attributable to the effect
of changes in foreign currency exchange rates.  The remaining increase
in net sales in the HVAC segment for the year ended December 31, 2007 as
compared to the same period of 2006 includes higher sales volume of HVAC
products sold to commercial customers of approximately 3.5%, partially offset by
lower sales volume for products sold to both residential site-built and
manufactured housing customers of approximately 0.6%.  Overall, sales
of products sold to residential site-built and manufactured housing customers
decreased in the first quarter of 2007 by approximately 33% and increased in the
subsequent three quarters as compared to the same periods of 2006 primarily as a
result of higher average unit sales prices.  The Company’s net sales
to customers serving the manufactured housing markets, principally consisting of
air conditioners and furnaces, constituted approximately 4.5% and 5.1% of the
Company’s consolidated net sales for the year ended December 31, 2007 and 2006,
respectively.





Foreign
net sales, which are attributed based on the location of the Company’s
subsidiary responsible for the sale, were approximately 21.5% and 19.5% of
consolidated net sales for the year ended December 31, 2007 and 2006,
respectively.  Net sales from the Company’s Canadian subsidiaries were
approximately 8.7% and 8.2% of consolidated net sales for the year ended
December 31, 2007 and 2006, respectively.  Net sales from the
Company’s Canadian subsidiaries include net sales from the Company’s RVP and
HVAC segments.  Net sales from the Company’s European subsidiaries
were approximately 10.2% and 9.7% of consolidated net sales for the year ended
December 31, 2007 and 2006, respectively.  Net sales from the
Company’s European subsidiaries include net sales primarily from the Company’s
RVP and HVAC segments and to a lesser extent the Company’s HTP
segment.





Cost of Products
Sold.Consolidated cost of products sold was approximately
$1,679.9 million for the year ended December 31, 2007 as compared to
approximately $1,547.3 million for the year ended December 31,
2006.  Cost of products sold, as a percentage of net sales, increased
from approximately 69.8% for the year ended December 31, 2006 to approximately
70.9% for the year ended December 31, 2007 primarily as a result of the factors
described below.





Overall,
consolidated material costs were approximately 46.7% and 44.8% of net sales for
the year ended December 31, 2007 and 2006, respectively.  As compared
to the year ended December 31, 2006, the Company experienced higher material
costs related to purchases of steel, copper, aluminum and related purchased
components, such as motors.  Cost increases during the year ended
December 31, 2007 as compared to the same period of 2006 were partially offset
by continued strategic sourcing initiatives and improvements in manufacturing
efficiency.





During
the year ended December 31, 2007 the Company experienced increased freight costs
primarily due to higher sales relating to acquisitions and increased energy
costs in the fourth quarter.  These increases were partially offset by
the Company’s strategic sourcing initiatives including obtaining favorable
shipping rates for lower cost “full truckload” shipments, as well as through
other cost reduction measures.  These cost reduction measures reduce
the overall effect of freight costs on cost of goods sold as a percentage of net
sales.





Overall,
changes in the cost of products sold as a percentage of net sales for one period
as compared to another period may reflect a number of factors including changes
in the relative mix of products sold, the effect of changes in sales prices,
material costs and changes in productivity levels.





In the
RVP segment, cost of products sold for the year ended December 31, 2007 was
approximately $588.2 million, or 71.0% as a percentage of the RVP segment’s net
sales, as compared to approximately $573.8 million, or 69.9% as a percentage of
the RVP segment’s net sales for the year ended December 31,
2006.  Cost of products sold in the RVP segment for the fourth quarter
and year ended December 31, 2007 includes the following:





Fourth
      Quarter Ended
            
            Year
              EndedDecember
      31, 2007(Amounts
      in millions)(1
            )
            Decrease
      in product liability expense as compared to the same period of
      2006
            
            $
            (9.1
            )
            
            $
            (1.8
            )(2
            )
            Charge
      to warranty expense related to a product safety upgrade
            
            
            ---
            
            
            
            0.5(3
            )
            Increase
      related to the effect of changes in foreign currency exchange
      rates
            
            
            6.8
            
            
            
            16.0(4
            )
            Cost
      of products sold contributed by acquisitions
            
            
            3.2
            
            
            
            16.3(5
            )
            Severance
      charges related to the closure of the Company’s Jensen, Inc. Vernon, CA
      facility
            
            
            0.2
            
            
            
            0.3





Cost of
products sold in the RVP segment for the fourth quarter and year ended December
31, 2006 includes the following:





Fourth
      Quarter Ended
            
            Year
              EndedDecember
      31, 2006(Amounts
      in millions)(1
            )
            Severance
      charges related to the closure of the Company’s NuTone
      facility
            
            $
            0.1
            
            
            $
            1.8(2
            )
            Charge
      to warranty expense related to a product safety upgrade
            
            
            ---
            
            
            
            1.5(3
            )
            Non-cash
      charge recorded related to the amortization of purchase price allocated to
      inventory
            
            
            ---
            
            
            
            0.3





The
increase in the percentage of cost of products sold to net sales for the year
ended December 31, 2007 over the same period of 2006 in the RVP segment reflects
the impact of the above items, increased material costs and a decline in sales
volume of kitchen range hoods and bathroom exhaust fans without a proportionate
decrease in costs.





In the
HTP segment, cost of products sold for the year ended December 31, 2007was approximately $306.6
million, or 53.8% as a percentage of the HTP segment’s net sales, as compared to
approximately $254.5 million, or 52.5% as a percentage of the HTP segment’s net
sales for the year ended December 31, 2006.  Cost of products sold in
the HTP segment for the year ended December 31, 2007 reflects (1) approximately
$48.7 million of cost of products sold contributed by acquisitions and (2) a
reduction in warranty expense of approximately $0.7 million related to a product
safety upgrade.  Cost of products sold in the HTP segment for the year
ended December 31, 2006 includes (1) a charge to warranty costs of approximately
$2.3 million related to a product safety upgrade and (2) a non-cash charge of
approximately $0.2 million related to the amortization of purchase price
allocated to inventory.  The increase in the percentage of cost of
products sold to net sales for the year ended December 31, 2007 as compared to
the same period of 2006 is primarily as a result of acquisitions which have a
higher cost of products sold as a percentage of net sales as compared to the
segment’s operations prior to the acquisitions.





In the
HVAC segment, cost of products sold for the year ended December 31, 2007 was
approximately $785.1 million, or 81.0% as a percentage of the HVAC segment’s net
sales, as compared to approximately $719.0 million, or 78.8% as a percentage of
the HVAC segment’s net sales for the year ended December 31,
2006.  Cost of products sold in the HVAC segment for the year ended
December 31, 2007 includes (1) approximately $21.0 million of cost of products
sold contributed by acquisitions and (2) an increase of approximately $9.2
million related to the effect of changes in foreign currency exchange
rates.  Cost of products sold in the HVAC segment for the year ended
December 31, 2006 includes a non-cash charge of approximately $2.8 million
related to the amortization of purchase price allocated to
inventory.  The increase in cost of products sold as a percentage of
net sales for the year ended December 31, 2007 as compared to the same period of
2006 reflects the effect of higher material costs related primarily to purchases
of copper, steel, aluminum and purchased components such as motors.





Selling, General and Administrative
Expense, Net.Consolidated selling, general and administrative
expense, net (“SG&A”) was approximately $475.5 million for the year ended
December 31, 2007 as compared to approximately $381.7 million for the year ended
December 31, 2006.  SG&A as a percentage of net sales increased
from approximately 17.2% for the year ended December 31, 2006 to approximately
20.1% for the year ended December 31, 2007.  This increase in SG&A
as a percentage of net sales is principally due to the effect of a curtailment
gain, related to post-retirement medical and life insurance benefits recorded in
the second quarter of 2006 of approximately $35.9 million in the RVP
segment.





SG&A
for the fourth quarter and year ended December 31, 2007 includes the following
(income) and expense items (see Note 12 of the Notes to the Consolidated
Financial Statements included elsewhere herein):





Fourth
      Quarter Ended
            Year
              EndedDecember
      31, 2007(Amounts
      in millions)(1
            )
            SG&A
      related to acquisitions
            
            $
            8.2
            
            
            $
            36.3(2
            )
            Effect
      of changes in foreign currency exchange rates
            
            
            3.2
            
            
            
            6.6(3
            )
            Charges
      related to the closure of the Company’s NuTone, Inc.Cincinnati,
      OH facility
            
            
            ---
            
            
            
            1.8(4
            )
            Charges
      related to the closure of the Company’s Mammoth, Inc.Chaska,
      MN facility
            
            
            1.1
            
            
            
            3.7(5
            )
            Charges
      related to the closure of the Company’s Jensen, Inc.Vernon,
      CA facility
            
            
            0.7
            
            
            
            0.8(6
            )
            Legal
      and other professional fees and expenses incurred in connection with
      matters related to certain subsidiaries based in Italy and
      Poland
            
            
            (0.1
            )
            
            
            2.1(7
            )
            Charges
      related to reserves for amounts due from customers in the RVP, HTP and
      HVAC segments
            
            
            ---
            
            
            
            2.7(8
            )
            Loss
      on settlement of litigation in the RVP segment
            
            
            ---
            
            
            
            1.9(9
            )
            (Decrease)
      increase in displays expense in the RVP segment
            
            
            (2.3
            )
            
            
            2.2(10
            )
            Net
      foreign exchange (gains) losses related to transactions, including
      intercompany debt not indefinitely invested in the Company’s
      subsidiaries
            
            
            (0.3
            )
            
            
            3.1(11
            )
            Stock-based
      compensation expense
            
            
            ---
            
            
            
            0.3(12
            )
            Favorable
      adjustment based upon the Company's revised estimate
      of reserves provided in 2006 related to certain suppliers in Italy
      and Poland
            
            
            (6.7
            )
            
            
            (6.7
            )(13
            )
            Legal
      fees and expenses incurred in the HTP segment in connection with a dispute
      with a supplier
            
            
            1.2
            
            
            
            2.0





SG&A
for the fourth quarter and year ended December 31, 2006 includes the following
(income) and expense items (see Note 12 of the Notes to the Consolidated
Financial Statements included elsewhere herein):





Fourth
      Quarter Ended
            
            Year
              EndedDecember
      31, 2006(Amounts
      in millions)(1
            )
            Gain
      from curtailment of post-retirement medical and life insurance
      benefits
            
            $
            ---
            
            
            $
            (35.9
            )(2
            )
            Losses
      related to certain suppliers in Italy and Poland
            
            
            16.0
            
            
            
            16.0(3
            )
            Compensation
      reserve adjustment
            
            
            (3.5
            )
            
            
            (3.5
            )(4
            )
            Write-off
      of expenses related to the Company’s initial public
    offering
            
            
            2.5
            
            
            
            2.5(5
            )
            Charges
      related to the closure of the Company’s NuTone, Inc.Cincinnati,
      OH facility
            
            
            (0.7
            )
            
            
            1.7(6
            )
            Gain
      on settlement of litigation in the HVAC segment
            
            
            ---
            
            
            
            (1.6
            )(7
            )
            Reserve
      for amounts due from a customer in China related to a Chinese construction
      project, net of minority interest of $0.8 million
            
            
            1.2
            
            
            
            1.2(8
            )
            Net
      foreign exchange losses related to transactions, including intercompany
      debt not indefinitely invested in the Company’s
    subsidiaries
            
            
            (1.7
            )
            
            
            (1.7
            )(9
            )
            Stock-based
      compensation expense
            
            
            ---
            
            
            
            0.3





Amortization of Intangible
Assets.Amortization of intangible assets increased
approximately $2.6 million from approximately $24.9 million for the year ended
December 31, 2006 to approximately $27.5 million for the year ended December 31,
2007.  The increase in amortization of intangible assets is
principally due to the impact of acquisitions, which contributed approximately
$6.4 million to the increase for the year ended December 31, 2007, partially
offset by higher amortization expense in the prior periods as a result of
accelerated amortization methods.





Depreciation
Expense.Depreciation expense increased approximately $4.6
million from approximately $33.0 million for the year ended December 31, 2006 to
approximately $37.6 million for the year ended December 31,
2007.  This increase is primarily attributable to capital
expenditures, and to a lesser extent the impact of acquisitions, which
represented approximately $1.3 million of the increase.





Operating
Earnings.Consolidated operating earnings decreased by
approximately $79.2 million from approximately $264.5 million for the year ended
December 31, 2006 to approximately $185.3 million for the year ended December
31, 2007.  Acquisitions contributed approximately $16.7 million to
operating earnings for the year ended December 31, 2007.  The decrease
in consolidated operating earnings is primarily due to the factors discussed
above and that follow.  Operating earnings, as a percentage of net
sales, decreased from approximately 11.9% for the year ended December 31, 2006
to approximately 7.8% for the year ended December 31, 2007.





Operating
earnings of the RVP segment for the year ended December 31, 2007 were
approximately $102.9 million as compared to approximately $139.5 million for the
year ended December 31, 2006.  Operating earnings in the RVP segment
for the fourth quarter and year ended December 31, 2007 include the following
increases (decreases) in operating earnings:





Fourth
      Quarter Ended
            
            Year
              EndedDecember 31, 2007(Amounts
      in millions)(1
            )
            Favorable
      adjustment based upon the Company's revised estimate
      of reserves provided in 2006 related to certain suppliers in Italy
      and Poland
            
            $
            6.7
            
            
            $
            6.7(2
            )
            Decrease
      in product liability expense as compared to the same period of
      2006
            
            
            9.1
            
            
            
            1.8(3
            )
            Decrease
      (increase) in displays expense in the RVP segment
            
            
            2.3
            
            
            
            (2.2
            )(4
            )
            Legal
      and other professional fees and expenses incurred in connection with
      matters related to certain subsidiaries
              based in Italy and Poland
            
            
            0.1
            
            
            
            (2.1
            )(5
            )
            Loss
      on settlement of litigation in the RVP segment
            
            
            ---
            
            
            
            (1.9
            )(6
            )
            Charges
      related to the closure of the Company’s NuTone, Inc. Cincinnati, OH
      facility
            
            
            ---
            
            
            
            (1.8
            )(7
            )
            Increased
      depreciation expense of property and equipment
            
            
            (0.5
            )
            
            
            (1.4
            )(8
            )
            Charges
      related to the closure of the Company’s Jensen, Inc.Vernon,
      CA facility
            
            
            (0.9
            )
            
            
            (1.1
            )(9
            )
            Net
      foreign exchange gains (losses) related to transactions, including
      intercompany debt not indefinitely invested in the Company’s
      subsidiaries
            
            
            0.5
            
            
            
            (1.0
            )(10
            )
            Increase
      in operating earnings related to effect of changes in foreign currency
      exchange rates
            
            
            0.1
            
            
            
            0.6(11
            )
            Charge
      to warranty expense related to a product safety upgrade
            
            
            ---
            
            
            
            (0.5
            )(12
            )
            Charges
      related to reserves for amounts due from customers
            
            
            ---
            
            
            
            (0.4
            )(13
            )
            Increase
      in operating earnings related to acquisitions
            
            
            ---
            
            
            
            0.3(14
            )
            (Increased)
      decreased amortization of intangible assets
            
            
            (0.3
            )
            
            
            0.1





Operating
earnings in the RVP segment for the fourth quarter and year ended December 31,
2006 include the following increases (decreases) in operating
earnings:





Fourth
      Quarter Ended
            
            Year
              EndedDecember
      31, 2006(Amounts
      in millions)(1
            )
            Gain
      from curtailment of post-retirement medical and life insurance
      benefits
            
            $
            ---
            
            
            $
            35.9(2
            )
            Reserves
      related to estimated losses as a result of the unlikelihood that certain
      suppliers to the Company’s kitchen range hood subsidiaries based in Italy
      and Poland will be able to repay advances and amounts due under other
      arrangements
            
            
            (16.0
            )
            
            
            (16.0
            )(3
            )
            Charges
      related to the closure of the Company’s NuTone, Inc.Cincinnati,
      OH facility
            
            
            0.6
            
            
            
            (3.5
            )(4
            )
            Charge
      to warranty expense related to a product safety upgrade
            
            
            ---
            
            
            
            (1.5
            )(5
            )
            Net
      foreign exchange gains related to transactions, including intercompany
      debt not indefinitely invested in the
              Company’s subsidiaries
            
            
            0.2
            
            
            
            ---(6
            )
            Non-cash
      charge related to the amortization of purchase price allocated to
      inventory
            
            
            ---
            
            
            
            (0.3
            )





The
remaining decrease in operating earnings in the RVP segment for the year ended
December 31, 2007 as compared to the same period in 2006 is a result of lower
sales volume of kitchen range hoods and bathroom exhaust fans primarily in the
United States market, partially offset by price increases in 2007.





Operating
earnings of the HTP segment for the year ended December 31, 2007 were
approximately $76.3 million as compared to approximately $83.9 million for the
year ended December 31, 2006.  Operating earnings of the HTP segment
for the year ended December 31, 2007 reflects (1) approximately $8.7 million of
operating earnings contributed by acquisitions, (2) approximately $1.4 million
of increased depreciation expense of property and equipment and approximately
$1.9 million of increased amortization of intangible assets, primarily
attributable to acquisitions, both of which are included in the impact of
acquisitions noted above, (3) a charge of approximately $0.5 million related to
a reserve for amounts due from a customer, (4) a reduction in warranty expense
of approximately $0.7 million related to a product safety upgrade, (5)
approximately $2.0 million of fees and expenses incurred in connection with a
dispute with a supplier and (6) a decrease in earnings of approximately $0.3
million from the effect of foreign currency exchange rates.





Operating
earnings of the HTP segment for the year ended December 31, 2006 reflects (1) a
charge to warranty costs of approximately $2.3 million related to a product
safety upgrade and (2) a non-cash charge of approximately $0.2 million related
to the amortization of purchase price allocated to inventory.





The
remaining decrease in operating earnings in the HTP segment for the year ended
December 31, 2007 over the same period in 2006 is primarily a result of lower
sales volume of certain security and access control devices and increased
material costs in cost of products sold, partially offset by increased sales
volume of audio and video distribution equipment and speakers.





Operating
earnings of the HVAC segment were approximately $31.1 million for the year ended
December 31, 2007 as compared to approximately $64.9 million for the year ended
December 31, 2006.  Operating earnings of the HVAC segment for the
year ended December 31, 2007 reflect (1) approximately $7.7 million of operating
earnings contributed by acquisitions, (2) a charge of approximately $1.8 million
related to reserves for amounts due from customers, (3) approximately $3.7
million of expense related to the closure of the Company’s Mammoth facility (see
Note 11 of the Notes to the Consolidated Financial Statements included elsewhere
herein), (4) approximately $1.8 million of increased depreciation expense of
property and equipment and approximately $2.5 million of decreased amortization
of intangible assets primarily attributable to acquisitions, both of which are
included in the impact of acquisitions noted above, (5) an increase in earnings
of approximately $0.1 million from the effect of foreign currency exchange rates
and (6) net foreign exchange losses of approximately $2.5 million related to
transactions, including intercompany debt not indefinitely invested in the
Company’s subsidiaries.





Operating
earnings of the HVAC segment for the year ended December 31, 2006 reflects (1) a
non-cash charge of approximately $2.8 million related to the amortization of
purchase price allocated to inventory, (2) an approximate $1.6 million gain
related to the settlement of litigation, (3) a charge of approximately $1.2
million, net of minority interest of approximately $0.8 million, related to a
reserve for amounts due from a customer in China related to a Chinese
construction project and (4) net foreign exchange gains of approximately $0.4
million related to transactions, including intercompany debt not indefinitely
invested in the Company’s subsidiaries.





The
remaining decrease in operating earnings in the HVAC segment for the year ended
December 31, 2007 as compared to the same period in 2006 is primarily the result
of decreased sales volume for products sold to both residential site-built and
manufactured housing customers and increased material costs related to purchases
of copper, steel and purchased components such as motors, offset by higher sales
levels of HVAC products sold to commercial customers.





Operating
earnings of foreign operations, consisting primarily of the results of
operations of the Company’s Canadian and European subsidiaries, were
approximately 14.1% and 7.0% of operating earnings (before unallocated and
corporate expenses) for the years ended December 31, 2007 and 2006,
respectively.  Sales and earnings derived from international markets
are subject to, among others, the risks of currency fluctuations.





Interest
Expense.  Interest expense increased approximately $20.8
million or approximately 12.8% during the year ended December 31, 2007 as
compared to the year ended December 31, 2006.  During the year ended
December 31, 2007, the Company experienced increases in interest expense
primarily as a result of (1) approximately $5.0 million of additional non-cash
interest expense related to the Company’s senior unsecured loan facility (see
Note 5 of the Notes to the Consolidated Financial Statements included elsewhere
herein), (2) approximately $4.9 million from increased borrowings and higher
interest rates related to Nortek’s senior secured credit facility, (3)
approximately $11.0 million of additional debt accretion relating to the PIK
option on the Company’s senior unsecured loan facility issued in May 2006, (4)
approximately $3.4 million of additional interest expense related to the
accretion of NTK Holdings’ 10 3/4% Senior Discount Notes and (5) an increase of
approximately $1.5 million related to increased borrowings at the Company’s
subsidiaries, primarily as a result of acquisitions and the effect of changes in
foreign currency exchange rates.  These increases were partially
offset by a decrease of approximately $5.0 million related to the amortization
of the Nortek Holdings deferred compensation plan, which was fully paid in May
2006.





Investment
Income.Investment income was approximately $2.0 million and
$2.2 million for the years ended December 31, 2007 and 2006,
respectively.





Provision for Income
Taxes.The provision for income taxes was approximately $10.6
million for the year ended December 31, 2007 as compared to approximately $46.1
million for the year ended December 31, 2006.  The effective income
tax rates of 294.5% and 44.4% for the years ended December 31, 2007 and 2006,
respectively, differ from the expected United States federal statutory rate of
35% principally as a result of state income tax provisions, non-deductible
expenses, the effect of foreign operations and interest on uncertain tax
positions.  The increase in the effective income tax rates between
2007 and 2006 is principally due to the provision of foreign withholding taxes
related to dividends paid from the Company’s foreign subsidiaries and the
provision of U.S. tax on certain unremitted earnings of foreign subsidiaries
(see Note 4 of the Notes to the Consolidated Financial Statements included
elsewhere herein).





Net
Earnings.  Consolidated net earnings decreased by approximately
$64.7 million from net earnings of approximately $57.7 million, or 2.6% as a
percentage of net sales, for the year ended December 31, 2006 to a net loss of
approximately $7.0 million for the year ended December 31, 2007.  This
decrease was primarily due to the factors discussed above, which included a
decrease of approximately $79.2 million in consolidated operating earnings, an
increase of approximately $20.8 million in interest expense and a decrease in
investment income of approximately $0.2 million, offset by a decrease of
approximately $35.5 million in the provision for income taxes.




EBITDA.The
Company uses EBITDA as both an operating performance and liquidity
measure.  Operating performance measure disclosures with respect to
EBITDA are provided below.  Refer to the Liquidity and Capital
Resources section for liquidity measure disclosures with respect to EBITDA and a
reconciliation from net cash flows from operating activities to
EBITDA.





EBITDA
is defined as net earnings (loss) before interest, taxes, depreciation and
amortization expense.  EBITDA is not a measure of operating
performance under U.S. generally accepted accounting principles (“GAAP”) and
should not be considered as an alternative or substitute for GAAP profitability
measures such as operating earnings (loss) from continuing operations,
discontinued operations, extraordinary items and net earnings
(loss).  EBITDA as an operating performance measure has material
limitations since it excludes, among other things, the statement of operations
impact of depreciation and amortization expense, interest expense and the
provision (benefit) for income taxes and therefore does not necessarily
represent an accurate measure of profitability, particularly in situations where
a company is highly leveraged or has a disadvantageous tax
structure.  The Company uses a significant amount of capital assets
and therefore, depreciation and amortization expense is a necessary element of
the Company’s costs and ability to generate revenue and therefore its exclusion
from EBITDA is a material limitation.  The Company has a significant
amount of debt and therefore, interest expense is a necessary element of the
Company’s costs and ability to generate revenue and therefore its exclusion from
EBITDA is a material limitation.  The Company generally incurs
significant U.S. federal, state and foreign income taxes each year and the
provision (benefit) for income taxes is a necessary element of the Company’s
costs and therefore its exclusion from EBITDA is a material
limitation.  As a result, EBITDA should be evaluated in conjunction
with net earnings (loss) for a more complete analysis of the Company’s
profitability, as net earnings (loss) includes the financial statement impact of
these items and is the most directly comparable GAAP operating performance
measure to EBITDA.  As EBITDA is not defined by GAAP, the Company’s
definition of EBITDA may differ from and therefore may not be comparable to
similarly titled measures used by other companies, thereby limiting its
usefulness as a comparative measure.  Because of the limitations that
EBITDA has as an analytical tool, investors should not consider it in isolation,
or as a substitute for analysis of the Company’s operating results as reported
under GAAP.





Company
management uses EBITDA as a supplementary non-GAAP operating performance measure
to assist with its overall evaluation of Company and subsidiary operating
performance (including the performance of subsidiary management) relative to
outside peer group companies.  In addition, the Company uses EBITDA as
an operating performance measure in financial presentations to the Company’s
Board of Directors, shareholders, various banks participating in Nortek’s Credit
Facility, note holders and Bond Rating agencies, among others, as a supplemental
non-GAAP operating measure to assist them in their evaluation of the Company’s
performance.  The Company is also active in mergers, acquisitions and
divestitures and uses EBITDA as an additional operating performance measure to
assess Company, subsidiary and potential acquisition target enterprise value and
to assist in the overall evaluation of Company, subsidiary and potential
acquisition target performance on an internal basis and relative to peer group
companies.  The Company uses EBITDA in conjunction with traditional
GAAP operating performance measures as part of its overall assessment of
potential valuation and relative performance and therefore does not place undue
reliance on EBITDA as its only measure of operating performance.





The
Company believes EBITDA is useful for both the Company and investors as it is a
commonly used analytical measurement for comparing company profitability, which
eliminates the effects of financing, differing valuations of fixed and
intangible assets and tax structure decisions.  The Company believes
that EBITDA is specifically relevant to the Company, due to the different
degrees of leverage among its competitors, the impact of purchase accounting
associated with acquisitions, which impacts comparability with its competitors
who may or may not have recently revalued their fixed and intangible assets, and
the differing tax structures and tax jurisdictions of certain of the Company’s
competitors.  The Company has included EBITDA as a supplemental
operating performance measure, which should be evaluated by investors in
conjunction with the traditional GAAP performance measures discussed earlier in
this Results of Operations section for a complete evaluation of the Company’s
operating performance.





The following table presents a
reconciliation from net(loss)earnings, which is
the most directly comparable GAAP operating performance measure, to EBITDA for
theyearsendedDecember 31, 2007 and 2006:




For the Years Ended December
      31,2007
              
              
              2006(Amounts in
      millions)Net (loss) earnings (1),
      (2)
              
              $
              (7.0
              )
              
              $
              57.7Provision for income
      taxes
              
              
              10.6
              
              
              
              46.1Interest expense
      (3)
              
              
              183.7
              
              
              
              162.9Investment
      income
              
              
              (2.0
              )
              
              
              (2.2
              )Depreciation
      expense
              
              
              37.6
              
              
              
              33.0Amortization
      expense
              
              
              27.5
              
              
              
              28.2EBITDA
              
              $
              250.4
              
              
              $
              325.7










(1)
            In the RVP
      segment, the net loss for the year ended December 31, 2007 includes a
      favorable adjustment to selling, general and administrative expense, net
      based upon the Company’s revised estimate of reserves provided in 2006 for
      certain suppliers in Italy and Poland of approximately $6.7 million, a
      decrease in product liability expense of approximately $1.8 million as
      compared to the year ended December 31, 2006, a charge to warranty expense
      of approximately $0.5 million related to a product safety upgrade, an
      approximate $1.8 million charge related to the closure of the Company’s
      NuTone, Inc. Cincinnati, Ohio facility, an approximate $1.1 million charge
      related to the closure of the Company’s Jensen, Inc. Vernon, California
      facility, legal and other professional fees and expenses incurred in
      connection with matters related to certain subsidiaries based in Italy and
      Poland of approximately $2.1 million, an approximate $1.9 million loss
      related to the settlement of litigation, a charge of approximately $0.4
      million related to a reserve for amounts due from a customer and net
      foreign exchange losses of approximately $1.0 million related to
      transactions, including intercompany debt not indefinitely invested in the
      Company’s subsidiaries.





In the
HTP segment, the net loss for the year ended December 31, 2007 includes a charge
of approximately $0.5 million related to a reserve for amounts due from a
customer, a reduction in warranty expense of approximately $0.7 million related
to a product safety upgrade and approximately $2.0 million of fees and expenses
incurred in connection with a dispute with a supplier.





In the
HVAC segment, the net loss for the year ended December 31, 2007 includes a
charge of approximately $3.7 million related to the planned closure of the
Company’s Mammoth, Inc. Chaska, Minnesota manufacturing facility, a charge of
approximately $1.8 million related to reserves for amounts due from customers
and net foreign exchange losses of approximately $2.5 million related to
transactions, including intercompany debt not indefinitely invested in the
Company’s subsidiaries.





(2)
            In
      the RVP segment, net earnings for the year ended December 31, 2006 include
      an approximate $35.9 million curtailment gain related to post-retirement
      medical and life insurance benefits, reserves of approximately $16.0
      million related to estimated losses as a result of the unlikelihood that
      certain suppliers to our kitchen range hood subsidiaries based in Italy
      and Poland will be able to repay advances and
      amounts due under other arrangements, an approximate $3.5 million charge
      related to the closure of the Company’s NuTone, Inc. Cincinnati, Ohio
      facility and an increase in warranty expense in the first quarter of 2006
      of approximately $1.5 million related to a product safety
      upgrade.





In the
HTP segment, net earnings for the year ended December 31, 2006 include an
increase in warranty expense of approximately $2.3 million related to a product
safety upgrade.





In the
HVAC segment, net earnings for the year ended December 31, 2006 include an
approximate $1.6 million gain related to the favorable settlement of litigation,
a charge of approximately $1.2 million, net of minority interest of
approximately $0.8 million, related to a reserve for amounts due from a customer
in China related to a Chinese construction project and net foreign exchange
gains of approximately $0.4 million related to transactions, including
intercompany debt not indefinitely invested in the Company’s
subsidiaries.





(3)
            Interest
      expense for the year ended December 31, 2007 includes cash interest of
      approximately $116.4 million and non-cash interest of approximately $67.3
      million.  Interest expense for the year ended December 31, 2006
      includes cash interest of approximately $115.3 million (including
      approximately $3.9 million relating to the accelerated amortization of the
      Nortek Holdings, Inc. deferred compensation plan) and non-cash interest of
      approximately $47.6 million.




Year
ended December 31, 2006 as compared to the year ended December 31,
2005





Net
Sales.Consolidated net sales increased approximately $259.2
million or 13.2% for the year ended December 31, 2006 as compared to the year
ended December 31, 2005 as discussed further in the following
paragraphs.





In the
RVP segment, net sales increased approximately $26.3 million or 3.3% for the
year ended December 31, 2006 as compared to the year ended December 31,
2005.  Net sales in the RVP segment for the year ended December 31,
2006 reflects an increase of approximately $8.8 million attributable to the
effect of changes in foreign currency exchange rates and includes approximately
$4.2 million attributable to acquisitions.





The
change in net sales in the RVP segment for the year ended December 31, 2006 as
compared to the year ended December 31, 2005 reflects higher average unit sales
prices of kitchen range hoods and bath fans, partially offset by lower sales
volume of bath fans, which principally occurred in the second half of
2006.  Higher average unit sales prices of kitchen range hoods and
bath fans reflect, in part, the impact of the sale of new products with higher
price points.  Range hoods and bathroom exhaust fans are the largest
product category sold in the RVP segment, accounting for approximately 84.8% of
the total RVP segment’s net sales for the year ended December 31,
2006.  Overall, sales of range hoods and bathroom exhaust fans
increased approximately 4.0% in the year ended December 31, 2006 over the year
ended December 31, 2005.





In the
HTP segment, net sales increased approximately $129.7 million or 36.6% for the
year ended December 31, 2006 as compared to the year ended December 31,
2005.  The increase in net sales in the HTP segment for the year ended
December 31, 2006 includes approximately $93.5 million attributable to
acquisitions and the balance of the increase is predominately due to increased
sales volume of audio and video distribution equipment, speakers and access
control devices, partially offset by the decline in sales of certain security
and garage door operators.





In the
HVAC segment, net sales increased approximately $103.2 million or 12.7% for the
year ended December 31, 2006 as compared to the year ended December 31,
2005.  Net sales in the HVAC segment for the year ended December 31,
2006 include an increase of approximately $114.8 million attributable to
acquisitions and an increase of approximately $4.4 million attributable to the
effect of changes in foreign currency exchange rates.  The change in
net sales in the HVAC segment for the year ended December 31, 2006 as compared
to the year ended December 31, 2005 includes lower sales volume, partially
offset by the effect of higher average sales prices of products with a rating of
13 SEER or higher sold to residential site-built and manufactured housing
customers.  Sales of the Company’s commercial HVAC products, excluding
the effect of foreign exchange and acquisitions, increased slightly in 2006 as
compared to 2005.  Net sales in the HVAC segment for HVAC products
sold to residential site-built customers constituted the largest category of
product sold to a particular group of customers within the HVAC
segment.  Sales of products to residential site-built customers
increased approximately 1.3% over the year ended December 31,
2005.  The Company’s net sales to customers serving the manufactured
housing markets, principally consisting of air conditioners and furnaces,
constituted approximately 5.3% and 6.9% of the Company’s consolidated net sales
for the years ended December 31, 2006 and 2005, respectively.  The
decrease in net sales to customers serving the manufactured housing markets is
due, in part, to the effect of higher 2005 sales for FEMA related business
caused by Hurricane Katrina.





Foreign
net sales, which are attributed based on the location of the Company’s
subsidiary responsible for the sale, were approximately 19.5% and 18.5% of
consolidated net sales for the years ended December 31, 2006 and 2005,
respectively.  Net sales from the Company’s Canadian subsidiaries were
approximately 8.2% and 8.1% of consolidated net sales for the years ended
December 31, 2006 and 2005, respectively.  Net sales from the
Company’s Canadian subsidiaries include net sales from the Company’s RVP and
HVAC segments.  Net sales from the Company’s European subsidiaries
were approximately 9.7% and 9.9% of consolidated net sales for the years ended
December 31, 2006 and 2005, respectively.  Net sales from the
Company’s European subsidiaries include net sales primarily from the Company’s
RVP and HVAC segments and to a lesser extent the Company’s HTP
segment.





Cost of Products
Sold.Consolidated cost of products sold was approximately
$1,547.3 million for the year ended December 31, 2006 as compared to
approximately $1,361.4 million for the year ended December 31,
2005.  Cost of products sold, as a percentage of net sales, increased
from approximately 69.5% for the year ended December 31, 2005 to approximately
69.8% for the year ended December 31, 2006, primarily as a result of the factors
that follow.





Overall,
consolidated material costs were approximately 44.8% and 44.5% of net sales for
the years ended December 31, 2006 and 2005, respectively.  Although
the Company continued to experience higher material costs related primarily to
purchases of copper, aluminum and related purchased components, as well as
increased transportation and energy costs, these cost increases were partially
offset by continued strategic sourcing initiatives and improvements in
manufacturing efficiency, as well as sales price increases.





As
noted in the previous paragraph, during the year ended December 31, 2006, the
Company experienced an increase in freight costs due primarily to increased
sales volume and rising energy prices.  This increase was partially
offset by favorable shipping rates for lower cost “full truckload” shipments and
higher dollars per shipment based on the increased volumes, as well as cost
reduction measures, thereby reducing the overall effect of increased freight
costs on cost of goods sold as a percentage of net sales.





Overall,
changes in the cost of products sold as a percentage of net sales for one period
as compared to another period may reflect a number of factors including changes
in the relative mix of products sold, the effect of changes in sales prices,
material costs and changes in productivity levels.





In the
RVP segment, cost of products sold for the year ended December 31, 2006 was
approximately $573.8 million, or 69.9% as a percentage of the RVP segment’s net
sales, as compared to approximately $544.9 million, or 68.6% as a percentage of
the RVP segment’s net sales, for the year ended December 31,
2005.  Cost of products sold in the RVP segment for the year ended
December 31, 2006 includes (1) an increase of approximately $5.9 million related
to the effect of changes in foreign currency exchange rates, (2) approximately
$2.7 million of cost of products sold from acquisitions, (3) approximately $1.8
million of severance charges related to the closure of the Company’s NuTone
facility, (4) increased warranty expense in the first quarter of 2006 of
approximately $1.5 million related to a product safety upgrade and (5) a
non-cash charge of approximately $0.3 million related to the amortization of
purchase price allocated to inventory.  Cost of products sold in the
RVP segment for the year ended December 31, 2005 includes a non-cash charge of
approximately $0.4 million related to the amortization of purchase price
allocated to inventory.  The increase in the percentage of cost of
products sold to net sales for the year ended December 31, 2006 over the same
period of 2005 reflects increased material costs and a slight decline in sales
volume of kitchen range hoods and bath fans without a proportionate decrease in
costs, partially offset by higher average unit sales prices of kitchen range
hoods and bath fans.





In the
HTP segment, cost of products sold for the year ended December 31, 2006 was
approximately $254.5 million, or 52.5% as a percentage of the HTP segment’s net
sales, as compared to approximately $184.2 million, or 51.9% as a percentage of
the HTP segment’s net sales, for the year ended December 31,
2005.  Cost of products sold in the HTP segment for the year ended
December 31, 2006 reflects (1) approximately $46.3 million of cost of products
sold contributed from acquisitions, including a non-cash charge of approximately
$0.2 million related to the amortization of purchase price allocated to
inventory and (2) increased warranty expense of approximately $2.3 million
related to a product safety upgrade.  Cost of products sold in the HTP
segment for the year ended December 31, 2005 includes a non-cash charge of
approximately $0.5 million related to the amortization of purchase price
allocated to inventory.  The increase in the percentage of cost of
products sold to net sales for the year ended December 31, 2006 over the same
period of 2005 also reflects increased material costs, including purchased
components and sourced products.





In the
HVAC segment, cost of products sold for the year ended December 31, 2006 was
approximately $719.0 million, or 78.8% as a percentage of the HVAC segment’s net
sales, as compared to approximately $632.3 million, or 78.1% as a percentage of
the HVAC segment’s net sales, for the year ended December 31,
2005.  Cost of products sold in the HVAC segment for the year ended
December 31, 2006 includes (1) an increase of approximately $82.5 million
attributable to acquisitions, including non-cash charges of approximately $2.8
million related to the amortization of purchase price allocated to inventory and
(2) an increase of approximately $3.5 million related to the effect of changes
in foreign currency exchange rates.  The change in cost of products
sold as a percentage of net sales for the year ended December 31, 2006 over the
same period of 2005 reflects the effect of lower sales volume, in part due to
2005 sales for FEMA related business caused by Hurricane Katrina, and higher
material costs related primarily to purchases of copper and aluminum, which
experienced cost increases during 2006, partially offset by continued strategic
sourcing initiatives, improvements in manufacturing efficiency and the effect of
acquisitions, which had a lower level of material costs as compared to the
businesses in the HVAC segment prior to the acquisitions.  Increased
average unit sales prices of products sold to residential site-built customers
as noted above was also a factor.





Selling, General and Administrative
Expense.Consolidated selling, general and administrative
expense (“SG&A”) was approximately $381.7 million for the year ended
December 31, 2006 as compared to approximately $342.6 million for the year ended
December 31, 2005.  SG&A as a percentage of net sales decreased
from approximately 17.5% for the year ended December 31, 2005 to approximately
17.2% for the year ended December 31, 2006.  This decrease in SG&A
as a percentage of net sales is principally due to a curtailment gain of
approximately $35.9 million recorded in the RVP segment related to
post-retirement medical and life insurance benefits from the final
implementation of a union contract that no longer provides such benefits, a
decrease of approximately $3.5 million related to the reduction of a
compensation accrual originally provided in 2004 that was determined to be no
longer required, the impact of acquisitions in the HVAC segment which have a
lower percentage of SG&A to net sales and sales growth.  This
decrease in SG&A as a percentage of sales was offset by reserves of
approximately $16.0 million related to estimated losses as a result of the
unlikelihood that certain suppliers to our kitchen range hood subsidiaries based
in Italy and Poland will be able to repay advances and amounts due under other
arrangements (see “Liquidity and Capital Resources” included elsewhere herein),
as well as, acquisitions and increased SG&A of existing businesses in the
HTP segment which have a higher percentage of SG&A to net sales than the
Company’s other segments.





SG&A
for the year ended December 31, 2006 also includes (1) approximately $50.2
million from acquisitions in the all three of the Company’s segments, (2) a
charge of approximately $2.5 million related to expenses incurred related to the
Company’s initial public offering not yet completed (although the Company has
not withdrawn its registration statement on Form S-1, there can be no assurance
that the Company will complete the Offering in the foreseeable future), (3) a
decrease of approximately $1.7 million of displays expense in the RVP segment,
(4) an increase of approximately $2.2 million (of which approximately $1.5
million is included in the RVP segment and approximately $0.7 million is
included in the HVAC segment) related to the effect of changes in foreign
currency exchange rates, (5) approximately $1.7 million of severance, equipment
write-offs and other charges recorded in the second quarter of 2006 related to
the closure of the Company’s NuTone facility within the RVP segment, (6) an
approximate $1.6 million gain related to the favorable settlement of litigation
within the HVAC segment, (7) a non-cash foreign exchange gain of approximately
$1.3 million, of which approximately $0.1 million is included in the HVAC
segment, related to intercompany debt not indefinitely invested in the Company’s
subsidiaries, (8) a charge of approximately $1.2 million, net of minority
interest of approximately $0.8 million, related to a reserve for amounts due
from a customer in China related to a Chinese construction project within the
HVAC segment and (9) approximately $0.3 million of stock-based compensation
expense, which is recorded in Unallocated.





SG&A
for the year ended December 31, 2005 includes (1) approximately $0.3 million of
stock-based compensation expense, which is recorded in Unallocated, (2) a
non-cash foreign exchange loss of approximately $2.1 million (of which
approximately $1.2 million is included in the RVP segment) related to
intercompany debt not indefinitely invested in the Company’s subsidiaries, (3) a
gain of approximately $1.6 million related to the sale of a corporate office
building of one of the Company’s subsidiaries in the HTP segment and (4) a gain
of approximately $1.4 million, which is recorded in Unallocated, from the
settlement of certain obligations of former subsidiaries.





Amortization of Intangible
Assets.Amortization of intangible assets, as a percentage of
net sales, increased from approximately 0.9% for the year ended December 31,
2005 to approximately 1.1% for the year ended December 31, 2006.  The
increase is principally due to the impact of acquisitions, which contributed
approximately $8.1 million to the increase, partially offset by higher
amortization expense in prior years as a result of accelerated amortization
methods.




Depreciation
Expense.Depreciation expense increased approximately $6.3
million from approximately $26.7 million for the year ended December 31, 2005 to
approximately $33.0 million for the year ended December 31,
2006.  This increase is primarily attributable to the impact of
capital expenditures, as well as acquisitions (which represented approximately
$2.6 million of the increase).





Operating
Earnings.Consolidated operating earnings increased by
approximately $27.6 million from approximately $236.9 million for the year ended
December 31, 2005 to approximately $264.5 million for the year ended December
31, 2006.  The increase in consolidated operating earnings is
primarily due to the factors discussed above and that
follow.  Operating earnings, as a percentage of net sales, decreased
from approximately 12.1% for the year ended December 31, 2005 to approximately
11.9% for the year ended December 31, 2006.





Operating
earnings of the RVP segment for the year ended December 31, 2006 were
approximately $139.5 million as compared to approximately $123.9 million for the
year ended December 31, 2005.  Operating earnings of the RVP segment
for the year ended December 31, 2006 as compared to the same period of 2005
reflects (1) a curtailment gain of post-retirement medical and life insurance
benefits of approximately $35.9 million recorded in the second quarter of 2006,
(2) reserves of approximately $16.0 million related to estimated losses as a
result of the unlikelihood that certain suppliers to our kitchen range hood
subsidiaries based in Italy and Poland will be able to repay advances and
amounts due under other arrangements, (3) approximately $3.5 million of
severance, equipment write-offs and other charges related to the closure of the
Company’s NuTone facility, (4) a decrease of approximately $1.7 million of
displays expense, (5) an increase in earnings of approximately $1.4 million from
the effect of foreign currency exchange rates, (6) approximately $1.6 million of
increased depreciation expense of property and equipment and approximately $1.7
million of decreased amortization of intangible assets, (7) increased warranty
expense in the first quarter of 2006 of approximately $1.5 million related to a
product safety upgrade, (8) an increase of approximately $0.2 million
attributable to acquisitions and (9) a non-cash charge of approximately $0.3
million related to the amortization of purchase price allocated to
inventory.  Operating earnings of the RVP segment for the year ended
December 31, 2005 reflects (1) a non-cash foreign exchange loss of approximately
$1.2 million related to intercompany debt not indefinitely invested in the
Company’s subsidiaries and (2) a non-cash charge of approximately $0.4 million
related to the amortization of purchase price allocated to
inventory.  Operating earnings in the RVP segment for the year ended
December 31, 2006 also improved over the same period in 2005 as a result of the
factors noted previously including higher average unit sales prices, partially
offset by lower sales volume of kitchen range hoods and bath fans.





Operating
earnings of the HTP segment for the year ended December 31, 2006 were
approximately $83.9 million as compared to approximately $71.0 million for the
year ended December 31, 2005.  Operating earnings of the HTP segment
for the year ended December 31, 2006 reflects (1) approximately $10.6 million of
operating earnings contributed by acquisitions, (2) approximately $2.0 million
of increased depreciation expense of property and equipment and approximately
$4.2 million of increased amortization of intangible assets, primarily
attributable to acquisitions, which is included in the impact of acquisitions
noted above, (3) an increase in warranty expense of approximately $2.3 million
related to a product safety upgrade and (4) a non-cash charge of approximately
$0.2 million, all of which is included in the impact of acquisitions noted
above, related to the amortization of purchase price allocated to
inventory.  Operating earnings of the HTP segment for the year ended
December 31, 2005 reflects (1) a non-cash charge of approximately $0.5 million
related to the amortization of purchase price allocated to inventory and (2) a
gain of approximately $1.6 million related to the sale of a corporate office
building of one of the Company’s subsidiaries.  The increase in
operating earnings in the HTP segment for the year ended December 31, 2006 over
the same period in 2005 is primarily a result of acquisitions, increased net
sales volume of audio and video distribution equipment, speakers and access
control devices, partially offset by higher cost of products sold as noted
previously and, in part, to increased warranty expense as noted
above.





Operating
earnings of the HVAC segment were approximately $64.9 million for the year ended
December 31, 2006 as compared to approximately $66.3 million for the year ended
December 31, 2005.  Operating earnings of the HVAC segment for the
year ended December 31, 2006 reflect (1) approximately $11.9 million of
operating earnings contributed by acquisitions, (2) a non-cash charge of
approximately $2.8 million, all of which is included in the impact of
acquisitions noted above, related to the amortization of purchase price
allocated to inventory, (3) an approximate $1.6 million gain related to the
favorable settlement of litigation, (4) a charge of approximately $1.2 million,
net of minority interest of approximately $0.8 million, related to a reserve for
amounts due from a customer in China related to a Chinese construction project,
(5) approximately $2.9 million of increased depreciation expense of property and
equipment attributable primarily to capital expenditures and approximately $3.9
million of increased amortization of intangible assets primarily related to
acquisitions, (6) a non-cash foreign exchange gain of approximately $0.1 million
related to intercompany debt not indefinitely invested in the Company’s
subsidiaries and (7) an increase of approximately $0.2 million from the effect
of foreign currency exchange rates.  Operating earnings in the HVAC
segment for the year ended December 31, 2006 decreased over the year ended
December 31, 2005 as a result of decreased sales volume, offset by acquisitions
and higher average sales prices of products with a rating of 13 SEER or higher
sold to residential site-built and manufactured housing
customers.  The effect on earnings of continued strategic sourcing
initiatives and improvements in manufacturing efficiencies and increased average
sales prices, which were partially driven by the change in the minimum SEER
rating to 13 SEER on January 23, 2006, was partially offset by higher material
costs within the entire HVAC segment.





The
operating expense in Unallocated was approximately $23.8 million for the year
ended December 31, 2006 as compared to approximately $24.3 million for the year
ended December 31, 2005.  The change in operating expense for the year
ended December 31, 2006 as compared to the same period of 2005 in Unallocated is
primarily due to the items noted below.  Operating expense in
Unallocated for the year ended December 31, 2006 reflects (1) a charge of
approximately $2.5 million related to expenses incurred related to the Company’s
initial public offering not yet completed, (2) a non-cash foreign exchange gain
of approximately $1.2 million related to intercompany debt not indefinitely
invested in the Company’s subsidiaries, (3) an approximate $3.5 million
reduction of a compensation accrual originally provided in 2004 that was
determined to be no longer required related to a compensation reserve
adjustment, (4) approximately $0.3 million of stock-based compensation charges
and (5) approximately $0.2 million of decreased depreciation expense of property
and equipment, as well as $0.2 million of increased amortization of intangible
assets.  Operating expense in Unallocated for the year ended December
31, 2005 reflects (1) approximately $0.3 million of stock-based compensation
charges, (2) a non-cash foreign exchange loss of approximately $0.9 million
related to intercompany debt not indefinitely invested in the Company’s
subsidiaries and (3) a gain of approximately $1.4 million from the settlement of
certain obligations.





Operating
earnings of foreign operations, consisting primarily of the results of
operations of the Company’s Canadian and European subsidiaries, were
approximately 6.9% and 10.2% of operating earnings (before unallocated and
corporate expenses) for the years ended December 31, 2006 and 2005,
respectively.  Sales and earnings derived from international markets
are subject to, among others, the risks of currency fluctuations.





Interest
Expense.Interest expense increased approximately $24.3
million or approximately 17.5% during the year ended December 31, 2006 as
compared to the year ended December 31, 2005.  During the year ended
December 31, 2006, the Company experienced increases in interest expense
primarily as a result of (1) approximately $10.6 million from increased interest
rates related primarily to Nortek’s senior secured credit facility, (2)
approximately $11.0 million of debt accretion relating to the PIK option on the
Company’s senior unsecured loan facility in 2006, (3) approximately $6.1 million
of interest expense related to the accretion of NTK Holdings’ 10 3/4% Senior
Discount Notes, due primarily to such notes being outstanding for the full year
in 2006 versus approximately ten months in 2005 and (4) an increase of
approximately $0.6 million related to the amortization of deferred financing
costs.  These increases were offset by a decrease in interest expense
of approximately $6.6 million related to the amortization of the 2004 Nortek
Holdings, Inc. Deferred Compensation Plan.  On February 18, 2005,
Nortek Holdings made a distribution to the participants of its deferred
compensation plan in the amount of approximately $57.7 million, which resulted
in additional interest expense of approximately $8.2 million, and on May 10,
2006, made a second distribution to the participants in the amount of
approximately $54.0 million, which resulted in additional interest expense of
approximately $3.9 million.  As a result of this second distribution,
the participants in the deferred compensation plan are not entitled to any
further distributions.





Investment
Income.Investment income was approximately $2.2 million and
$1.8 million for the years ended December 31, 2006 and 2005,
respectively.





Provision for Income
Taxes.The provision for income taxes was approximately $46.1
million for the year ended December 31, 2006 as compared to approximately $43.2
million for the year ended December 31, 2005.  The effective income
tax rates of 44.4% and 43.2% for the years ended December 31, 2006 and 2005,
respectively, differed from the United States federal statutory rate of 35%
principally as a result of the effect of non-deductible expenses, the impact of
foreign tax rates on foreign earnings and state income tax
provisions.





Net
Earnings.  Consolidated net earnings improved by approximately
$0.8 million from approximately $56.9 million for the year ended December 31,
2005 to approximately $57.7 million for the year ended December 31,
2006.  This increase was primarily due to the factors discussed above
which included an increase of approximately $27.6 million in consolidated
operating earnings and an increase of approximately $0.4 million in investment
income, which was offset by an increase of approximately $2.9 million in the
provision for income taxes and an increase of approximately $24.3 million in
interest expense.





EBITDA.The
Company uses EBITDA as both an operating performance and liquidity
measure.  Operating performance measure disclosures with respect to
EBITDA are provided below.  Refer to the Liquidity and Capital
Resources section for liquidity measure disclosures with respect to EBITDA and a
reconciliation from net cash flows from operating activities to
EBITDA.





EBITDA
is defined as net earnings (loss) before interest, taxes, depreciation and
amortization expense.  EBITDA is not a measure of operating
performance under U.S. generally accepted accounting principles (“GAAP”) and
should not be considered as an alternative or substitute for GAAP profitability
measures such as operating earnings (loss) from continuing operations,
discontinued operations, extraordinary items and net earnings
(loss).  EBITDA as an operating performance measure has material
limitations since it excludes, among other things, the statement of operations
impact of depreciation and amortization expense, interest expense and the
provision (benefit) for income taxes and therefore does not necessarily
represent an accurate measure of profitability, particularly in situations where
a company is highly leveraged or has a disadvantageous tax
structure.  The Company uses a significant amount of capital assets
and depreciation and amortization expense is a necessary element of the
Company’s costs and ability to generate revenue and therefore its exclusion from
EBITDA is a material limitation.  The Company has a significant amount
of debt and interest expense is a necessary element of the Company’s costs and
ability to generate revenue and therefore its exclusion from EBITDA is a
material limitation.  The Company generally incurs significant U.S.
federal, state and foreign income taxes each year and the provision (benefit)
for income taxes is a necessary element of the Company’s costs and therefore its
exclusion from EBITDA is a material limitation.  As a result, EBITDA
should be evaluated in conjunction with net earnings (loss) for a more complete
analysis of the Company’s profitability, as net earnings (loss) includes the
financial statement impact of these items and is the most directly comparable
GAAP operating performance measure to EBITDA.  As EBITDA is not
defined by GAAP, the Company’s definition of EBITDA may differ from and
therefore may not be comparable to similarly titled measures used by other
companies, thereby limiting its usefulness as a comparative
measure.  Because of the limitations that EBITDA has as an analytical
tool, investors should not consider it in isolation, or as a substitute for
analysis of the Company’s operating results as reported under GAAP.





Company
management uses EBITDA as a supplementary non-GAAP operating performance measure
to assist with its overall evaluation of Company and subsidiary operating
performance (including the performance of subsidiary management) relative to
outside peer group companies.  In addition, the Company uses EBITDA as
an operating performance measure in financial presentations to the Company’s
Board of Directors, shareholders, various banks participating in Nortek’s Credit
Facility, note holders and Bond Rating agencies, among others, as a supplemental
non-GAAP operating measure to assist them in their evaluation of the Company’s
performance.  The Company is also active in mergers, acquisitions and
divestitures and uses EBITDA as an additional operating performance measure to
assess Company, subsidiary and potential acquisition target enterprise value and
to assist in the overall evaluation of Company, subsidiary and potential
acquisition target performance on an internal basis and relative to peer group
companies.  The Company uses EBITDA in conjunction with traditional
GAAP operating performance measures as part of its overall assessment of
potential valuation and relative performance and therefore does not place undue
reliance on EBITDA as its only measure of operating performance.





The
Company believes EBITDA is useful for both the Company and investors as it is a
commonly used analytical measurement for comparing company profitability, which
eliminates the effects of financing, differing valuations of fixed and
intangible assets and tax structure decisions.  The Company believes
that EBITDA is specifically relevant to the Company, due to the different
degrees of leverage among its competitors, the impact of purchase accounting
associated with acquisitions, which impacts comparability with its competitors
who may or may not have recently revalued their fixed and intangible assets, and
the differing tax structures and tax jurisdictions of certain of the Company’s
competitors.  The Company has included EBITDA as a supplemental
operating performance measure, which should be evaluated by investors in
conjunction with the traditional GAAP performance measures discussed earlier in
this Results of Operations section for a complete evaluation of the Company’s
operating performance.





The
following table presents a reconciliation from net earnings, which is the most
directly comparable GAAP operating performance measure, to EBITDA for the years
ended December 31, 2006 and 2005:







For the Years Ended December
      31,2006
              
              
              2005(Amounts in
      millions)Net earnings (1),
      (2)
              
              $
              57.7
              
              
              $
              56.9Provision for income
      taxes
              
              
              46.1
              
              
              
              43.2Interest expense
      (3)
              
              
              162.9
              
              
              
              138.6Investment
      income
              
              
              (2.2
              )
              
              
              (1.8
              )Depreciation
      expense
              
              
              33.0
              
              
              
              26.7Amortization
      expense
              
              
              28.2
              
              
              
              19.2EBITDA
              
              $
              325.7
              
              
              $
              282.8


(1)
            Net
      earnings include an approximate $35.9 million curtailment gain related to
      post-retirement medical and life insurance benefits, reserves of
      approximately $16.0 million related to estimated losses as a result of the
      unlikelihood that certain suppliers to our kitchen range hood subsidiaries
      based in Italy and Poland will be able to repay advances and amounts due
      under other arrangements, an approximate $3.5 million charge related to
      the closure of the Company’s NuTone, Inc. Cincinnati, Ohio facility and an
      increase in warranty expense in the first quarter of 2006 of approximately
      $1.5 million related to a product safety upgrade in the RVP segment for
      the year ended December 31, 2006.  Net earnings include an
      increase in warranty expense of approximately $2.3 million related to a
      product safety upgrade in the HTP segment for the year ended December 31,
      2006.  Net earnings include an approximate $1.6 million gain
      related to the favorable settlement of litigation and a charge of
      approximately $1.2 million, net of minority interest of approximately $0.8
      million, related to a reserve for amounts due from a customer in China
      related to a Chinese construction project in the HVAC segment for the year
      ended December 31, 2006.  Net earnings include an approximate
      $3.5 million reduction of a compensation accrual originally provided in
      2004 that was determined to be no longer required, a charge of
      approximately $2.5 million related to expenses incurred related to the
      Company’s initial public offering not yet completed, a non-cash foreign
      exchange gain of approximately $1.2 million related to intercompany debt
      not indefinitely invested in the Company’s subsidiaries and approximately
      $0.3 million of stock-based compensation charges, which is included in
      Unallocated, for the year ended December 31, 2006.





(2)
            Net
      earnings include a non-cash foreign exchange loss of approximately $1.2
      million related to intercompany debt not indefinitely invested in the
      Company’s subsidiaries in the RVP segment for the year ended December 31,
      2005.  Net earnings include a gain of approximately $1.6 million
      related to the sale of a corporate office building of one of the Company’s
      subsidiaries in the HTP segment for the year ended December 31,
      2005.  Net earnings include approximately $0.3 million of
      stock-based compensation charges, which is included in Unallocated, for
      the year ended December 31, 2005.





(3)
            Interest
      expense for the year ended December 31, 2006 includes cash interest of
      approximately $115.3 million (including approximately $3.9 million
      relating to the accelerated amortization of the Nortek Holdings deferred
      compensation plan) and non-cash interest of approximately $47.6
      million.  Interest expense for the year ended December 31, 2005
      includes cash interest of approximately $108.7 million (including
      approximately $8.2 million relating to the accelerated amortization of the
      Nortek Holdings deferred compensation plan) and non-cash interest of
      approximately $29.9 million.





Liquidity
and Capital Resources





The Company’s
principal sources of liquidity are its cash flow from subsidiaries, its ability
to borrow under the terms of Nortek’s revolving credit facility and its
unrestricted cash and cash equivalents.





The
Company’s ability to pay interest on or to refinance its indebtedness depends on
the Company’s future performance, working capital levels and capital structure,
which are subject to general economic, financial, competitive, legislative,
regulatory and other factors which may be beyond its
control.  Critical factors in the level of the Company’s sales,
profitability and cash flows are the levels of residential remodeling and
replacement activity and new residential and non-residential construction
activity.  The level of new residential and non-residential
construction activity and, to a lesser extent, the level of residential
remodeling and replacement activity are affected by seasonality and cyclical
factors such as interest rates, inflation, consumer spending habits, employment
levels and other macroeconomic factors, over which the Company has no
control.  Any decline in economic activity as a result of these or
other factors typically results in a decline in new construction and, to a
lesser extent, residential remodeling and replacement purchases, which would
result in a decrease in the Company’s sales, profitability and cash
flows.  Reduced levels of home sales and housing starts and other
softening in the housing markets in 2007 negatively affected the Company’s
results of operations in 2007 and its cash flow and these factors are expected
to continue to negatively affect the Company’s results of operations and its
cash flow in 2008.





In
addition, uncertainties due to the significant instability in the mortgage
markets and the resultant impact on the overall credit market could continue to
adversely impact the Company’s business.  The tightening of credit
standards is expected to result in a decline in consumer spending for home
remodeling and replacement projects which could adversely impact the Company’s
operating results and the cash flow from its
subsidiaries.  Additionally, increases in the cost of home mortgages
and the difficulty in obtaining financing for new homes could continue to
materially impact the sales of the Company’s products in the residential
construction market.





There
can be no assurance that the Company will generate sufficient cash flow from the
operation of its subsidiaries or that future financings will be available on
acceptable terms or in amounts sufficient to enable the Company to service or
refinance its indebtedness, or to make necessary capital
expenditures.





In March 2008,
Moody’s downgraded the debt ratings for Nortek and its Parent Company, NTK
Holdings, from “B2” to “B3” and issued a negative outlook.  Moody’s
rating downgrade reflects the Company’s high leverage, reduced financial
flexibility and the anticipated pressure of the difficult new home construction
market and home values on the Company’s 2008 financial
performance.  The negative ratings outlook reflects Moody’s concern
that the market for the Company’s products will remain under significant
pressure so long as new housing starts do not rebound and that the repair and
remodeling market could contract meaningfully in 2008 and possibly in
2009.  Additionally, Moody’s was concerned whether the Company’s cost
cutting initiatives would be successful enough so as to offset pressure on the
Company’s sales.  Also in March 2008, Standard and Poors affirmed the
Company’s “B” corporate rating with a negative outlook.





At December 31,
2007, the Company’s Best subsidiary was not in compliance with a maintenance
covenant with respect to two loan agreements with two banks with aggregate
borrowings outstanding of approximately $9.4 million.  The Company’s
Best subsidiary obtained waivers from the two banks, which indicated that the
Company’s Best subsidiary was not required to comply with the maintenance
covenant as of December 31, 2007.  The next measurement date for the
maintenance covenant is for the year ended December 31, 2008 and the Company
believes that it is probable that its Best subsidiary will be in compliance with
the maintenance covenant when their assessment of the required calculation is
completed in the first quarter of 2009.  As a result, the Company has
classified the outstanding borrowings under such agreements as a long-term
liability in its consolidated balance sheet at December 31,
2007.
 
 In
addition, Nortek's senior secured credit facility contains two financial
maintenance covenants, which become more restrictive over time, and the Company
cannot assure that these covenants will always be met particularly given the
further deterioration of the new residential construction and repair and
remodeling industries, plus the instability in the overall credit
markets.  These two covenants require that Nortek maintain at the end
of each quarter, calculated based on the last twelve months, a Leverage Ratio
and an Interest Coverage Ratio, each as defined.  The Leverage Ratio
must not exceed a defined ratio amount and the Interest Coverage Ratio must not
be less than a defined ratio amount.  The Leverage Ratio is calculated
by dividing Nortek's total indebtedness, net of cash, (as defined) by EBITDA (as
defined) and the Interest Coverage Ratio is calculated by dividing EBITDA (as
defined) by interest expense, net (as defined).  At December 31, 2007
Nortek was required to maintain a Leverage Ratio not greater than 5.85:1 and an
Interest Coverage Ratio of not less than 2.10:1.  At December 31, 2007
Nortek was in compliance with the Leverage Ratio and the Interest Coverage Ratio
covenants.  At December 31, 2007, Nortek’s Leverage Ratio was 5.37:1
and its Interest Coverage Ratio was 2.32:1.  The Leverage Ratio
requirement of 5.85:1 at December 31, 2007 tightens to 5.60:1 at the end of the
second quarter of 2008 and further tightens to 5.25:1 at December 31, 2008,
while the Interest Coverage Ratio requirement of 2.10:1 at December 31, 2007
tightens to 2.20:1 at the end of the first quarter of 2008 through December 31,
2008.  Should Nortek not satisfy either of these covenants, Nortek's
senior secured credit facility allows a cure, whereby a subsequent cash equity
investment equal to the EBITDA shortfall, will be treated as EBITDA for purposes
of the compliance calculations in the current and future periods.  The
senior secured credit facility allows for such a cure to occur twice within a
consecutive twelve-month period.  The Company expects that Nortek’s
financial statements for the first quarter of 2008, which will be filed with its
quarterly report on Form 10-Q on or about May 15, 2008, will indicate that its
EBITDA for such quarter (as calculated in accordance with the senior secured
credit facility) will be below the level necessary to be in compliance with the
Interest Coverage Ratio and the Leverage Ratio covenants as of the end of such
quarter.  Any such shortfall is not expected to be significant and
Nortek plans to utilize the equity cure right under its senior secured credit
facility to avoid any default otherwise arising out of such
shortfall.  The Company expects that Nortek may also encounter events
of non-compliance with the Interest Coverage Ratio and the Leverage Ratio
covenants as of the end of the second quarter of 2008 and anticipates that
Nortek may seek to use the equity cure right again to remedy any such
non-compliance.  Based upon the Company’s current forecast regarding
Nortek’s operating results for the balance of 2008 following the second quarter,
the Company does not anticipate further events of non-compliance with the
Interest Coverage Ratio and Leverage Ratio covenants as of the end of the third
and fourth quarters of 2008.  To the extent Nortek experiences events
of non-compliance with such covenants, which are not resolved through the use of
the equity cure feature or other alternatives, Nortek would need to seek waivers
or amendments from the lenders under its senior secured credit facility or
refinance such facility.  Should an event of non-compliance occur,
Nortek will not be permitted to borrow under its credit facility until such time
that a cure happens.  If these events of non-compliance were to occur,
and were not cured, an event of default would exist under Nortek's senior
secured credit facility and would allow the lenders to accelerate the payment of
indebtedness outstanding.  In addition, an event of default under the
credit facility would result in a cross default under substantially all of the
Company’s other senior and senior subordinated indebtedness.  In light
of the instability and uncertainty that currently exists within the financial
and credit markets and the tightening of credit standards, Nortek may not be
able to obtain any such waivers or amendments or any such refinancing on
acceptable terms.  In addition, any such waivers, amendments or
refinancing may involve terms which would have a further adverse effect on the
future cash flows of the Company.  Based upon the application of
equity cures, other potential equity investments and Nortek’s forecast of its
financial results for 2008, the Company has determined that it is probable that
Nortek will be in compliance with the terms of its senior secured credit
facility through December 31, 2008 and as a result the Company has classified
Nortek’s long-term indebtedness as a long-term liability in its consolidated
balance sheet at December 31, 2007.





A
breach of the covenants under the indentures that govern NTK Holdings' 10 3/4%
senior discount notes, and Nortek's 8 1/2% senior subordinated notes or under
the agreements that govern NTK Holdings' senior unsecured loan facility and
Nortek's senior secured credit facility could result in an event of default
under the applicable indebtedness.  Such default may allow the
creditors to accelerate the related debt and may result in the acceleration of
any other debt to which a cross-acceleration or cross-default provision
applies.  In addition, an event of default under Nortek's senior
secured credit facility would permit the lenders to terminate all commitments to
extend further credit under that facility.  Furthermore, if Nortek was
unable to repay the amounts due and payable under its senior secured credit
facility, those lenders could proceed against the collateral granted to them to
secure that indebtedness.  In the event the Company’s lenders or
noteholders accelerate the repayment of their borrowings, the Company cannot
assure that the Company and its subsidiaries would have sufficient assets to
repay such indebtedness.  The Company’s future financing arrangements
will likely contain similar or more restrictive covenants.  As a
result of these restrictions, the Company may be:





·
            limited
      in how the Company conducts its
business,


·
            unable
      to raise additional debt or equity financing to operate during general
      economic or business downturns, or


·
            unable
      to compete effectively or to take advantage of new business
      opportunities.





Such restrictions if imposed, would
affect the Company’s ability to grow in accordance with its
plans.





On May
10, 2007, the Company exercised an option to extend the maturity date of the
senior unsecured loan facility to March 1, 2014 (the “Option”) and paid a loan
extension fee of approximately $4.5 million.  As a result, the Company
recorded approximately $4.5 million as debt discount and recorded approximately
$3.9 million of additional non-cash interest expense in 2007 related primarily
to the decrease in the fair value of the Option.  The debt discount is
being amortized as non-cash interest expense using the interest method through
March 1, 2014 (see Note 5 of the Notes to the Consolidated Financial Statements
included elsewhere herein).





The
Company had consolidated debt at December 31, 2007, of approximately $2,017.9
million consisting of (i) $96.4 million (including borrowings of approximately
$35.0 million under the U.S. revolving portion of Nortek’s senior secured credit
facility) of short-term borrowings and current maturities of long-term debt,
(ii) $43.7 million of long-term notes, mortgage notes and other indebtedness,
(iii) $10.0 million of Nortek’s 9 7/8% Senior Subordinated Notes due 2011, (iv)
$625.0 million of Nortek’s 8 1/2% Senior Subordinated Notes due 2014, (v) $670.3
million of long-term debt outstanding under Nortek’s senior secured credit
facility, (vi) $338.6 million of the Company’s 10 3/4% Senior Discount Notes and
(vii) $233.9 million under the Company’s unsecured term loan
facility.





During
the year ended December 31, 2007, the Company had a net increase in its
consolidated debt of approximately $91.4 million resulting from:





(Amounts
      in millions)Borrowings
      under the revolving portion of Nortek’s senior secured credit
      facility
            
            $
            94.0Payments
      made related the revolving portion of Nortek’s senior secured credit
      facility
            
            
            (69.0
            )Debt
      accretion related to the 10 3/4% Senior Discount Notes
            
            
            33.7Debt
      accretion relating to the PIK option on the senior unsecured loan
      facility
            
            
            22.0Debt
      discount, net relating to the senior unsecured loan
    facility
            
            
            (4.1
            )Additional
      borrowings related primarily to the Company’s foreign
      subsidiaries
            
            
            27.3Issuance
      of unsecured notes and debt assumed related to acquisitions in
      2007
            
            
            11.7Foreign
      currency translation
            
            
            4.1Principal
      payments
            
            
            (28.3
            )Net
      change in consolidated debt
            
            $
            91.4





The
Company’s debt to equity ratio was approximately 22.7:1 at December 31, 2007 as
compared to approximately 26.5:1 at December 31, 2006.  The decrease
in the ratio was a result of an increase in stockholder’s investment, primarily
due to the effect of changes in foreign exchange rates and pension liability
adjustments, partially offset by an increase in indebtedness as noted above and
a net loss of approximately $7.0 million for the year.





At December 31, 2007, Nortek had
approximately $35.0 million
outstanding and
approximately $133.4million of available borrowing capacity
under theU.S.revolving portion of its senior secured
credit facility, with approximately $21.6million in outstanding letters of
credit.  Borrowings under the revolving portion of the senior secured
credit facility are usedfor general corporate purposes, including
borrowings to fund working capital requirements.  Under the Canadian revolvingportion of its senior secured credit
facility, Nortek had no outstanding borrowings and approximately $10.0 million
of available borrowing capacity.  Letters of credit have been
issued under Nortek’s revolving credit facility as additional security for (1)
approximately $17.2 million relating to certain of the Company’s insurance
programs, (2) approximately $3.6 million relating to leases outstanding for
certain of the Company’s manufacturing facilities and (3) approximately $0.8
million relating to certain of the subsidiaries’ purchases and other
requirements.  Letters of credit reduce borrowing availability under
Nortek’s revolving credit facility on a dollar for dollar
basis.





The
indentures and other agreements governing the Company and its subsidiaries’
indebtedness (including the credit agreement for Nortek’s senior secured credit
facility) contain certain restrictive financial and operating covenants
including covenants that restrict the ability of the Company and its
subsidiaries to complete acquisitions, pay dividends, incur indebtedness, make
investments, sell assets and take certain other corporate actions.





At December 31, 2007, the Company had
approximately $64.4 million available for the payment
of cash dividends, stock purchases or other restricted payments (“Restricted
Payments”) under the terms of the indenture governing the Company’s 10 3/4%
Senior Discount Notes’ and the agreement governing the Company’s senior
unsecured loan facility.  Restricted Payments to NTK Holdings and
Nortek Holdings from Nortek are limited by the terms of Nortek’s most
restrictive loan agreement, Nortek’s senior secured credit
facility.  The amount available for such payments under Nortek’s
senior secured credit facility was approximately $172.2 million at December 31,
2007.





The
following is a summary of the Company’s estimated future cash obligations under
long-term debt obligations (excluding unamortized debt discount of approximately
$4.1 million), interest expense (based upon interest rates in effect at the time
of the preparation of this summary), capital lease obligations, minimum annual
rental obligations primarily for non-cancelable lease obligations (operating
leases), acquisition agreements, purchase obligations, other long-term
liabilities and other obligations.  Long-term debt and interest
payments in the table below reflect the financing transactions during the year
ended December 31, 2007 as previously described (see Notes 2 and 5 of the Notes
to the Consolidated Financial Statements included elsewhere
herein):





Payments
      due by periodLess
      than
              1 Year
            
            
            Between
              1 & 2 Years
            
            
            Between
              3 & 4 Years
            
            
            5
      Years
              or Greater
            
            
            Total(Amounts
      in millions)Notes,
      mortgage notes and obligations payable (1)
            
            $
            29.9
            
            
            $
            193.3
            
            
            $
            511.1
            
            
            $
            1,203.7
            
            
            $
            1,938.0Interest
      payments
            
            
            100.4
            
            
            
            338.9
            
            
            
            336.0
            
            
            
            215.5
            
            
            
            990.8Capital
      lease obligations
            
            
            2.5
            
            
            
            4.6
            
            
            
            4.1
            
            
            
            8.8
            
            
            
            20.0Operating
      lease obligations
            
            
            20.8
            
            
            
            29.8
            
            
            
            20.5
            
            
            
            17.8
            
            
            
            88.9Future
      contingent consideration
            
            
            32.7
            
            
            
            19.9
            
            
            
            ---
            
            
            
            ---
            
            
            
            52.6Other
      liabilities (2)
            
            
            6.5
            
            
            
            20.5
            
            
            
            21.2
            
            
            
            83.9
            
            
            
            132.1Total
            
            $
            192.8
            
            
            $
            607.0
            
            
            $
            892.9
            
            
            $
            1,529.7
            
            
            $
            3,222.4




(1)
            Excludes notes payable
      and other short-term obligations of approximately $64.0
      million, which are classified as current on the Company’s Consolidated
      Balance Sheet.





(2)
            Includes
      pension, profit sharing and other post-retirement
      benefits (see Note 7 of the Notes to the Consolidated Financial Statements
      included elsewhere herein).





The
Company and its subsidiaries, affiliates or significant shareholders may from
time to time, in their sole discretion, purchase, repay, redeem or retire any of
the Company’s outstanding debt (including publicly issued debt), in privately
negotiated or open market transactions, by tender offer or otherwise, which may
be subject to restricted payment limitations.





The Company periodically acquires
companies, utilizing cash and proceeds from additional indebtedness to finance
these acquisitions.  Companies acquired and the payment of contingent
consideration during the year ended December 31, 2007 and the impact on cash
flows were as follows:





·
            On
      September 18, 2007, the Company acquired all the capital stock of Stilpol
      and certain assets and liabilities of Metaltecnica for approximately $7.9
      million in cash and the assumption of indebtedness of approximately $4.1
      million through its kitchen range hood subsidiaries, based in Italy and
      Poland (“Best Subsidiaries”).  The Company’s Best subsidiaries
      borrowed the cash portion of the purchase price from banks in
      Italy.


·
            On
      August 1, 2007, the Company, through its wholly-owned subsidiary Jensen,
      Inc., acquired the assets of Triangle for approximately $1.7 million
      of cash.


·
            On
      July 27, 2007, the Company acquired all of the ownership units of
      HomeLogic for an initial purchase price of approximately $5.1 million
      (utilizing approximately $3.1 million of cash and issuing unsecured 6%
      subordinated notes totaling approximately $2.0 million due July 2011) plus
      contingent consideration, which may be payable in future
      years.


·
            On
      July 23, 2007, the Company, through Linear, acquired the assets and
      certain liabilities of Aigis for approximately $2.8 million (utilizing
      approximately $2.2 million of cash and issuing unsecured 6% subordinated
      notes totaling approximately $0.6 million due July
  2011).


·
            On
      June 25, 2007, the Company, through Linear, acquired IEI through a cash
      tender offer to purchase all of the outstanding shares of common stock of
      IEI at a price of $6.65 per share.  The total purchase price was
      approximately $13.8 million.


·
            On
      April 10, 2007, the Company, through Linear, acquired the assets and
      certain liabilities of All Star for an initial purchase price of
      approximately $2.8 million (utilizing approximately $2.3 million of cash
      and issuing unsecured 6% subordinated notes totaling $0.5 million due
      April 2009).


·
            On
      March 26, 2007, the Company, through ABT, acquired the assets of Par
      Safe for future contingent consideration of approximately $4.6 million
      that was earned in 2007 and will be paid in
  2008.


·
            On
      March 2, 2007, the Company, through Linear, acquired the stock of
      LiteTouch for approximately $10.5 million (utilizing approximately $8.0
      million of cash and issuing unsecured 6% subordinated notes totaling $2.5
      million due March 2009) plus contingent consideration, which may be
      payable in future years.


·
            On
      July 18, 2006, the Company, through Linear acquired the stock of Magenta
      for approximately $14.4 million, plus contingent consideration of
      approximately $16.5 million which was earned in 2007 and will be paid in
      2008.


·
            On
      June 26, 2006, the Company, through Linear, acquired the stock of Secure
      Wireless and ABT through two mergers for approximately $10.5 million, plus
      contingent consideration of approximately $18.1 million that was earned by
      Secure Wireless in 2006 and was paid in April 2007 and approximately $11.6
      million that was earned in 2007 and will be paid in
      2008.  Additional contingent consideration may be payable in
      future years.


·
            On
      April 14, 2006, the Company, through two newly formed subsidiaries of its
      HVAC segment, acquired the assets and certain liabilities of Huntair and
      Cleanpak, for approximately $48.4 million (utilizing approximately $38.4
      million of cash and issuing unsecured 6% subordinated notes totaling $10.0
      million due April 2008) plus contingent consideration of approximately
      $30.0 million which was earned in 2006 and was paid in April
      2007.


·
            During
      the first half of 2007, additional purchase price of approximately $1.5
      million was paid related to the acquisition of Gefen,
  Inc.


·
            Contingent
      consideration of approximately $7.5 million related to the acquisition of
      OmniMount, which was accrued for at December 31, 2006, was paid in the
      first quarter of 2007.





Approximately
$55.6 million of contingent consideration was paid during 2007 related to the
Secure Wireless, Huntair, Cleanpak and OmniMount acquisitions.  The
remaining estimated total maximum potential amount of contingent consideration
that may be paid in the future for all completed acquisitions is approximately
$94.7 million, of which approximately $32.7 million was accrued at December 31,
2007 and will be paid in 2008 (see Note 2 of the Notes to the Consolidated
Financial Statements included elsewhere herein).





The
Company has evaluated and expects to continue to evaluate possible acquisition
transactions and possible dispositions of certain of its businesses on an
ongoing basis and at any given time may be engaged in discussions or
negotiations with respect to possible acquisitions or dispositions.





On May
5, 2006, the Company filed a registration statement on Form S-1 (last amended on
September 15, 2006) with the SEC for an initial public offering of shares of its
common stock.  The Company withdrew its registration statement on Form
S-1 in a filing with the SEC on November 13, 2007 due to the unsettled market
conditions.





As of
December 31, 2007, the Company’s former subsidiary, Ply Gem, has guaranteed
approximately $19.4 million of third party obligations relating to rental
payments through June 30, 2016 under a facility leased by a former subsidiary,
which was sold on September 21, 2001.  The Company has indemnified
these guarantees in connection with the sale of Ply Gem on February 12, 2004 and
has recorded an estimated liability related to this indemnified guarantee of
approximately $0.8 million at December 31, 2007 in accordance with
Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN
45”).  The buyer of the former subsidiary has provided certain
indemnifications and other rights to Nortek for any payments that it might be
required to make pursuant to this guarantee.  Should the buyer of the
former subsidiary cease making payments then the Company may be required to make
payments on its indemnification.





The
Company has indemnified third parties for certain matters in a number of
transactions involving dispositions of former subsidiaries.  The
Company has recorded liabilities in relation to these indemnifications,
including the indemnified guarantee noted above, of approximately $11.1 million
and $12.0 million at December 31, 2007 and 2006,
respectively.  Approximately $5.0 million of short-term liabilities
and approximately $6.1 million of long-term liabilities are recorded in accrued
expenses and other long-term liabilities, respectively, in the accompanying
consolidated balance sheet at December 31, 2007 related to these
indemnifications.





The
Company’s combined short-term and long-term product liability accruals increased
from approximately $26.8 million at December 31, 2006 to approximately $32.7
million at December 31, 2007.  Product liability expense decreased
from approximately $14.2 million for the year ended December 31, 2006 to
approximately $12.4 million for the year ended December 31, 2007.  The
decrease in product liability expense for the year ended December 31, 2007 as
compared to 2006 is primarily as a result of a reduction of approximately $0.9
million in product liability accruals being recorded in 2007 in the RVP
segment.  The Company records insurance liabilities and related
expenses for product and general liability losses in accordance with either the
contractual terms of its policies or, if self-insured, the total liabilities
that are estimable and probable as of the reporting date (see Note 8 of the
Notes to the Consolidated Financial Statements included elsewhere
herein).





The
Company’s combined short-term and long-term warranty accruals increased from
approximately $41.2 million at December 31, 2006 to approximately $47.3 million
at December 31, 2007.  Warranty expense increased from approximately
$27.4 million for the year ended December 31, 2006 to approximately $30.7
million for the year ended December 31, 2007.  The increase in
warranty expense for the year ended December 31, 2007 as compared to the same
period of 2006 is primarily as a result of increased expense levels for
residential HVAC products as a result of the change to 13 SEER products,
partially offset by approximately $3.8 million recorded in 2006 in the RVP and
HTP segments related to product safety upgrades as compared to a reduction in
warranty expense of approximately $0.2 million recorded in 2007 related to these
same product safety upgrades.  The Company provides for estimated
warranty liabilities at the time of sale and periodically assesses the adequacy
of its recorded warranty liabilities and adjusts the amounts as necessary (see
Note 8 of the Notes to the Consolidated Financial Statements included elsewhere
herein).





At
December 31, 2007, the Company had approximately $53.4 million of unrestricted
cash and cash equivalents to fund its cash flow needs for
2008.  During 2008, the Company expects that it is reasonably likely
that the following major cash requirements will occur as compared to
2007:





For the year ended December
    31,2008
            
            
            2007(Amounts
      in millions)Interest
      payments, net
            
            $
            100.4
            
            
            $
            120.7Principal
      payments, net
            
            
            29.9
            
            
            
            95.5Capital
      lease obligations
            
            
            2.5
            
            
            
            1.8Completed
      acquisitions and contingent
              earn out payments
            
            
            32.7
            
            
            
            93.5Capital
      expenditures
            
            
            35.0
            
            
            
            36.4Operating
      lease and other rental payments
            
            
            29.2
            
            
            
            31.0Defined
      benefit pension plan contributions
            
            
            3.6
            
            
            
            9.3





In
addition, cash requirements for income tax payments will be dependent on the
Company’s level of earnings.  At December 31, 2007, the Company has
available certain tax carryforwards and future tax credits, that depending on
the level of U.S. taxable income in 2008, could reduce income taxes up to $3.7
million that might be otherwise payable.  In 2007, the Company made
income tax payments, net of refunds of
approximately $10.9million.





The
Company expects to meet its cash flow requirements for fiscal 2008, including
debt repayments and acquisitions, from cash from operations, existing cash and
cash equivalents and the use of Nortek’s senior secured credit
facility.





Unrestricted
cash and cash equivalents decreased from approximately $57.4 million at December
31, 2006 to approximately $53.4 million at December 31, 2007.  The
Company has classified as restricted, in the accompanying consolidated balance
sheet, certain cash and cash equivalents that are not fully available for use in
its operations.  At December 31, 2007, approximately $3.3 million (of
which approximately $2.3 million is included in long-term assets) of cash and
cash equivalents are held primarily as collateral to fund certain benefit
obligations relating to supplemental executive retirement plans.





Capital
expenditures were approximately $36.4 million for the year ended December 31,
2007 as compared to approximately $42.3 million for the year ended December 31,
2006.  Capital expenditures are expected to be between approximately
$30.0 million and $35.0 million in 2008.  Under Nortek’s amended
senior secured credit facility, capital expenditures are limited to
approximately $67.5 million in 2008.





The
Company’s working capital decreased from approximately $210.2 million at
December 31, 2006 to approximately $205.7 million at December 31, 2007, while
the current ratio remained unchanged from December 31, 2006 to December 31, 2007
at 1.4:1.  This decrease in working capital for the year ended
December 31, 2007 was primarily a result of increases in accounts payable and
short-term borrowings and a decrease in accounts receivable, partially offset by
increases in inventory and a decrease in accrued expenses, as described further
below and previously.  The decrease in cash from December 31, 2006 to
December 31, 2007 was also a contributing factor to the decrease in working
capital.





Accounts
receivable decreased approximately $8.9 million, or approximately 2.7%, between
December 31, 2006 and December 31, 2007, while net sales increased approximately
$28.1 million, or approximately 5.2%, in the fourth quarter of 2007 as compared
to the fourth quarter of 2006.  Acquisitions and the effect of foreign
currency exchange rates contributed approximately $19.9 million and $12.7
million, respectively, to the increase in net sales in the fourth quarter of
2007 as compared to the fourth quarter of 2006.  This decrease in
accounts receivable is primarily a result of lower sales volume in the fourth
quarter of 2007 as compared to 2006.  The rate of change in accounts
receivable in certain periods may be different than the rate of change in sales
in such periods principally due to the timing of net sales.  Increases
or decreases in net sales near the end of any period generally result in
significant changes in the amount of accounts receivable on the date of the
balance sheet at the end of such period, as was the situation on December 31,
2007 as compared to December 31, 2006.  Accounts receivable from
customers related to foreign operations increased approximately 11.5% to
approximately $110.2 million at December 31, 2007 from December 31, 2006, of
which approximately $10.2 million related to the effect of changes in foreign
currency exchange rates.  The Company did not experience any
significant overall changes in credit terms, collection efforts, credit
utilization or delinquency in accounts receivable in 2007.





Inventories
increased approximately $30.0 million, or approximately 10.8%, between December
31, 2006 and December 31, 2007 as a result of inventory build-ups related to the
closure of certain manufacturing facilities as previously discussed, increased
material costs principally for steel, copper, aluminum and related purchased
components, and to a lesser extent acquisitions.  Acquisitions and the
effect of changes in foreign currency exchange rates contributed approximately
$10.1 million and $5.1 million, respectively, to the increase in inventories at
December 31, 2007.





Accounts
payable increased approximately $4.5 million, or 2.4%, between December 31, 2006
and December 31, 2007 due primarily to increased inventory levels and the timing
of payments.  Acquisitions and the effect of changes in foreign
currency exchange rates contributed approximately $6.4 million and $6.2 million,
respectively, to the increase in accounts payable at December 31,
2007.





Accrued expenses
and taxes decreased approximately $35.1 million, or approximately 12.4%, between
December 31, 2006 and December 31, 2007 primarily as a result of contingent
consideration payments of approximately $55.6 million related to OmniMount,
Huntair, Cleanpak and Secure Wireless which were accrued for at December 31,
2006 and which were paid in 2007, partially offset by additional contingent
consideration payments of approximately $32.7 million accrued at December 31,
2007, which will be paid in 2008 (see Note 2 of the Notes to the Consolidated
Financial Statements included elsewhere herein), as well as a decrease in
estimated reserves of approximately $6.1 million related to certain matters of
subsidiaries based in Italy and Poland (see Note 8 of the Notes to the
Consolidated Financial Statements included elsewhere herein).





Changes
in certain working capital accounts, as noted above, between December 31, 2006
and December 31, 2007, differ from the changes reflected in the Company’s
Consolidated Statement of Cash Flows for such period as a result of the specific
items mentioned in the four preceding paragraphs and from other non-cash items,
including among others, the effect of changes in foreign currency exchange
rates.





Net
cash flows provided by operating activities for the year ended December 31, 2007
increased by approximately $12.3 million to approximately $106.3 million of net
cash provided by operating activities from approximately $94.0 million for the
year ended December 31, 2006, primarily due to the effect of payments in 2006 of
approximately $54.0 million related to the Company’s deferred compensation plan
and a reduction in the level of cash used for working capital needs, partially
offset by a decrease in net earnings.  Net cash flows used in
investing activities for the year ended December 31, 2007 decreased by
approximately $16.4 million to net cash used in investing activities of
approximately $129.9 million from approximately $146.3 million for the year
ended December 31, 2006, primarily due to a decrease of approximately $12.7
million in payments for acquisitions and a decrease in the level of capital
expenditures of approximately $5.9 million, partially offset by a decrease in
the proceeds from the sale of property and equipment of approximately $4.6
million.  Net cash flows provided by financing activities for the year
ended December 31, 2007 decreased by approximately $12.9 million to net cash
provided by financing activities of approximately $19.6 million from
approximately $32.5 million for the year ended December 31, 2006 resulting from
a reduction in dividends paid in 2006 of approximately $174.9 million, offset by
a decline in net borrowing of approximately $184.9 million.  As
discussed earlier, the Company generally uses cash flows from operations, and
where necessary borrowings, to finance its capital expenditures and strategic
acquisitions, to meet the service requirements of its existing indebtedness and
for working capital and other general corporate purposes.





Unrestricted
cash and cash equivalents decreased approximately $4.0 million and $19.8 million
for the years ended December 31, 2007 and 2006, respectively, principally as a
result of the following:









Condensed Consolidated Cash Flows
      (1)For the Years Ended December
      31,2007
              
              
              2006Operating
      Activities:
              
              (Amounts in
      millions)Cash flow from
      operations, net
              
              $
              122.1
              
              
              $
              155.5Change in accounts
      receivable, net
              
              
              23.7
              
              
              
              (19.6
              )Change in
      inventories
              
              
              (16.6
              )
              
              
              (14.0
              )Change in prepaids
      and other current assets
              
              
              (2.0
              )
              
              
              13.1Change in accounts
      payable
              
              
              (8.4
              )
              
              
              (0.7
              )Change in accrued
      expenses and taxes
              
              
              (16.5
              )
              
              
              18.5Change in long-term
      deferred compensation
              
              
              ---
              
              
              
              (54.0
              )Investing
      Activities:Capital
      expenditures
              
              
              (36.4
              )
              
              
              (42.3
              )Net cash paid for
      businesses acquired
              
              
              (93.5
              )
              
              
              (106.2
              )Proceeds from the
      sale of property and equipment
              
              
              0.5
              
              
              
              5.1Change in restricted
      cash and investments
              
              
              1.2
              
              
              
              0.4Financing
      Activities:Change in borrowings,
      net
              
              
              24.1
              
              
              
              8.2Payment in connection
      with the senior unsecuredloan facility rollover
              
              
              (4.5
              )
              
              
              ---Borrowings under the
      senior unsecured loan facility
              
              
              ---
              
              
              
              200.8Dividends
              
              
              ---
              
              
              
              (174.9
              )Other, net
              
              
              2.3
              
              
              
              (9.7
              )$
              (4.0
              )
              
              $
              (19.8
              )


(1)
            Summarized
      from the Company’s Consolidated Statement of Cash Flows for the years
      ended December 31, 2007 and 2006 (see the Consolidated Financial
      Statements included elsewhere herein).  Additionally, see Notes
      3 and 4 of the Notes to the Consolidated Financial Statements included
      elsewhere herein.







The
impact of changes in foreign currency exchange rates on cash was not material
and has been included in Other, net.





At
December 31, 2007, the Company had approximately $45.0 million of foreign net
operating loss carry-forwards that if utilized would offset future foreign tax
payments.  In addition, the Company has a federal net operating loss
carryforward of approximately $4.0 million, and has an alternative minimum tax
credit carryforward of approximately $2.3 million at December 31,
2007.





The
Company uses EBITDA as both a liquidity and an operating performance
measure.  Liquidity measure disclosures with respect to EBITDA are
provided below.  Refer to the Results of Operations section for
operating performance measure disclosures with respect to EBITDA and a
reconciliation from net earnings (loss) to EBITDA.





EBITDA
is defined as net earnings (loss) before interest, taxes, depreciation and
amortization expense.  EBITDA is not a measure of cash flow under U.S.
generally accepted accounting principles (“GAAP”) and should not be considered
as an alternative or substitute for GAAP cash flow measures such as cash flows
from operating, investing and financing activities.  EBITDA does not
necessarily represent an accurate measure of cash flow performance because it
excludes, among other things, capital expenditures, working capital
requirements, significant debt service for principal and interest payments,
income tax payments and other contractual obligations, which may have a
significant adverse impact on a company’s cash flow performance thereby limiting
its usefulness when evaluating the Company’s cash flow
performance.  The Company uses a significant amount of capital assets
and capital expenditures are a significant component of the Company’s annual
cash expenditures and therefore their exclusion from EBITDA is a material
limitation.   The Company has significant working capital
requirements during the year due to the seasonality of its business, which
require significant cash expenditures and therefore its exclusion from EBITDA is
a material limitation.  The Company has a significant amount of debt
and the Company has significant cash expenditures during the year related to
principal and interest payments and therefore their exclusion from EBITDA is a
material limitation.  The Company generally pays significant U.S.
federal, state and foreign income taxes each year and therefore its exclusion
from EBITDA is a material limitation.  As a result, EBITDA should be
evaluated in conjunction with net cash from operating, investing and financing
activities for a more complete analysis of the Company’s cash flow performance,
as they include the financial statement impact of these
items.  Although depreciation and amortization are non-cash charges,
the assets being depreciated and amortized will often have to be replaced in the
future and EBITDA does not reflect any cash requirements for
replacements.  As EBITDA is not defined by GAAP, the Company’s
definition of EBITDA may differ from and therefore may not be comparable to
similarly titled measures used by other companies thereby limiting its
usefulness as a comparative measure.  Because of the limitations that
EBITDA has as an analytical tool, investors should not consider it in isolation,
or as a substitute for analysis of the Company’s cash flows as reported under
GAAP.





Company
management uses EBITDA as a supplementary non-GAAP liquidity measure to allow
the Company to evaluate its operating units’ cash-generating ability to fund
income tax payments, corporate overhead, debt service, capital expenditures and
increases in working capital.  EBITDA is also used by management to
allocate resources for growth among its businesses, to identify possible
impairment charges, to evaluate the Company’s ability to service its debt and to
raise capital for growth opportunities, including acquisitions.  In
addition, the Company uses EBITDA as a liquidity measure in financial
presentations to the Company’s Board of Directors, shareholders, various banks
participating in Nortek’s Credit Facility, note holders and Bond Rating
agencies, among others, as a supplemental non-GAAP liquidity measure to assist
them in their evaluation of the Company’s cash flow performance.  The
Company uses EBITDA in conjunction with traditional GAAP liquidity measures as
part of its overall assessment of cash flow ability and therefore does not place
undue reliance on EBITDA as its only measure of cash flow
performance.





The
Company believes EBITDA is useful for both the Company and investors as it is a
commonly used analytical measurement for assessing a company’s cash flow ability
to service and/or incur additional indebtedness, which eliminates the impact of
certain non-cash items such as depreciation and amortization.  The
Company believes that EBITDA is specifically relevant to the Company due to the
Company’s leveraged position as well as the common use of EBITDA as a liquidity
measure within the Company’s industries by lenders, investors, others in the
financial community and peer group companies.  The Company has
included EBITDA as a supplemental liquidity measure, which should be evaluated
by investors in conjunction with the traditional GAAP liquidity measures
discussed earlier in this Liquidity and Capital Resources section for a complete
evaluation of the Company’s cash flow performance.





The
following table presents a reconciliation from net cash provided by operating
activities, which is the most directly comparable GAAP liquidity measure, to
EBITDA for the three years ended December 31, 2007:




For the Years Ended December
      31,2007
              
              
              2006
              
              
              2005(Amounts in
      millions)Net cash provided by operating
      activities
              
              $
              106.3
              
              
              $
              94.0
              
              
              $
              70.7Cash
      used by working capital andother long-term asset and
      liability changes
              
              
              15.8
              
              
              
              61.5
              
              
              
              86.0Non-cash interest expense,
      net
              
              
              (67.3
              )
              
              
              (47.6
              )
              
              
              (29.9
              )Non-cash stock-based compensation
              
              
              (0.3
              )
              
              
              (0.3
              )
              
              
              (0.3
              )Gain from curtailment of
      post-retirement medical benefits
              
              
              ---
              
              
              
              35.9
              
              
              
              ---Compensation reserve
      adjustment
              
              
              ---
              
              
              
              3.5
              
              
              
              ---(Loss) gain on sale of property
      and equipment
              
              
              (2.4
              )
              
              
              (1.3
              )
              
              
              1.6Deferred federal income tax
      (provision) benefit
              
              
              6.0
              
              
              
              (26.8
              )
              
              
              (25.3
              )Provision for income
      taxes
              
              
              10.6
              
              
              
              46.1
              
              
              
              43.2Interest expense
      (1)
              
              
              183.7
              
              
              
              162.9
              
              
              
              138.6Investment
      income
              
              
              (2.0
              )
              
              
              (2.2
              )
              
              
              (1.8
              )EBITDA (2), (3),
      (4)
              
              $
              250.4
              
              
              $
              325.7
              
              
              $
              282.8


(1)
            Interest
      expense for the year ended December 31, 2007 includes cash interest of
      approximately $116.4 million and non-cash interest of approximately $67.3
      million.  Interest expense for the year ended December 31, 2006
      includes cash interest of approximately $115.3 million (including
      approximately $3.9 million relating to the accelerated amortization of the
      Nortek Holdings, Inc. deferred compensation plan) and non-cash interest of
      approximately $47.6 million.  Interest expense for the year
      ended December 31, 2005 includes cash interest of approximately $108.7
      million (including approximately $8.2 million relating to the accelerated
      amortization of the Nortek Holdings deferred compensation plan) and
      non-cash interest of approximately $29.9
  million.





(2)
            In the RVP
      segment, EBITDA for the year ended December 31, 2007 includes a favorable
      adjustment to selling, general and administrative expense, net based upon
      the Company’s revised estimate of reserves provided in 2006 for certain
      suppliers in Italy and Poland of approximately $6.7 million, a decrease in
      product liability expense of approximately $1.8 million as compared to the
      year ended December 31, 2006, a charge to warranty expense of approximately
      $0.5 million related to a product safety upgrade, an approximate $1.8
      million charge related to the closure of the Company’s NuTone, Inc.
      Cincinnati, Ohio facility, an approximate $1.1 million charge related to
      the closure of the Company’s Jensen, Inc. Vernon, California facility,
      legal and other professional fees and expenses incurred in connection with
      matters related to certain subsidiaries based in Italy and Poland of
      approximately $2.1 million, an approximate $1.9 million loss related to
      the settlement of litigation, a charge of approximately $0.4 million
      related to a reserve for amounts due from a customer and net foreign
      exchange losses of approximately $1.0 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries.





In the
HTP segment, EBITDA for the year ended December 31, 2007 includes a charge of
approximately $0.5 million related to a reserve for amounts due from a customer,
a reduction in warranty expense of approximately $0.7 million related to a
product safety upgrade and approximately $2.0 million of fees and expenses
incurred in connection with a dispute with a supplier.





In the
HVAC segment, EBITDA for the year ended December 31, 2007 includes a charge of
approximately $3.7 million related to the planned closure of the Company’s
Mammoth, Inc. Chaska, Minnesota manufacturing facility, a charge of
approximately $1.8 million related to reserves for amounts due from customers
and net foreign exchange losses of approximately $2.5 million related to
transactions, including intercompany debt not indefinitely invested in the
Company’s subsidiaries.





(3)
            In
      the RVP segment, EBITDA for the year ended December 31, 2006 includes an
      approximate $35.9 million curtailment gain related to post-retirement
      medical and life insurance benefits, reserves of approximately $16.0
      million related to estimated losses as a result of the unlikelihood that
      certain suppliers to our kitchen range hood subsidiaries based in Italy
      and Poland will be able to repay advances and amounts due under other
      arrangements, an approximate $3.5 million charge related to the closure of
      the Company’s NuTone, Inc. Cincinnati, Ohio facility and an increase in
      warranty expense in the first quarter of 2006 of approximately $1.5
      million related to a product safety
upgrade.





In the
HTP segment, EBITDA for the year ended December 31, 2006 includes an increase in
warranty expense of approximately $2.3 million related to a product safety
upgrade.





In the
HVAC segment, EBITDA for the year ended December 31, 2006 includes an
approximate $1.6 million gain related to the favorable settlement of litigation,
a charge of approximately $1.2 million, net of minority interest of
approximately $0.8 million, related to a reserve for amounts due from a customer
in China related to a Chinese construction project and net foreign exchange
gains of approximately $0.4 million related to transactions, including
intercompany debt not indefinitely invested in the Company’s
subsidiaries.





(4)
            In
      the RVP segment, EBITDA for the year ended December 31, 2005 includes a
      non-cash foreign exchange loss of approximately $1.2 million related to
      intercompany debt not indefinitely invested in the Company’s
      subsidiaries.





In the
HTP segment, EBITDA for the year ended December 31, 2005 includes a gain of
approximately $1.6 million related to the sale of a corporate office building of
one of the Company’s subsidiaries.





In
Unallocated, EBITDA for the year ended December 31, 2005 includes an approximate
$1.4 million gain related to the favorable settlement of
litigation.




Inflation,
Trends and General Considerations





The
Company has evaluated and expects to continue to evaluate possible acquisition
transactions and the possible dispositions of certain of its businesses on an
ongoing basis and at any given time may be engaged in discussions or
negotiations with respect to possible acquisitions or dispositions.





The Company’s performance is dependent
to a significant extent upon the levels of new residential construction,
residential replacement and remodeling and non-residential
construction, all of which
are affected by such factors as interest rates,credit availability,inflation, consumer confidence and
unemployment, among
others.The Company’s
performance in 2007 was adversely impacted as a result of the troubled housing
market together with a difficult mortgage industry that resulted in the
significant industry wide decline in new housing activity, as well as a negative
impact on consumer spending on home remodeling and repair.  In
addition, the Company’s residential HVAC products are subject to federal minimum
efficiency standards, which increased to 13 SEER in 2006.  The 13 SEER
units have a higher unit cost and selling price to consumers which the Company
believes may have softened demand as some homeowners may have opted to delay
replacing units or to repair them instead, as well as not add new units to
existing homes that do not currently have such products.  In 2007 the
Company’s earnings continued to be challenged by higher commodity costs which
have only been partially offset by the Company’s strategic cost reduction
initiatives.  The Company expects these industry and market trends to
continue in 2008.





The
Company has recently experienced an increase in the level of product liability
expense in 2007 and 2006, particularly in the RVP segment.  The
Company is unable to ascertain at this time whether this higher level of expense
will continue at this level, increase or decrease.





The
demand for the Company’s products is seasonal, particularly in the Northeast and
Midwest regions of the United States where inclement weather during the winter
months usually reduces the level of building and remodeling activity in both the
home improvement and new construction markets.  The Company’s lower
sales levels usually occur during the first and fourth
quarters.  Since a high percentage of the Company’s manufacturing
overhead and operating expenses are relatively fixed throughout the year,
operating income and net earnings tend to be lower in quarters with lower sales
levels.  In addition, the demand for cash to fund the working capital
of the Company’s subsidiaries is greater from late in the first quarter until
early in the fourth quarter.





The Company issubject to the effects of changing
pricesand for the past
several years,the impact
of inflation hashada significantadverse effect on itsresults of operations for the periods
presented.In some circumstances, market conditions
or customer expectations may preventthe Companyfrom increasing the prices ofitsproducts to offset the inflationary
pressures that may increase costs in the future.During 2007,the Company
continued to experience higher material costs related primarily to purchases of
copper, steel, aluminum and related purchased components such as
motors.  These cost increases were partially offset by continued
strategic sourcing initiatives and improvements in manufacturing efficiency, as
well as sales price increases.





As of December 31, 2007, approximately
6.2% of the Company’s workforce was subject to various collective bargaining
agreements.





In late
June 2006, the Company informed the union located at the Cincinnati, OH location
of its subsidiary NuTone, that the Company would close the manufacturing
operations at the facility on or about August 30, 2006.  As a result
of this closure, the Company, through its RVP segment, recorded an approximate
$3.5 million charge to operations in 2006 (of which approximately $1.8 million
was recorded in cost of goods sold and approximately $1.7 million was recorded
in selling, general and administrative expense, net) consisting of severance of
approximately $2.2 million and write-offs related to equipment sales and
disposals of approximately $1.3 million.





During
the year ended December 31, 2007, the Company recorded liabilities and expensed
into selling, general and administrative expense, net approximately $1.8 million
in the accompanying consolidated statement of operations related to the closure
of its NuTone Cincinnati, OH facility and the relocation of such operations to
certain other subsidiaries of the Company within the RVP segment.  The
NuTone facility was shutdown in the third quarter of 2007 and approximately 59
employees were terminated.  Prior to August 2006, this facility
supported manufacturing, warehousing and distribution activities for
NuTone.





During the second quarter of 2007, after
meeting and negotiating with the bargaining committee of the Teamsters Local
970, representing approximately 127 union employees of the Company’s
wholly-owned subsidiary Mammoth, Inc. (“Mammoth”) located in Chaska, Minnesota,
it was decided to shut down manufacturing operations at the Chaska plant and
relocate such operations to other manufacturing facilities within the Commercial
HVAC Group.  During the second quarter of 2007, Mammoth finalized its
negotiations with the union over the severance benefits associated with the
shutdown and approximately $0.3 million was paid related to severance to the
union employees.  In addition to the severance paid in the second
quarter of 2007 related to the union employees, the Company recorded
approximately $3.4millionin selling, general and administrative,
netduring the year ended December 31,
2007related to shutdown
costs and asset write-offs associated with the anticipated cessation of
manufacturing operations at Chaska during the fourth quarter of
2007.It is
estimated that an additional approximate $0.8 million will be expensed in 2008
related to this shutdown.





On August 8, 2007, after negotiating
with the bargaining committee of the Steel, Paper House, Chemical Drivers and
Helpers, Local No. 578, which represented approximately 64 union employees
located at the Vernon, CA manufacturing facility of the Company’s wholly-owned
subsidiary Jensen, Inc. (“Jensen”),the decision was madeto shut down manufacturing operations
and relocate such operations to other manufacturing facilities within the RVP
segment.  Additionally, on such date, Jensen finalized its
negotiations with the union over the severance benefits associated with this
shutdown.During
the year ended December 31, 2007, the Company recorded in selling, general and
administrative expense, net approximately $0.8 million related tothe shutdown, including severance,
relocation expenses, facility lease costs and asset write-offsand expensed an additional $0.3 million
to cost of products sold related to severance associated with the
shutdown.  The Company does not anticipate recording any further
expenses associated with this shutdown in 2008.





A work
stoppage at one of the Company’s facilities that lasts for a significant period
of time could cause the Company to lose sales, incur increased costs and
adversely affect its ability to meet customers’ needs.  A plant
shutdown or a substantial modification to a collective bargaining agreement
could result in material gains or losses or the recognition of an asset
impairment.  As agreements expire and until negotiations are
completed, the Company does not know whether it will be able to negotiate
collective bargaining agreements on the same or more favorable terms as the
current agreements or at all and without production interruptions, including
labor stoppages.





Market
Risk





As
discussed more specifically below, the Company is exposed to market risks
related to changes in interest rates, foreign currencies and commodity
pricing.  The Company does not use derivative financial instruments,
except, on a limited basis to periodically mitigate certain economic
exposures.  The Company does not enter into derivative financial
instruments or other financial instruments for trading purposes.





A. Interest
Rate Risk





The
Company is exposed to market risk from changes in interest rates primarily
through its investing and borrowing activities.  In addition, the
Company’s ability to finance future acquisition transactions may be impacted if
the Company is unable to obtain appropriate financing at acceptable interest
rates.





The
Company’s investing strategy, to manage interest rate exposure, is to invest in
short-term, highly liquid investments and marketable
securities.  Short-term investments primarily consist of federal
agency discount notes, treasury bills and bank issued money market instruments
with original maturities of 90 days or less.  At December 31, 2007,
the fair value of the Company’s unrestricted and restricted investments and
marketable securities was not materially different from their cost
basis.





The Company manages
its borrowing exposure to changes in interest rates by optimizing the use of
fixed rate debt with extended maturities.  At December 31, 2007,
approximately 52.1% of the carrying values of the Company’s long-term debt was
at fixed interest rates.  The remaining portion of the Company’s
long-term debt is at variable interest rates.  Based upon interest
rates in effect at December 31, 2007, an overall unfavorable change in interest
rates of 100 basis points would result in an additional charge to interest
expense of approximately $8.8 million.





See the
table set forth in item D (Long-term Debt) below and Note 5 of the Notes to the
Consolidated Financial Statements included elsewhere herein for further
disclosure of the terms of the Company’s debt.





B.  Foreign
Currency Risk





The Company’s results of operations are
affected by fluctuations in the value of the U.S. dollar as compared to the
value of currencies in foreign markets primarily related to changes in the Euro,
the Canadian Dollar and the British Pound.  In 2007, the net impact of
foreign currency changes was not material to the Company’s financial condition
or results of operations.  The impact of foreign currency changes
related to translation resulted in an increase in stockholder’s investment of
approximately $15.4 million for the year ended December 31,
2007.  Additionally, the impact of foreign currency changes related to
transactions resulted in an increase in foreign exchange losses recorded in
selling, general and administrative expense, net of approximately $3.1 million
for the year ended December 31, 2007.  The Company manages its
exposure to foreign currency exchange risk principally by trying to minimize the
Company’s net investment in foreign assets, including, the use of strategic
short and long-term borrowings at the foreign subsidiary
level.  Consistent with this strategy, notes payable and other short-term obligations at December 31, 2007 consist primarily of short-term
borrowings by certain of the Company’s foreign subsidiaries.  At
December 31, 2007, the Company’s net investment in foreign assets was
approximately $150.3 million.  An overall unfavorable change in
foreign exchange rates of 10% would result in an approximate $13.7 million
reduction in equity as a result of the impact on the cumulative translation
adjustment.  The Company generally does not enter into derivative
financial instruments to manage foreign currency exposure.  At
December 31, 2007, the Company did not have any significant outstanding foreign
currency hedging contracts.





C.  Commodity
Pricing Risk





The Company is subject to significant
market risk with respect to the pricing of its principal raw materials, which
include, among others, steel, copper, packaging material, plastics, glass and
aluminum.  If prices of these raw materials were to increase
dramatically, the Company may not be able to pass such increases on to its
customers and, as a result, gross margins could decline
significantly.  The Company manages its exposure to commodity pricing
risk by continuing to diversify its product mix, strategic buying programs and
vendor partnering.





The Company generally does not enter
into derivative financial instruments to manage commodity-pricing
exposure.  At December 31, 2007, the Company did not have any material
outstanding commodity forward contracts.





D.  Long-term
Debt





The table that follows sets forth as of
December 31, 2007, the Company’s long-term debt obligations (excluding
approximately $4.1 million of debt discount), principal cash flows by scheduled
maturity, weighted average interest rates and estimated fair market
values.  Less than approximately 1% of the Company’s total long-term
indebtedness is denominated in foreign currencies.  The weighted
average interest rates for variable rate debt are based on December 31, 2007
interest rates.







Long-term
Debt:


Scheduled Maturity
            
            
            Average Interest RateFixed
            
            
            Variable
            
            
            
            
            
            Fixed
            
            VariableYear-ending
            
            Rate
            
            
            Rate
            
            
            Total
            
            
            Rate
            
            Rate
            
            Total(Dollar
      amounts in millions)December
      31,    2008
            
            $
            20.0
            
            
            $
            12.4
            
            
            $
            32.4
            
            
            
            6.1
            %
            
            
            6.4
            %
            
            
            6.2
            %2009
            
            
            8.0
            
            
            
            12.5
            
            
            
            20.5
            
            
            
            6.2
            
            
            
            6.4
            
            
            
            6.32010
            
            
            2.4
            
            
            
            175.0
            
            
            
            177.4
            
            
            
            6.8
            
            
            
            7.1
            
            
            
            7.12011
            
            
            14.8
            
            
            
            496.7
            
            
            
            511.5
            
            
            
            8.8
            
            
            
            7.1
            
            
            
            7.12012
            
            
            2.1
            
            
            
            1.6
            
            
            
            3.7
            
            
            
            7.1
            
            
            
            5.5
            
            
            
            6.4Thereafter
            
            
            972.4
            
            
            
            240.1
            
            
            
            1,212.5
            
            
            
            9.3
            
            
            
            10.4
            
            
            
            9.5Total
      Long-term Debt at December 31, 2007 (1)
            
            $
            1,019.7
            
            
            $
            938.3
            
            
            $
            1,958.0
            
            
            
            9.2
            %
            
            
            7.9
            %
            
            
            8.6
            %Fair
      Market Value of Long-term Debt at December 31, 2007
            
            $
            803.7
            
            
            $
            938.3
            
            
            $
            1,742.0





(1)
            Includes
      the Company’s senior unsecured loan facility with an initial principal
      amount of approximately $205.0 million.  Since the initial
      borrowing on May 10, 2006, the Company has elected the PIK option to
      increase the principal amount of the senior unsecured loan facility for
      the interest accrued during the applicable interest periods.  As
      a result of exercising this PIK Option, the Company recorded approximately
      $33.0 million of accrued interest as additional indebtedness relating to
      the senior unsecured loan facility.  At December 31, 2007, the
      actual outstanding principal balance on the senior unsecured loan facility
      was approximately $238.0 million.  The amount recorded as of
      December 31, 2007, net of unamortized debt discount of approximately $4.1
      million, is approximately $233.9 million.   The senior
      unsecured loan facility matures in 2014 and has an interest rate of
      approximately 10.4% at December 31,
2007.





Includes the Company’s 10 3/4% Senior
Discount Notes due 2014 with an aggregate principal amount at maturity of
approximately $403.0 million.  The carrying value of the 10 3/4%
Senior Discount Notes was approximately $338.6million at December 31, 2007, which is
being accreted to the principal amount through September
2009.





Includes Nortek’s 9 7/8% Senior
Subordinated Notes due 2011 and Nortek’s 8 1/2% Senior Subordinated Notes due
2014 with a total aggregate principal amount of approximately$10.0 million and$625.0 million, respectively.





Includes Nortek’s SeniorSecured
Credit Facility with a total principal amount of approximately $677.3 million
and a variable interest rate of approximately 7.1%.  The Company’s
Senior Secured Credit Facility matures at various times through
2011.





See
Liquidity and Capital Resources and Note 5 the Notes to the Consolidated
Financial Statements included elsewhere herein for further information
surrounding the Company’s outstanding debt obligations.





Forward
–Looking Statements





This document contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995.  When used in this discussion and throughout this document,
words, such as “intends”, “plans”, “estimates”, “believes”, “anticipates” and
“expects” or similar expressions are intended to identify forward-looking
statements.  These statements are based on the Company’s current plans
and expectations and involve risks and uncertainties, over which the Company has
no control, that could cause actual future activities and results of operations
to be materially different from those set forth in the forward-looking
statements.  Important factors that could cause actual future
activities and operating results to differ include the availability and cost of
certain raw materials, (including, among others, steel, copper, packaging
materials, plastics, resins, glass, wood and aluminum) and purchased components,
the level of domestic and foreign construction and remodeling activity affecting
residential and commercial markets, interest rates, employment, inflation,
foreign currency fluctuations, consumer spending levels, exposure to foreign
economies, the rate of sales growth, price, and product and warranty liability
claims.  Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date
hereof.  The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.  All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by these cautionary
statements.  Readers are also urged to carefully review and consider
the various disclosures made by the Company, in this document, as well as the
Company's periodic reports on Forms 10-K, 10-Q and 8-K, filed with the
SEC.





NTK
HOLDINGS, INC. AND SUBSIDIARIES
 December
31, 2007


Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk.





Quantitative
and qualitative disclosure about market risk is set forth in Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Market Risk.





Item
8.  Financial Statements and Supplementary Data.





Financial
statements and supplementary data required by this Item 8 are set forth at the
pages indicated in Item 15(a), including exhibits, of Part IV of this report,
incorporated herein by reference.





Item
9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.





Not
applicable.





Item
9A.  Controls and Procedures.





Evaluation of Disclosure
Controls and Procedures.  An evaluation of the Company’s
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) was carried out under the supervision and with the participation
of the Company’s Chairman and Chief Executive Officer along with the Company’s
Vice President and Chief Financial Officer and the members of the Company’s
Disclosure and Controls Committee.  The Company’s Chairman and Chief
Executive Officer along with the Company’s Vice President and Chief Financial
Officer concluded that the company’s disclosure controls and procedures, as of
the end of the period covered by this annual report on Form 10-K, are effective
in ensuring that the information required to be disclosed by the Company in the
reports it files or submits to the SEC, is (i) accumulated and communicated to
the Company’s management (including the Chief Executive Officer and Chief
Financial Officer) to allow timely decisions regarding required disclosure, and
(ii) recorded, processed, summarized and reported within the time periods
specified in the Commission’s rules and forms.





Management’s Annual Report
on Internal Control over Financial Reporting.  The Company’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in the Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the Company.  The Company’s management assessed the
effectiveness of its internal control over financial reporting as of December
31, 2007.  In making this assessment, the Company’s management used
the criteria set forth by the Committee Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control-Integrated
Framework.  The Company’s management has concluded that, as of
December 31, 2007, its internal control over financial reporting is effective
based on these criteria.  This report is considered “furnished” and
not “filed” under the Exchange Act.  This annual report does not include an
attestation report of the Company's registered public accounting firm regarding
internal control over financial reporting. Management's report was not subject
to attestation by the Company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit theCompany to provide only management's
report in this annual report.





Changes in Internal Control
over Financial Reporting.  There was no change in the Company’s
internal control over financial reporting (as defined in the Exchange Act Rules
13a-15(d) or 15d-15(d)) that occurred during the Company’s fourth fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.





Item
9B.  Other Information.





None.





PART
III





Item
10.  Directors, Executive Officers and Corporate
Governance.





Directors
of the Registrant





NTK
Holdings, Inc. is the sole stockholder of Nortek Holdings, Inc., which is the
sole stockholder of Nortek, Inc.  NTK Holdings, Inc. is a wholly-owned
subsidiary of Investors LLC, whose members include affiliates of Thomas H. Lee
Partners, L.P. (“THL”) and members of the Company’s senior
management.  Each member of the management committee of Investors LLC
is also a director of NTK Holdings.  For more information, see
“Certain Relationships and Related Transactions – Securityholders
Agreement”.





The
following table sets forth the names of the Company’s directors, their
positions, ages and the year each of them became a director of NTK Holdings and
Nortek:





Name
            Principal Occupation
            Age
            NTK
      Holdings
              Director Since
            Nortek
              Director SinceRichard
      L. Bready
            Chairman,
      President and Chief Executive Officer
      of the Company
            63
            2004
            1976Jeffrey
      C. Bloomberg
            Director
            60
            2005
            2005Joseph
      M. Cianciolo
            Director
            68
            2005
            2003Anthony
      J. DiNovi
            Director
            45
            2005
            2004David
      V. Harkins
            Director
            67
            2005
            2004David
      B. Hiley
            Director
            69
            2005
            2003Kent
      R. Weldon
            Director
            40
            2005
            2004





Richard L. Breadyhas served
as Chairman of the Board, Chief Executive Officer and President of NTK Holdings
since November 2004 and of Nortek since December 1990.  Mr. Bready
joined Nortek as Treasurer in 1975 and was elected Director in
1976.  Prior to joining Nortek, Mr. Bready was an independent
financial consultant and an audit manager at a major public accounting
firm.  Mr. Bready is a director of Gamco Investors, Inc. and Bancorp
RI.





Jeffrey C. Bloomberghas been
a member of the Board of Directors of both NTK Holdings and Nortek since April
19, 2005.  Mr. Bloomberg was previously a member of Nortek's Board of
Directors from January 9, 2003 to August 27, 2004.  Mr. Bloomberg has
served since 2001 in the Office of the Chairman of Gordon Brothers Group LLC, a
company which assists retail and consumer goods companies in asset redeployment
and providing capital solutions to middle market companies in the retail and
consumer product industries.  From 1994 to 2001, Mr. Bloomberg served
as the President of Bloomberg Associates, an investment banking
company.





Joseph M. Cianciolohas been
a member of the Board of Directors of NTK Holdings since February 2005 and of
Nortek since 2003.  Mr. Cianciolo retired in June 1999 as the managing
partner of the Providence, Rhode Island office of KPMG LLP.  At the
time of his retirement, Mr. Cianciolo had been a partner of KPMG LLP since
1970.  Mr. Cianciolo currently serves as a director of United Natural
Foods, Inc. and Eagle Bulk Shipping, Inc.





Anthony J. DiNovihas been a
member of the Board of Directors of NTK Holdings since February 2005 and of
Nortek since August 27, 2004.  Mr. DiNovi is a Co-President and
Managing Director of THL.  Prior to joining THL in 1988, Mr. DiNovi
was in the corporate finance departments of Goldman, Sachs & Co. and
Wertheim Schroder & Co., Inc.  Mr. DiNovi currently serves as a
director of American Operations Media, Inc., Dunkin Brands, Inc., Michael Foods,
Inc., Vertis, Inc. and West Corp.





David V. Harkinshas been a
member of the Board of Directors of NTK Holdings since February 2005 and of
Nortek since August 27, 2004.  Mr. Harkins currently serves as Vice
Chairman of THL.  Mr. Harkins is currently a director of National
Dentex Corporation and Dunkin Brands, Inc.  Mr. Harkins served as
interim Chairman of the Board and Chief Executive Officer of Conseco, Inc. from
April 28, 2000 until June 28, 2000 without compensation for such
service.  On December 17, 2002, Conseco, Inc. voluntarily commenced a
case under Chapter 11 of the United States Code in the United States Bankruptcy
Court, Northern District of Illinois, Eastern Division.





David B. Hileyhas been a
member of the Board of Directors of NTK Holdings since February 2005 and of
Nortek since 2003 and had been a financial consultant for the Company from 1991
to 2005.  From April 1, 1998 through March 1, 2000, Mr. Hiley served
as Executive Vice President and Chief Financial Officer of Koger Equity, Inc., a
real estate investment trust.  Prior to that, he was head of
investment banking at Thomson McKinnon Securities.  Mr. Hiley
currently serves as a director of Eagle Bulk Shipping, Inc.





Kent R. Weldonhas been a
member of the Board of Directors of NTK Holdings since February 2005 and of
Nortek since August 27, 2004.  Mr. Weldon is a Managing Director of
THL.  Mr. Weldon was employed by THL from 1991 until 1993 and has been
employed by THL since 1995, when he rejoined the firm.  Prior to
joining THL, Mr. Weldon worked in the corporate finance department of Morgan
Stanley & Co. Incorporated.  Mr. Weldon currently serves as a
director of Cumulus Media Partners, Michael Foods, Inc., Progressive Moulded
Products, Ltd., CMP Susquehanna Holdings Corporation and CMP Susquehanna
Corporation.





Executive
Officers of the Company





The
following table sets forth the names of the executive officers of the Company,
their positions, and ages:





Name
            Age
            PositionRichard
      L. Bready
            63
            Chairman,
      President and Chief Executive OfficerAlmon
      C. Hall
            61
            Vice
      President and Chief Financial OfficerKevin
      W. Donnelly
            53
            Vice
      President, General Counsel and SecretaryEdward
      J. Cooney
            60
            Vice
      President and TreasurerBryan
      L. Kelln
            42
            Senior
      Vice President and Chief Operating
Officer





Messrs.
Bready, Hall, Cooney and Donnelly have served in the same or substantially
similar executive positions with Nortek for at least the past five years and
with NTK Holdings since February 10, 2005.





On June
13, 2005, the Company appointed Bryan L. Kelln to the newly created position of
Vice President-Operations and subsequently on December 22, 2006, Mr. Kelln was
promoted to the newly created position of Senior Vice President and Chief
Operating Officer.  Prior to joining the Company, Mr. Kelln served as
President of Jacuzzi, Inc. from July 2004 to May 2005; as Operating Executive of
The Jordan Company from 2002 to 2004; as President and CEO of RockShox, Inc.
from 2000 to 2002; and as Senior Vice President of General Cable
Corporation.  Mr. Kelln currently serves as a director of Sensus
Metering Systems, Inc.  See “Executive Compensation – Employment
Contracts and Termination of Employment and Change of Control Arrangements –
Agreement with Bryan L. Kelln”.





Executive
officers are elected annually by the Company’s board of directors and serve
until their successors are chosen and qualified.  The Company’s
executive officers include only those officers of the Company who perform
policy-making functions and have managerial responsibility, for major aspects of
the Company’s overall operations.  A number of other individuals who
serve as officers of the Company’s subsidiaries perform policy-making functions
and have managerial responsibilities for the subsidiary or division by which
they are employed, although not for the Company overall.  Certain of
these individuals could, depending on earnings of such unit, be more highly
compensated than some executive officers of the Company.





There
are no family relationships between any director, executive officer or other
significant employee and any other director, executive officer or other
significant employee.




Code
of Ethics





The
Company has adopted a code of ethics that applies to its President and Chief
Executive Officer, Vice President and Chief Financial Officer, Vice President
and Treasurer, Vice President and Controller and other persons performing
similar functions as identified by the President and Chief Executive
Officer.  The Company is filing a copy of its code of ethics as
Exhibit 14 to this Form 10-K.





Audit
Committee





The
Company’s audit committee currently is comprised of Messrs. Cianciolo, Bloomberg
and Hiley.  Although the Company is not a “listed issuer” within the
meaning of Rule 10A-3 under the Exchange Act, the Company’s board of directors
has determined that Mr. Cianciolo and Mr. Bloomberg are considered “independent”
directors within the meaning of the rules of the New York Stock Exchange for
listed companies and within the meaning of Rule 10A-3 under the Exchange
Act.  In addition, Mr. Cianciolo is an audit committee financial
expert as that term is used in Item 407(d)(5)(ii)of
Regulation S-K adopted by the Securities and Exchange Commission.  The
audit committee met 9 times in 2007.





The
duties and responsibilities of the audit committee include, among other
things:





·
            overseeing
      management's maintenance of the reliability and integrity of the Company’s
      accounting policies and financial reporting and the Company’s disclosure
      practices;


·
            overseeing
      management's establishment and maintenance of processes to assure that an
      adequate system of internal control is
  functioning;


·
            overseeing
      management's establishment and maintenance of processes to assure the
      Company’s compliance with all applicable laws, regulations and corporate
      policy;


·
            reviewing
      the Company’s annual and quarterly financial statements prior to their
      filing or prior to the release of earnings;
and


·
            appointing,
      compensating, terminating, retaining and overseeing the work of the
      independent registered public accounting firm and considering and
      approving any non-audit services proposed to be performed by the
      independent registered public accounting
firm.





The
audit committee will have the power to investigate any matter brought to its
attention within the scope of its duties and to retain counsel for this purpose
where appropriate.





Compensation
Committee





The
Company’s compensation committee is comprised of Messrs. Bready and
DiNovi.  The duties and responsibilities of the compensation committee
include, among other things:





·
            reviewing
      key employee compensation policies, plans and programs, including those
      for the executive officers, other than Mr.
  Bready;


·
            monitoring
      performance and compensation of the Company’s employee-directors, officers
      and other key employees;


·
            preparing
      recommendations and periodic reports to the board of directors concerning
      these matters; and


·
            administering
      the incentive programs referred to in “Executive Compensation”
      below.





Compensation
Committee Interlocks and Insider Participation





Mr.
Bready and Mr. DiNovi are currently the members of the Company’s compensation
committee.  The committee determines compensation of the Company’s
executive officers other than Mr. Bready.  Mr. Bready’s compensation
is determined by the full Board of Directors.








Item
11.  Executive Compensation.





Compensation
Discussion and Analysis





Introduction





The
Compensation Committee of the Company’s Board of Directors has responsibility
for developing, overseeing and implementing the overall compensation philosophy
for the Company’s named executive officers, except for the Chief Executive
Officer whose compensation is determined by the full board of
directors.  Generally, (i) the Chief Executive Officer recommends for
the approval of the Compensation Committee, the specific elements of
compensation, the incentive compensation awards and salary adjustments that
apply to the named executive officers (other than the Chief Executive Officer),
and (ii) the full board of directors approves the specific elements of
compensation, incentive compensation awards and salary adjustments for the Chief
Executive Officer.  However, in connection with the THL Transaction,
certain of the named executive officers, including the Chief Executive Officer
and Chief Financial Officer, negotiated and executed employment contracts which
govern certain elements of their compensation.  In this analysis, the
term “named executive officer” refers to the Company’s Chief Executive Officer,
Chief Financial Officer and the other executive officers included in the Summary
Compensation Table further below.





Compensation
Philosophy and Objectives





In
general, the Company's executive compensation program is designed to attract,
motivate, reward and retain high caliber executives to assist the Company in
achieving its strategic and operating objectives, and to compensate them at a
level that is commensurate with both corporate and individual performance
achievements with the ultimate goal of increasing equityholder
value.  The Compensation Committee attempts to design a compensation
package that is fair to both the executives and equityholders in relation to
corporate performance and contributions to equityholder value, that is
competitive in relation to companies of similar size and operations, and that is
balanced appropriately between cash and equity-based compensation.  As
part of this compensation package, the Compensation Committee includes
incentive-based compensation designed to reward the executive for both short and
long-term company success.  Short term performance is measured each
fiscal year, and is typically rewarded through discretionary cash
bonuses.  Long-term performance is targeted through equity awards
which have been granted to the named executive officers in the form of Class C
units in Investors LLC, which are discussed in detail below, to ensure that the
named executive officer’s interests are aligned with the interests of the
equityholders of the Company.





Overview
of Compensation and Process





The
Compensation Committee oversees the executive compensation program and makes the
final approval of compensation elements and amounts based upon the
recommendations of the Chief Executive Officer.  The Chief Executive
Officer makes recommendations relating to compensation elements and levels of
the named executive officers (excluding the Chief Executive Officer), in each
case subject to the final approval of the Compensation Committee.  In
making these recommendations, which are based in part on independent
compensation consultants and third party data as described below, the Chief
Executive Officer consults with the Company’s Treasurer working together with
the Human Resources Department.  The Compensation Committee can
exercise its discretion to increase or decrease any recommended payments,
adjustments or awards to the named executive officers not otherwise earned under
the terms of contractual arrangements described below.





The
Company engaged a compensation consultant to review base salary and
discretionary bonus levels in comparison with companies of similar size and
industry.  The Company has participated in surveys; periodically
sought the advice of consultants; received industry data generally available
from companies of comparable size and industry; and with respect to long-term
equity performance programs, the Company sought the advice of legal and
accounting specialists in order to establish the Class C unit vesting program
entered into in connection with the THL Transaction.  Such third party
information is available to the Compensation Committee.





The
Company does not have a formal policy relating to the allocation of compensation
between cash and non-cash elements, such as equity awards.  In the
recent past, the Company has utilized both cash and non-cash awards for variable
compensation programs.  When making incentive compensation awards, the
Company will determine the appropriate form of award depending on the
circumstances.  The Company maintains a long-term equity compensation
plan pursuant to which the named executive officers received grants of Class C
units in Investors LLC in connection with the THL Transaction (except for Mr.
Kelln who was granted his Class C units upon his date of hire which was
subsequent to the THL Transaction).  The vesting criteria for the
Class C units are described in detail below.





While
the Company similarly has no written policy relating to the allocation of
compensation between short term and long-term performance standards, it attempts
to achieve a mix between the two.  Short term exceptional performance
is rewarded in cash through the annual discretionary cash
bonuses.  Long-term incentive objectives are met through the equity
grants made in the form of Class C units in Investors LLC to the named executive
officers in connection with the THL Transaction (except for Mr. Kelln who was
granted his Class C-units upon his date of hire which was subsequent to the THL
Transaction).  Such equity grants in the recent past have not been
made as part of a regular or annual program.  Rather, the Compensation
Committee takes a longer term approach to its equity grants and accordingly made
equity based awards in the form of Class C units of Investors LLC one time in
connection with the THL Transaction (or at the date of hire for named executive
officers who are hired subsequent to the THL Transaction).  In
connection with the THL Transaction certain of the named executive officers,
including the Chief Executive Officer and Chief Financial Officer, negotiated
and executed employment contracts which govern the number of Class C units that
they were entitled to receive.





Elements
of Compensation





There
were four primary components of the compensation package of the named executive
officers for 2007.  Those components are base salary; discretionary
cash bonuses; equity based awards; and retirement benefits.  In
addition, each named executive officer receives health and life insurance
benefits.  Also, the Company provides perquisites, some of which are
discretionary and others are provided pursuant to the terms of employment
agreements between the Company and certain named executive officers entered into
in connection with the THL Transaction.  The purpose of such
perquisites is to motivate employees; to create goodwill; and to reward
employees for achievements that may not be measurable financial
objectives.  These perquisites are reflected in the “All Other
Compensation” column in the Summary Compensation table below and the related
footnotes.





Base
Salary


The Company provides named executive
officers, like its other employees, a base salary in order to compensate them
for the services which they provide to the Company over the course of the
year.  The Company attempts to meet competitive salary norms for a
company of its size and to reward performance and increased levels of
responsibility through annual salary increases.  Salaries of
executives upon the executive's hiring or promotion are determined by reference
to the market data provided by the compensation surveys, search consultants and
industry data generally available from companies of comparable size and industry
discussed above.  Salaries are typically evaluated annually and
adjusted from their base level from year to year based upon the executive's
performance, level of responsibilities and other factors relating to individual
performance.  Additionally, competitive benchmark data is consulted
periodically.  Like the other elements of compensation, these
adjustments are recommended to theCompensationCommittee by the Chief Executive Officer
after consultation with the Company’s Treasurer.  Adjustments to the
salary of the Chief Executive Officer, if any, are determined by the Company’s
full board of directors.





Mr.
Bready


Pursuant to the terms of his employment
agreement entered into with the Company in connection with the THL Transaction,
Mr. Bready’s base salary shall not be less than $3,500,000 or such greater
amount as determined from time to time at the discretion of the Company’s full
board of directors.  Mr. Bready’s base salaryfor 2007 was $3,500,000.





Mr. Hall and
Mr. Donnelly


Pursuant to the terms of their
respective employment agreements entered into with the Company in connection
with the THL Transaction, Mr. Hall’s and Mr. Donnelly’s base salary shall not be
less that $430,000 and $280,000, respectively, subject to adjustments as
determinedby the Chief Executive Officer each
year.  In 2007the base salaries for Mr. Hall and Mr.
Donnelly were: $472,500and $315,000, respectively.  For
2008, Mr. Hall’s and Mr. Donnelly’s annual
base salaries have been increased to $500,000and $375,000, respectively.





Mr.
Cooney


Mr. Cooney’s base salary for
2007was $283,500.  For 2008, Mr. Cooney’s base salary has been
increased to $300,000.





Mr.
Kelln


Mr. Kelln’s base salaryfor 2007was $420,000.  For 2008, Mr. Kelln’s base salary has been
increased to $520,000.





Discretionary Cash
Bonuses


At year
end, the Chief Executive Officer assesses the individual performance of each
named executive officer together with the Company’s operating and financial
performance achievements as compared to an established financial plan for the
Company.  Then, if the Chief Executive Officer so determines, he makes
a recommendation to the Compensation Committee for a discretionary cash bonus
award for each named executive officer other than himself.  The Chief
Executive Officer’s recommendation and the Compensation Committee’s ultimate
awards of discretionary cash bonuses are designed to reward corporate success
and individual achievement with the emphasis on overall Company
performance.  The Chief Executive Officer and the Compensation
Committee consider EBITDA as a principal measure of the Company’s achievements,
among others, and therefore, it is utilized as an important performance metric
in establishing the discretionary cash bonuses.





Mr.
Bready


Pursuant to the terms of his employment
agreement entered into with the Company in connection with the THL Transaction,
Mr. Bready is not entitled to earn any incentive or bonus compensation during
the employment term which expires on December 31, 2009.  The board of
directors of the Company, however, may elect to award incentive compensation or
cash bonuses to Mr. Bready, from time to time.  Mr. Bready did not
receive any incentive compensation or discretionary cash bonuses in
2006or 2007.





Messrs.
Hall, Donnelly, Cooney and Kelln


Messrs. Hall, Donnelly, Cooney and
Kelln’s discretionary cash bonus for 2007, as recommended by the Chief Executive
Officer and approved by the Compensation Committee, was $500,000for Mr. Hall;$300,000for Mr. Donnelly; $250,000for Mr. Cooney and $350,000for Mr. Kelln.





Messrs. Hall, Donnelly, Cooney and
Kelln’s discretionary cash bonus for 2006, as recommended by the Chief Executive
Officer and approved by the Compensation Committee, was $725,000for Mr. Hall; $400,000for Mr. Donnelly; $300,000for Mr. Cooney and $450,000for Mr. Kelln.





Equity-based Award
Plans


The
Compensation Committee considers the Class C units, which represent ownership
interests of Investors LLC, to be similar to traditional equity-based awards
and, consequently an important tool in rewarding and incentivising executive
performance which will have a long-term impact on equityholder
value.  The majority of the Class C unit grants were made to the named
executive officers in connection with the THL Transaction.  However,
the Compensation Committee, from time to time, considers the discretionary award
of additional Class C units.  For example, Mr. Kelln, who joined the
Company subsequent to the THL Transaction, was granted Class C units upon his
date of hire.  The Company does not make equity awards every
year.  Besides the award of Class C units of Investors LLC under the
LLC Agreement discussed in detail below, the Company has no other long-term or
equity incentive plans.  For more information on the ownership
structure of Investors LLC and the vesting of the Class C units see “Security
Ownership of Certain Beneficial Owners and Management” and “Certain
Relationships and Relation Transactions – Limited Liability Company Agreement of
Investors LLC”.





The
named executive officers own the following number of Class C units (includes C-1
and C-2 units):





Mr.
      Bready
            
            
            23,586.66Mr.
      Hall
            
            
            4,246.02Mr.
      Donnelly
            
            
            2,830.68Mr.
      Cooney
            
            
            2,123.01Mr.
      Kelln
            
            
            4,500.00





The
value of the Class C units is discussed in more detail below.





Retirement-related
Benefits





401(k) plan:The
401(k) plan is a tax-qualified retirement savings plan pursuant to which all of
the Company's employees, including the named executive officers, are able to
contribute the lesser of 16% of their annual salary or the limit prescribed by
the Internal Revenue Service to the plan on a before-tax basis.  The
Company matches 50% of the participants’ contributions up to 6% (for a maximum
possible match of 3%)  In addition to the match contribution, all
participants are eligible for a discretionary profit sharing employer
contribution.





For
2007, Messrs. Bready, Hall, Donnelly, Cooney and Kelln each received an employer
matching contribution of $6,750.  In addition, for 2007, Messrs.
Bready, Hall, Donnelly, Cooney and Kelln each received a profit sharing employer
contribution equal to $11,250.





Pension
plan:  Nortek's qualified pension plan was frozen as of
December 31, 1995, and no further increases in benefits may occur as a result of
increases in service or compensation.  The benefit payable to a
participant at normal retirement equals the accrued benefit as of December 31,
1995 and will be payable as a joint and 50% survivor annuity in the case of a
married employee and as a single-line annuity in the case of an unmarried
employee.  The annual pension benefits entitled to be paid to the
executive officers beginning at age 65 under this pension plan, as a 50% joint
and survivor annuity, are as follows: Mr. Bready $160,922, Mr. Hall $52,163, and
Mr. Donnelly $15,574.





Termination
Compensation


In
order to attract, motivate, and retain executives, the Company believes that
certain severance arrangements for the named executive officers are appropriate
and necessary.  For Messrs. Bready, Hall and Donnelly their
termination compensation has been determined pursuant to the terms of their
employment agreements and in the case of Mr. Cooney, the Second Amended and
Restated Change in Control Severance Benefit Plan, entered into with the Company
in connection with the THL Transaction.  The Company believes that
termination benefits and change of control payments are helpful to provide
certainty to the named executive officers with respect to their positions with
the Company and to ensure that the named executive officers consider corporate
transactions which are in the best interest of the equity-holders of the Company
without concern over whether the transactions may jeopardize the executive’s own
employment.  Also, these benefits help to ensure that Company will
have the continued dedication and full attention of those key
employees.





For
more information on termination compensation payments for the named executive
officers, see the disclosure under “Potential Payments upon Termination or
Change-in-Control”.




Summary
Compensation Table





The
following table sets forth, on an accrual basis, information concerning the
compensation for services to the Company and its subsidiaries for 2007 of those
persons who were, at December 31, 2007, the Chief Executive Officer, the Chief
Financial Officer and the other three most highly compensated executive officers
of the Company (who together constitute all of the Company’s executive officers
at December 31, 2007), which the Company refers elsewhere in this Form 10-K as
its named executive officers.








Name
      and
              Principal Position
            
            Year
            
            
            Salary
            
            
            Bonus
            
            
            (1)
              Stock
              Awards
            
            
            Option
              Awards
            
            
            Non-Equity
              Incentive
      Plan
              Compensation
            
            
            Change
      in Pension
              Value
      and Nonqualified
              Deferred
              Compensation
              Earnings (6)
            
            
            (2)
      (3)
              All
      Other
              Compensation
            
            
            Total
              Compensation(a)
            
            (b)
            
            
            (c)
            
            
            (d)
            
            
            (e)
            
            
            (f)
            
            
            (g)
            
            
            (h)
            
            
            (i)
            
            
            (j)Richard
      L. Bready (4)
              Chairman,
      President and
              Chief
      Executive Officer
            
            
            2007
              2006
            
            
            $
            3,500,000
      3,500,000
            
            
            $
            ---
              ---
            
            
            $
            75,843
      115,994
            
            
            $
            ---
              ---
            
            
            $
            ---
              ---
            
            
            $
            66,000
      18,000
            
            
            $
            363,890
      458,233
            
            
            $
            4,005,733
      4,092,227Almon
      C. Hall (4)
              Vice
      President and
              Chief
      Financial Officer
            
            
            2007
              2006
            
            
            $
            472,500
      450,000
            
            
            $
            500,000
      725,000
            
            
            $
            13,652
      20,881
            
            
            
            ---
              ---
            
            
            
            ---
              ---
            
            
            $
            50,000(1,000
            )
            
            $
            64,462
              67,487
            
            
            $
            1,100,614
      1,262,368Kevin
      W. Donnelly (4)
              Vice
      President, General
              Counsel
      and Secretary
            
            
            2007
              2006
            
            
            $
            315,000
      300,000
            
            
            $
            300,000
      400,000
            
            
            $
            9,102
      13,921
            
            
            
            ---
              ---
            
            
            
            ---
              ---
            
            
            $
            8,000
              (3,000
            )
            
            $
            129,749
              50,612
            
            
            $
            761,851
      761,533Edward
      J. Cooney
              Vice
      President and
              Treasurer
            
            
            2007
              2006
            
            
            $
            283,500
      270,000
            
            
            $
            250,000
      300,000
            
            
            $
            6,826
      10,440
            
            
            
            ---
              ---
            
            
            
            ---
              ---
            
            
            
            ---
              ---
            
            
            $
            40,471
              39,560
            
            
            $
            580,797
      620,000Bryan
      L. Kelln (5)
              Senior
      Vice President and Chief Operating Officer
            
            
            2007
              2006
            
            
            $
            420,000
      400,000
            
            
            $
            350,000
      450,000
            
            
            $
            22,132
      22,130
            
            
            
            ---
              ---
            
            
            
            ---
              ---
            
            
            
            ---
              ---
            
            
            $
            42,308
      63,409
            
            
            $
            834,440
      935,539






(1)
            There
      were no stock or equity awards made to any of the named executive officers
      in 2006 or 2007.  This amount represents the dollar amount
      recognized for financial statement reporting purposes with respect to the
      2006 and 2007 fiscal years for the fair value of the Class C units granted
      in prior fiscal years in accordance with SFAS No. 123R.  For
      additional information, see Note 1 of the Notes to the Consolidated
      Financial Statements included elsewhere
herein.





(2)
            For
      Mr. Bready, includes: $274,485 for 2007 and $249,531 for 2006 related to
      personal use of the Company’s fractional ownership of aircrafts; an amount
      for 2007 and 2006 related to excess group term life insurance, personal
      use of automobiles provided by the Company, tax preparation services,
      reimbursement by the Company for health related costs paid by the
      executive, and country club dues for personal use; and for 2006, $133,501
      related to an executive service award (which includes a gross-up for
      federal and state income tax purposes) based upon thirty (30) years of
      service with the Company.





For Mr.
Hall, includes an amount for 2007 and 2006 related to excess group term life
insurance, personal use of an automobile provided by the Company, tax
preparation services, reimbursement by the Company for health related costs paid
by the executive, and country club dues for personal use.





For Mr.
Donnelly, includes an amount for 2007 and 2006 related to excess group term life
insurance, personal use of an automobile provided by the Company, reimbursement
by the Company for health related costs paid by the executive ($27,393 for
2007), and country club dues and assessments for personal use ($65,153 for
2007).





For Mr.
Cooney, includes an amount for 2007 and 2006 related to excess group term life
insurance, personal use of an automobile provided by the Company, and tax
preparation services.





For Mr.
Kelln, includes: an amount for 2007 and 2006 related to excess group term life
insurance, personal use of an automobile provided by the Company, and tax
preparation services; an amount for 2007 related to receipt of the Company’s
products for personal use; and an amount for 2006 related to reimbursement for
certain relocation expenses.





(3)
            For
      2007, includes $6,750 in matching contributions and $11,250 in profit
      sharing contributions by the Company for Messrs. Bready, Hall, Donnelly,
      Cooney and Kelln under the Company’s 401(k) Savings Plan, which is a
      defined contribution retirement
plan.





For
2006, includes $6,600 in matching contributions and $11,000 in profit sharing
contributions by the Company for Messrs. Bready, Hall, Donnelly and Cooney under
the Company’s 401(k) Savings Plan, which is a defined contribution retirement
plan and includes $6,000 in matching contributions and $11,000 in profit sharing
contributions by the Company for Mr. Kelln under the Company’s 401(k) Savings
Plan, which is a defined contribution retirement plan.





(4)
            On
      August 27, 2004, each of Messrs. Bready, Hall and Donnelly entered into
      amended and restated employment agreements with Nortek and Nortek
      Holdings.  For more information, see “Employment Contracts and
      Termination of Employment and Change in Control Agreements – Amended and
      Restated Employment Agreement of Richard L. Bready” and “Employment
      Contracts and Termination of Employment and Change in Control Agreements –
      Amended and Restated Employment Agreements of Almon C. Hall and Kevin W.
      Donnelly”.





(5)
            On
      December 22, 2006, the Company appointed Mr. Kelln to the newly created
      position of Senior Vice President and Chief Operating
      Officer.  Mr. Kelln was previously Vice President – Operations
      for the Company.





(6)
            For
      2007, the gross change in the estimated lump sum value of Mr. Bready’s
      benefit of $66,000 is the net result of an increase of $108,000due to passage of
      time and a decrease of $42,000 due to change in assumptions (mortality,
      discount rate, and form of benefit payment resulting from a change in the
      prescribed IRS benefit limits).  The gross change in the
      estimated lump sum value of Mr. Hall’s benefit of $50,000 is the net
      result of an increase of $30,000 due to passage of time and an increase of
      $20,000 due to change in assumptions (mortality and discount
      rate).  The gross change in the estimated lump sum value of Mr.
      Donnelly’s benefit of $8,000 is the net result of an increase of $5,000
      due to passage of time and an increase of $3,000 due to change in
      assumptions (mortality and discount
rate).





For
2006, the gross change in Mr. Bready's benefit of $18,000 is the net result of
an increase of $99,000 due to passage of time and a decrease of $81,000 due to
change in discount rate.  The gross change in Mr. Hall's benefit of
($1,000) is the net result of an increase of $27,000 due to passage of time and
a decrease of $28,000 due to change in discount rate.  The gross
change in Mr. Donnelly's benefit of ($3,000) is the net result of an increase of
$4,000 due to passage of time and a decrease of $7,000 due to change in discount
rate.





Grants
of Plan-Based Awards Table





There
were no grants of plan-based awards in 2007.





Outstanding
Equity Awards at December 31, 2007 Table





Nortek
is a wholly-owned direct subsidiary of Nortek Holdings and Nortek Holdings is a
wholly-owned direct subsidiary of NTK Holdings.  NTK Holdings is a
wholly-owned direct subsidiary of Investors LLC.  The outstanding
membership interests of Investors LLC which are entitled to further
distributions under the Limited Liability Company Agreement of Investors LLC
consist of 473,595.10 voting Class B units and 67,102.53 non-voting Class C
units.  The Class C units are divided into two series: Class C-1
time-vesting units and Class C-2 performance-vesting units.  The
relative rights and preferences of the Class B units and Class C units are
described in “Certain Relationships and Related Transactions – Limited Liability
Company Agreement of Investors LLC”.





The
following table provides further information regarding the Company’s named
executive officers’ unvested Class C units as of December 31,
2007.  The estimated value as of December 31, 2007 of the Class C-1
and C-2 units below is equal to $767.66 per unit and $520.34 per unit,
respectively.





Stock
      AwardsName
            
            Number
      of C-1 Units (time-vesting) that
              Have Not Vested (#)
            
            
            Market
      Value of C-1 Units (time-vesting) that Have
      Not Vested ($) (1)
            
            
            Equity
      Incentive Plan Awards: Number of C-2 Units (performance-vesting)
      that
              Have Not Vested (#)
            
            
            Equity
      Incentive Plan Awards: Market or Payout Value of C-2 Units
      (performance-vesting) that
              Have Not Vested ($) (1)Richard
      L. Bready
            
            
            ---
            
            
            $
            ---
            
            
            
            15,724.44
            
            
            $
            8,182,055Almon
      C. Hall
            
            
            ---
            
            
            
            ---
            
            
            
            2,830.68
            
            
            
            1,472,916Kevin
      W. Donnelly
            
            
            ---
            
            
            
            ---
            
            
            
            1,887.12
            
            
            
            981,944Edward
      J. Cooney
            
            
            ---
            
            
            
            ---
            
            
            
            1,415.34
            
            
            
            736,458Bryan
      L. Kelln
            
            
            250.00
            
            
            
            191,915
            
            
            
            3,000.00
            
            
            
            1,561,020





(1)
            Since
      the Class C-1 and C-2 units are not publicly traded, their closing market
      price as of December 31, 2007 is not available.  As a result,
      the Company engaged a third party advisor to assist it in determining the
      value of the Class C-1 and C-2 units as of December 31,
      2007.  This advisor prepared the estimated valuation using the
      probability weighted expected return method included in certain guidelines
      published by the American Institute of Certified Public Accountants as the
      AICPA Audit and Accounting Practice Aid Series, Valuation of
      Privately-Held-Company Equity Incentive Units Issued as Compensation,
      which was then adjusted to reflect the discount period, the minority
      interest factor and the lack of marketability factor to arrive at the
      final estimated valuations.





Units
Vested in the Year Ended December 31, 2007





The
following table provides further information regarding Class C units held by the
Company’s named executive officers that vested during 2007:





Class C Unit AwardsName
            
            Number
      of Vested C-1
              Units (#)
            
            
            Estimated
      Value Realized onVesting ($)
      (2)Richard
      L. Bready
            
            
            1,965.55
            
            
            $
            1,508,874Almon
      C. Hall
            
            
            353.83
            
            
            
            271,621Kevin
      W. Donnelly
            
            
            235.89
            
            
            
            181,083Edward
      J. Cooney
            
            
            176.92
            
            
            
            135,814Bryan
      L. Kelln
            
            
            500.00
            
            
            
            383,830





(2)
            See
      sub-note (1) above for a description of the valuation surrounding the
      Class C-1 unit awards.




Pension
Benefits for the Year Ended December 31, 2007





The
following table illustrates the benefit information for the Company’s only
pension plan, the Nortek, Inc. Retirement Plan:





Years
      of
            
            
            Annual
            
            
            Estimated
            
            
            PaymentsCredited
            
            
            Accrued
            
            
            Present
      Value of
            
            
            During
      LastName
            
            Service
            
            
            Benefit
            
            
            Accrued Benefit
            
            
            Fiscal YearRichard
      L. Bready
            
            
            21
            
            
            $
            182,141.28
            
            
            $
            1,607,000.00
            
            
            
            ---Almon
      C. Hall
            
            
            19
            
            
            
            60,303.96
            
            
            
            487,000.00
            
            
            
            ---Kevin
      W. Donnelly
            
            
            8
            
            
            
            17,342.99
            
            
            
            85,000.00
            
            
            
            ---





Annual
benefit accruals under the Nortek, Inc. Retirement Plan ceased effective
December 31, 1995.  All plan participants, including those identified
above, became 100% vested on that date.  Retirement benefits were
calculated using final average earnings and credited service according to the
plan’s benefit formula as of the benefit freeze date.





The
estimated present value of each participant’s accrued benefit was determined as
of December 31, 2007 based on a discount rate of 6.25% and mortality according
to the RP-2000 Mortality Table (sex distinct).  These assumptions are
consistent with those used for fiscal 2007 disclosure results.  The
Nortek, Inc. Retirement Plan does not offer a lump sum payment option for any of
the participants identified above.





Reduced
early retirement benefits are available to the aforementioned named executive
officers upon the attainment of age 55 with at least five (5) years of vesting
service.  Accrued benefits are reduced by 1/180th for the
first sixty (60) months early retirement age precedes age 65 and 1/360th for
each month thereafter in excess of sixty (60) months.





The
normal form of payment for single participants is a life annuity.  The
normal form of payment for married payments is an actuarially reduced 50% joint
& survivor annuity.  Optional forms of payment include actuarially
adjusted joint & survivor benefits (50%, 66 2/3%, and 100%) and a ten-year
certain and continuous annuity.





The
estimated annual 50% joint & survivor annuity payable to each participant
identified above at age 65 is detailed below:





Annual
      Accrued BenefitPayable
      at Age 65Name
            
            50% Joint & SurvivorRichard
      L. Bready
            
            $
            160,922Almon
      C. Hall
            
            
            52,163Kevin
      W. Donnelly
            
            
            15,574





These
estimated benefits are based on spouse dates of birth.





Potential
Payments upon Termination or Change-in-Control





The
information below sets forth the potential termination or change in control
payments required to be paid to certain of our named executive officers pursuant
to existing contracts.





Mr.
Bready


Based
upon a hypothetical termination date of December 31, 2007, the severance
benefits payable to Mr. Bready based upon the terms of his employment contract
entered into in connection with the THL Transaction, would be, for a period of
two (2) years, as follows: annual base salary of $1,750,000; approximately
$3,062 (based upon actual 2007 costs) equal to the annual cost of continued
coverage under the same disability, accident and life insurance plans of the
Company, approximately $100,000 annually for the cost of office space and
administrative support similar to what is currently provided by the Company,
approximately $14,429 (based upon actual 2007 costs) equal to the annual cost
for continued medical coverage, and approximately $345,890 (based upon actual
2007 costs) equal to the annual cost to continue other specified benefits and
perquisites, including personal use of an aircraft and
automobiles.  Anytime after the hypothetical termination on December
31, 2007, Mr. Bready may request, and the Company shall pay to Mr. Bready, a
lump sum cash payment (up to $1,000,000 prior to any gross-up described below)
in lieu of lifetime medical coverage in an amount established by the Company’s
board of directors, which amount shall be grossed-up for Section 4999 taxes and
federal and state income taxes.





Messrs. Hall and
Donnelly


Based
upon a hypothetical termination date of December 31, 2007, the severance
benefits for Messrs. Hall and Donnelly pursuant to their respective employment
contracts entered into in connection with the THL transaction would be, for a
period of two (2) years, as follows: annual base salary of $472,500 for Mr. Hall
and $315,000 for Mr. Donnelly; annual incentive bonus of $725,000 for Mr. Hall
and $450,000 for Mr. Donnelly; approximately $3,062 (based upon actual 2007
costs) for Mr. Hall and $2,776 (based upon actual 2007 costs) for Mr. Donnelly
equal to the annual cost of continued coverage under the same or equivalent
disability, accident and life insurance plans of the Company.  In
addition, Mr. Hall and Mr. Donnelly are entitled to lifetime medical coverage
for themselves and their respective spouses and dependants, and reimbursement
for their medical related expenses.  Based upon the actual 2007 costs,
the medical coverage and related reimbursement have an approximate annual cost
of $14,429, each plus approximately $8,778 for Mr. Hall and $27,393 for Mr.
Donnelly for reimbursement of health related expenses.  At anytime
after the hypothetical termination on December 31, 2007, or in the event of a
hypothetical change of control on December 31, 2007 (regardless of a subsequent
termination), Messrs. Hall and Donnelly may request, and the Company shall pay
to Messrs. Hall and Donnelly, a lump sum cash payment (up to $1,000,000 prior to
any gross-up described below) in lieu of lifetime medical coverage in an amount
established by the Company’s board of directors, but in any event not less than
$650,000 each, which amount shall be grossed-up for Section 4999 taxes and
federal and state income taxes.





Mr.
Cooney


Based
upon a hypothetical change in control occurring on December 31, 2007 and a
subsequent termination within twenty-four (24) months of the change of control,
the severance benefits for Mr. Cooney pursuant to the Second Amended and
Restated Change in Control Severance Benefit Plan would be, for a period of two
(2) years: annual base salary of $283,500; annual incentive bonus of $300,000;
and approximately $16,990 (based upon the actual 2007 costs) equal to the annual
cost of continued medical, disability, accident and life insurance plans of the
Company.





Employment
Contracts and Termination of Employment and Change-in-Control
Arrangements





Amended
and Restated Employment Agreement of Richard L. Bready





Upon
the consummation of the THL Transaction, Mr. Bready’s existing employment
agreement was amended and restated.  As amended and restated, his
agreement has an initial term commencing on August 27, 2004 and concluding on
December 31, 2009, renewable thereafter for successive one-year terms unless
Nortek and Nortek Holdings provide Mr. Bready with written notice of their
intent not to renew the agreement at least 90 days prior to the end of the
initial term or any successive term.  The amended and restated
employment agreement provides that during the employment term Mr. Bready will
serve as Chairman and Chief Executive Officer of Nortek and Nortek
Holdings.





The
amended and restated employment agreement provides that the basic annual salary
for Mr. Bready during the employment term will be not less than $3,500,000,
subject to increase at the board of directors’ discretion.  Mr. Bready
will not be eligible for any cash performance bonus awards for any period
subsequent to the closing date of the THL Transaction, unless the board in its
sole discretion determines otherwise.  In addition, Mr. Bready is
entitled to receive all other benefits, including medical and dental plan
participation, generally available to executive personnel.  Mr. Bready
also is entitled to two automobiles and reimbursement of associated costs and
the use, or reimbursement of the cost, of private aircraft transportation for
business travel and up to 50 hours per year of personal travel.  Under
the amended and restated employment agreement, Mr. Bready received one-third of
the 70,767.07 Class C-1 units and Class C-2 units initially authorized by the
Investors LLC.  For more information on the allocation of units
initially authorized by Investors LLC, please see “Certain Relationships and
Related Transactions – Limited Liability Company Agreement of Investors
LLC”.





Under
the amended and restated employment agreement, if the employment of Mr. Bready
is terminated:





·
            by
      Nortek and Nortek Holdings without “cause”, as defined in the amended and
      restated employment agreement,


·
            by
      Mr. Bready for “good reason”, as defined in the amended and restated
      employment agreement,


·
            as
      a result of any notice from Nortek and Nortek Holdings not to renew his
      employment as described above, or


·
            as
      a result of his disability or
death,





then
Nortek and Nortek Holdings are obligated to provide Mr. Bready or, in the event
of death, his designated beneficiary or estate, severance pay at the rate of
$1,750,000 per year and other specified benefits and perquisites, including
long-term disability insurance, for the remaining period of the initial
employment term of the employment contract, which ends December 31,
2009.





Under
the amended and restated employment agreement, (i) if Mr. Bready’s employment is
terminated by Nortek and Nortek Holdings without cause, or as a result of
non-renewal by Mr. Bready for good reason or as a result of disability, he will
be prohibited from competing with Nortek and Nortek Holdings for the longer of
one year or the period from the date of termination through December 31, 2009
and (ii) if Mr. Bready’s employment is terminated by Nortek and Nortek Holdings
with cause or as a result of resignation without good reason, he will be
prohibited from competing with Nortek and Nortek Holdings for one
year.





Under
the amended and restated employment agreement, following the termination of
employment of Mr. Bready for any reason, Nortek and Nortek Holdings are required
to provide, at no additional cost to Mr. Bready, up to $1,000,000 (not including
any additional tax gross-up payment as described below) in lifetime medical
coverage to Mr. Bready, his spouse and dependents.  In lieu of
lifetime medical coverage, Mr. Bready or his spouse may request a lump-sum
payment in an amount to be established by the board of directors as reasonably
sufficient to provide such coverage.  Nortek and Nortek Holdings are
also required to make a “gross-up” payment to Mr. Bready to cover any and all
state and federal income taxes that may be due as a result of the provision of
such lifetime medical coverage or lump-sum payment.





If it
is determined that any payment or benefit provided by Nortek, Nortek Holdings or
any of their predecessors to Mr. Bready under his amended and restated
employment agreement or any other agreement or plan, whether paid before or
after the date of his amended and restated employment agreement, is subject to
the 20% excise tax imposed by Section 4999 of the Internal Revenue Code, Nortek
and Nortek Holdings are required to make an additional lump-sum “gross-up”
payment to Mr. Bready sufficient, after giving effect to all federal, state and
other taxes and charges with respect to that payment, to restore him to the same
after-tax position that he would have been in if the excise tax had not been
imposed.





Amended
and Restated Employment Agreements of Almon C. Hall and Kevin W.
Donnelly





Upon
the consummation of the THL Transaction, the existing employment agreements of
Messrs. Hall and Donnelly were amended and restated.  Each such
amended and restated employment agreement is on terms substantially similar to
the prior employment agreements of Messrs. Hall and Donnelly and substantially
similar to each other, except as otherwise noted below.  Each such
amended and restated employment agreement became effective upon the consummation
of the THL Transaction and remains effective until the termination of the
employee’s employment.  The amended and restated employment agreements
provide that Mr. Hall will serve as Vice President and Chief Financial Officer
of Nortek and Nortek Holdings and that Mr. Donnelly will serve as Vice
President, General Counsel and Secretary of Nortek and Nortek
Holdings.





The
amended and restated employment agreement for Mr. Hall provides that the basic
annual salary for Mr. Hall is not less than $430,000.  The amended and
restated employment agreement for Mr. Donnelly provides that the basic annual
salary for Mr. Donnelly is not less than $280,000.  Messrs. Hall and
Donnelly are also eligible for incentive compensation in each year of the
employment period as recommended by the Chief Executive Officer of Nortek and
approved by the compensation committee of the board of directors of Nortek
Holdings.  In addition, Messrs. Hall and Donnelly are entitled to
receive all other benefits, including medical and dental plan participation,
generally available to Nortek executive personnel.  Messrs. Hall and
Donnelly are also entitled to reimbursement of the costs of automobile
transportation for personal and business use consistent with their employment
agreements prior to the THL Transaction.  Messrs. Hall and Donnelly
were also issued approximately 4,246 and 2,830 Class C units of Investors LLC,
respectively.





Under
each amended and restated employment agreement, if employment is
terminated:





·
            by
      Nortek and Nortek Holdings without “cause”, as defined in the amended and
      restated employment agreement,


·
            by
      the employee for “good reason”, as defined in the amended and restated
      employment agreement, or


·
            as
      a result of the employee’s death or
disability





then
Nortek and Nortek Holdings are obligated to provide the employee or, in the
event of death, his designated beneficiary or estate, severance pay and other
specified benefits and perquisites, including long-term disability insurance,
for the period equal to two years from the date of termination.





Under
each amended and restated employment agreement annual severance pay for the
employee is equal to his annual salary as of the date of termination plus the
highest amount of bonus or incentive compensation, exclusive of the Nortek 1999
equity performance plan, paid or payable in cash to the employee in any one of
the three calendar years immediately prior to the completion of the THL
Transaction or, if higher, the three calendar years immediately prior to such
termination.





Under
each amended and restated employment agreement, (i) if the employment of the
employee is terminated by Nortek and Nortek Holdings without cause, by the
employee for good reason or as a result of disability, the employee will be
prohibited from competing with Nortek and Nortek Holdings for the longer of the
period of two years from the date of termination or three years from the closing
of the THL Transaction and (ii) if the employment of the employee is terminated
by Nortek and Nortek Holdings with cause or by the employee as a result of
resignation without good reason, the employee will be prohibited from competing
with Nortek and Nortek Holdings for one year.





Under
each such amended and restated employment agreement, following the termination
of employment of the employee for any reason, Nortek and Nortek Holdings are
required to provide, at no additional cost to the employee, up to $1,000,000
(not including any additional tax gross-up payments as described below) in
lifetime medical coverage to the employee, his spouse and
dependents.  In lieu of lifetime medical coverage, at or following the
date of termination or a “change in control,” as defined in the amended and
restated employment agreement, the employee or his spouse may request a lump-sum
payment in an amount established by the board of directors as reasonably
sufficient to provide such coverage, but not less than $650,000 (not including
any additional tax gross-up payment as described in the following
sentence).  Nortek and Nortek Holdings are also required to make
“gross-up” payments to these employees to cover any and all state and federal
income taxes that may be due as a result of the provision of such lifetime
medical coverage or lump-sum payment.  If it is determined that any
payment or benefit provided by Nortek, Nortek Holdings or any of their
predecessors to either of Messrs. Hall or Donnelly, under his respective amended
and restated employment agreement or any other agreement or plan, whether paid
before or after the date of their respective amended and restated employment
agreements, is subject to the 20% excise tax imposed by Section 4999 of the
Internal Revenue Code, Nortek and Nortek Holdings are required to make an
additional lump-sum “gross-up” payment to the employee sufficient, after giving
effect to all federal, state and other taxes and charges with respect to such
payment, to restore him to the same after-tax position that he would have been
in if the excise tax had not been imposed.





Employment
Agreement of Bryan L. Kelln





On May
23, 2005, Nortek entered into an employment agreement with Mr. Bryan L.
Kelln.  Under the terms of the agreement, Mr. Kelln served as Vice
President-Operations of Nortek prior to his promotion to Senior Vice President
and Chief Operating Officer.  The agreement provides that the initial
basic annual salary for Mr. Kelln would be $400,000 per year, which is currently
$520,000 per year and subject to annual review for increases.  He is
also eligible for an incentive bonus with a target level of one hundred percent
of his base salary.  In addition, Mr. Kelln is entitled to receive
other benefits generally available to executive personnel, including
reimbursement of relocation costs, medical and dental plan participation,
disability insurance, and a company car.  Mr. Kelln also received
1,500 Class C-1 units and 3,000 Class C-2 units representing membership
interests in Investors LLC.  For more information on the allocation of
units by Investors LLC, please see “Relationships and Transactions with Related
Parties-Limited Liability Company Agreement of Investors LLC”.





Second
Amended and Restated Change in Control Severance Benefit Plan





Nortek
has a retention plan for certain of its key employees which provides that, in
consideration of each covered individual agreeing not to voluntarily terminate
his employment, if there is an attempted change of control, as that term is
defined in the plan of Nortek, and, if, within the 24 month period following the
change of control, the employment of the individual is terminated by Nortek for
any reason or by the individual by reason of a material adverse change in the
terms of employment as provided in the plan, the individual will be entitled at
the time of termination to severance pay for a period of 24 months following
termination at an annual rate equal to his base annual salary plus the highest
amount of bonus or incentive compensation paid or payable to him for any one of
the three preceding calendar years, and to continued medical, life insurance and
other benefits for the 24 month period (or a payment of an amount equal to the
cost of providing these benefits).  Edward J. Cooney, Nortek’s Vice
President and Treasurer is currently the only named executive officer among the
participants under the plan.








Compensation
of Directors





For
their services as directors, the Company’s directors who are not officers,
employees or consultants of the Company or its subsidiaries, or of THL, receive
directors’ fees from the Company.  The fees payable to those directors
are a $50,000 annual retainer, payable quarterly in advance, a $1,500 per
meeting ($1,000 if director participates by telephone) fee and a $1,000 per
committee meeting ($750 if director participates by telephone) fee.





The
following table provides a summary of compensation paid for the year ended
December 31, 2007 to the Company’s Board of Directors.  The table
shows amounts earned by such persons for services rendered to the Company in all
capacities in which they served:





Non-Employee
Director Compensation Table





Name
            
            Fees
      Earned orPaid in Cash
      ($)
            
            
            Stock
      Awards ($)
            
            
            Option
      Awards ($)
            
            
            Non-Equity
      Incentive PlanCompensation
      ($)
            
            
            Change
      in Pension Value and Nonqualified DeferredCompensation Earnings ($)
            
            
            All
      OtherCompensation
($)
            
            
            Total ($)Jeffrey
      C. Bloomberg
            
            $
            63,750
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            $
            ---
            
            
            $
            63,750Joseph
      M. Cianciolo
            
            
            63,750
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            63,750Anthony
      J. DiNovi
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---David
      V. Harkins
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---David
      B. Hiley (1)
            
            
            64,750
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            11,289
            
            
            
            76,039Kent
      R. Weldon
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---





(1)
            In
      2007 for Mr. Hiley, includes amounts related to personal use of company
      car.







Report
of the Compensation Committee for Fiscal Year 2007





The
Compensation Committee of the Board of Directors of the Company oversees the
Company’s compensation program on behalf of the Board.  In fulfilling
its oversight responsibilities, the Compensation Committee reviewed and
discussed with management the Compensation Discussion & Analysis set forth
in this annual report on Form 10-K.





In
reliance on the review and discussions referred to above, the Compensation
Committee recommended to the Board that the Compensation Discussion &
Analysis be included in the Company’s annual report on Form 10-K for the fiscal
year ended December 31, 2007, which will be filed with the Securities and
Exchange Commission.








Compensation
Committee


Richard
L. Bready


Anthony
J. DiNovi








Item
12.  Security Ownership of Certain Beneficial Owners and
Management.





Nortek
is a wholly-owned direct subsidiary of Nortek Holdings.  Nortek
Holdings is a wholly-owned direct subsidiary of NTK Holdings,
Inc.  NTK Holdings, Inc. is a wholly-owned direct subsidiary of
Investors LLC.  The following table sets forth information regarding
the beneficial ownership, as of March 15, 2008, of outstanding membership
interests or units, of Investors LLC by: (i) each person or group known to the
Company to own more than five percent of the Class B units of Investors LLC,
(ii) each member of the management committee of Investors LLC (the composition
of which is identical to the board of directors of the Company and the board of
directors of Nortek Holdings) and each of the Company’s named executive officers
and (iii) all members of the Investors LLC management committee and our
executive officers as a group.





The
outstanding membership interests of Investors LLC which are entitled to further
distribution under the Limited Liability Company Agreement of Investors LLC
consist of 473,595.10 voting Class B units and 67,102.53 non-voting Class C
units.  The Class C units are divided into two series: Class C-1
time-vesting units and Class C-2 performance-vesting units.  The
relative rights and preferences of the Class A units, Class B units and Class C
units are described in “Certain Relationships and Related Transactions - Limited
Liability Company Agreement of Investors LLC”.  A Securityholders
Agreement governs the exercise of voting rights with respect to the Class B
units of Investors LLC as described in “Certain Relationships and Related
Transactions - Securityholders Agreement”.  Unless otherwise noted, to
the Company’s knowledge, each of the persons listed below has sole voting and
investment power as to the units shown.  Beneficial ownership has been
determined in accordance with the applicable rules and regulations promulgated
under the Exchange Act.





Number
      of
            
            
            PercentageNumber
      of
            
            
            Percentage
      of
            
            
            Class
      C
            
            
            of
      Class CName and Address
            
            Class B Units
            
            
            Class B Units
            
            
            Units (1)
            
            
            Units (2)Principal
      Security Holders:Thomas
      H. Lee Partners L.P. and affiliates (3)
            
            
            360,800.02
            
            
            
            76.18
            %
            
            
            ---
            
            
            
            ---Management
      Committee Members and Named Executive OfficersJeffrey
      C. Bloomberg ^
            
            
            538.58
            
            
            
            *
            
            
            
            ---
            
            
            
            ---Richard
      L. Bready ^ +
            
            
            78,150.21
            
            
            
            16.50
            %
            
            
            23,586.66
            
            
            
            35.15
            %Joseph
      M. Cianciolo ^
            
            
            359.05
            
            
            
            *
            
            
            
            530.75
            
            
            
            *Edward
      J. Cooney +
            
            
            1,527.84
            
            
            
            *
            
            
            
            2,123.01
            
            
            
            3.16
            %Anthony
      J. DiNovi (3) ^
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Kevin
      W. Donnelly +
            
            
            3,697.42
            
            
            
            *
            
            
            
            2,830.68
            
            
            
            4.22
            %Almon
      C. Hall +
            
            
            6,031.21
            
            
            
            1.27
            %
            
            
            4,246.02
            
            
            
            6.33
            %David
      V. Harkins (3) ^
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---David
      B. Hiley ^
            
            
            988.01
            
            
            
            *
            
            
            
            1,061.51
            
            
            
            1.58
            %Bryan
      L. Kelln +
            
            
            ---
            
            
            
            ---
            
            
            
            4,500.00
            
            
            
            6.71
            %Kent
      R. Weldon (3) ^
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---All
      management committee members and executive officers as a group (11
      persons)
            
            
            91,292.32
            
            
            
            19.28
            %
            
            
            38,878.63
            
            
            
            57.94
            %





*           Less
than 1%





^           Director





+           Named
executive officer





(1)
            Includes
      the total amount of Class C-1 units that will be vested within sixty (60)
      days after March 15, 2008 for each of the named individuals for the
      following amounts: Mr. Bready, 7,862.22; Mr. Cianciolo, 176.92; Mr.
      Cooney, 707.67; Mr. Donnelly, 943.56; Mr. Hall, 1,415.34; Mr. Hiley,
      353.84; and Mr. Kelln 1,375.00.  Includes Class C-1 units that
      have not vested and will not vest within sixty (60) days after March 15,
      2008 for Mr. Kelln 125.00.  Includes Class C-2 units that have
      not vested for each of the named individuals for the following amounts:
      Mr. Bready, 15,724.44; Mr. Cianciolo, 353.83; Mr. Cooney, 1,415.34; Mr.
      Donnelly, 1,887.12; Mr. Hall, 2,830.68; Mr. Hiley, 707.67; and Mr. Kelln
      3,000.00.  There are currently no outstanding vested Class C-2
      units.  See “Certain Relationships and Related Transactions -
      Limited Liability Company Agreement of the Investors
  LLC”.





(2)
            Includes
      both vested and unvested Class C-1 units and Class C-2
    units.





(3)
            Includes
      interests owned by each of Thomas H. Lee Equity Fund V, L.P., Thomas H.
      Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V, L.P.,
      Great-West Investors L.P., Putnam Investments Employees’ Securities
      Company I, LLC, Putnam Investments Employees’ Securities Company II, LLC,
      1997 Thomas H. Lee Nominee Trust, and Thomas H. Lee Investors Limited
      Partnership.  Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee
      Parallel Fund V, L.P. and Thomas H. Lee Equity (Cayman) Fund V, L.P. are
      Delaware limited partnerships, whose general partner is THL Equity
      Advisors V, LLC, a Delaware limited liability company.  Thomas
      H. Lee Advisors, LLC, a Delaware limited liability company, is the general
      partner of THL, a Delaware limited partnership, which is the sole member
      of THL Equity Advisors V, LLC.  Thomas H. Lee Investors Limited
      Partnership is a Massachusetts limited partnership, whose general partner
      is THL Investment Management Corp., a Massachusetts
      corporation.  The 1997 Thomas H. Lee Nominee Trust is a trust
      with US Bank, N.A. serving as Trustee. Thomas H. Lee, a managing director
      of THL has voting and investment control over common shares owned of
      record by the 1997 Thomas H. Lee Nominee Trust. David V. Harkins, Anthony
      J. DiNovi and Kent R. Weldon are managing directors of
      THL.  Each of Messrs. Harkins, DiNovi and Weldon may be deemed
      to beneficially own member units of Investors LLC held of record by Thomas
      H. Lee Equity Fund V, L.P., Thomas H. Lee Parallel Fund V, L.P., Thomas H.
      Lee Equity (Cayman) Fund V, L.P. and Thomas H. Lee Investors Limited
      Partnership.  Each of these individuals disclaims beneficial
      ownership of these units except to the extent of their pecuniary interest
      therein.  The address of Thomas H. Lee Equity Fund V, L.P.,
      Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Equity (Cayman) Fund V,
      L.P., Thomas H. Lee Investors Limited Partnership, the 1997 Thomas H. Lee
      Nominee Trust, Anthony J. DiNovi, David V. Harkins and Kent R. Weldon is
      100 Federal Street, Boston, MA 02110. Great-West Investors L.P., Putnam
      Investments Employees’ Securities Company I, LLC and Putnam Investments
      Employees’ Securities Company II, LLC each disclaims beneficial ownership
      of any securities other than the securities held directly by such
      entity.  The address for the Putnam entities is One Post Office
      Square, Boston, MA 02109.





Equity
Compensation Plan Information





The
Company currently does not have any equity compensation plans other than the
Class C units which have been or may be granted under the LLC Agreement
described below.





Item
13.  Certain Relationships and Related Transactions.





Limited
Liability Company Agreement of Investors LLC





Upon
the consummation of the THL Transaction, the holders of units in Investors LLC
entered into a limited liability company agreement.  In February 2005
the limited liability company agreement was amended to reflect the formation of
NTK Holdings.  The limited liability company agreement of Investors
LLC authorizes Investors LLC to issue three classes of limited liability company
interests designated as Class A units, Class B units and Class C
units.





A
management committee elected by holders of the Class B units of Investors LLC
has the exclusive authority to manage and control the business and affairs of
Investors LLC.  The management committee's size and composition is
determined in accordance with the provisions of a Securityholders Agreement,
which states that the management committee initially will consist of six
managers.  See “Securityholders Agreement.”





All
remaining distributions of property by Investors LLC are made first to the
holders of Class C units until such holders receive any amounts from any prior
distribution that they would have received in such prior distribution with
respect to Class C units that have vested since the time of such prior
distribution had such Class C units been vested at the time of such prior
distribution; and thereafter to the holders of Class B units and Class C units
(to the extent the Class C units are vested at the time of such distribution, as
discussed below) proportionately based on the number of Class B units and vested
Class C units held by such holders.





The
Class C units are divided into two series: Class C-1 time-vesting units and
Class C-2 performance-vesting units.  One-third of the total number of
Class C units is designated as time-vesting units and two-thirds of the total
number of Class C units is designated as performance-vesting
units.  The Class C units are issued to officers, directors, employees
and consultants of Nortek Holdings and its subsidiaries as determined by the
management committee of Investors LLC.





The
Class C-1 time-vesting units vest over a three-year period on a quarterly basis
in equal amounts.  The vesting of the Class C-1 time-vesting units
will be accelerated and such units will become fully vested if:





·
            Investors
      LLC has sold 90% of the capital stock of NTK Holdings held by it in
      exchange for cash or marketable securities,
or





·
            following
      an initial public offering of equity securities of Investors LLC or its
      subsidiaries, Investors LLC has distributed 90% of the capital stock of
      NTK Holdings to the unit holders of Investors LLC and the unit holders of
      Investors LLC that are affiliated with Thomas H. Lee Equity Fund V, L.P.
      have distributed such shares of capital stock to their limited partners or
      members.





In
addition, the Class C-1 time-vesting units will become fully vested upon a
liquidity event that results in the Class C-2 performance-vesting units becoming
fully vested.  The Class C-2 performance-vesting units will vest only
in connection with certain liquidity events and only upon and to the extent of
satisfaction in connection with such liquidity events of a minimum internal rate
of return (at least 17%) and multiple of investment hurdles (ranging between 2
and 4 times the original investment) relating to the investment in Investors LLC
held by Thomas H. Lee Equity Fund V, L.P. and its
affiliates.  Unvested Class C units will be subject to forfeiture in
the event of termination of the employment or engagement of the holder of such
Class C units.





Securityholders
Agreement





Upon
the consummation of the THL Transaction, Investors LLC and the holders of its
Class A, Class B and Class C units entered into a securityholders
agreement.  In February 2005 the Company became a party to the
securityholders agreement.





·
            Governance.Under
      the securityholders agreement, the management committee of Investors LLC
      consists of not less than five and not more than eleven managers, as from
      time to time determined by Thomas H. Lee Equity Fund V, L.P. and its
      affiliates.  The management committee initially consists of six
      managers.  Under the terms of the securityholders agreement, for
      so long as Richard L. Bready is the holder of 5% or more of the
      outstanding Class B units and Class C units of Investors LLC or the fully
      diluted equity of any successor entity, Mr. Bready is entitled to
      designate two managers to serve on the management
      committee.  This securityholders agreement also governs the
      election of directors to the boards of directors of NTK Holdings, Nortek
      Holdings and Nortek and requires that such boards be identical to the
      management committee of Investors
LLC.





·
            Transfers.Under
      the securityholders agreement, transfers of equity securities of Investors
      LLC by securityholders are permitted only to specified types of related
      parties who agree to sign the securityholders agreement.  The
      securityholders agreement provides for customary tag-along rights and
      drag-along rights.





·
            Preemptive
      Rights.Under the securityholders agreement, Thomas H.
      Lee Equity Fund V, L.P. and its affiliates and any members of Nortek's
      management that hold at least 5% of the fully diluted equity of Investors
      LLC will be granted the right to participate in any future equity
      financings by Investors LLC, subject to customary exceptions, in an amount
      necessary to maintain the investor's fully diluted ownership interest in
      Investors LLC or any successor
company.





·
            Affiliate
      Transactions.Certain transactions between Investors
      LLC, NTK Holdings, Nortek Holdings, Nortek or its subsidiaries, on the one
      hand, and Thomas H. Lee Fund V, L.P. and its affiliates, on the other
      hand, require the approval of Mr. Bready or a majority of the independent
      managers of the management committee, if any, of Investors
      LLC.





·
            Registration
      Rights.Registration rights apply to shares of capital
      stock of NTK Holdings that are distributed to the holders of Investors LLC
      membership units.





Transaction
Fee; Management Agreement with Affiliate of THL





Upon
the closing of the THL Transaction, Nortek Holdings and Nortek entered into a
management agreement with THL Managers V, LLC, an affiliate of THL, pursuant to
which THL Managers V, LLC has provided certain financial and strategic advisory
and consultancy services.  In February 2005, the management agreement
was amended to reflect the formation of NTK Holdings.  The agreement
provides for the payment by us to THL Managers V, LLC or a designee thereof an
annual management fee equal to the greater of:





·
            $2,000,000
      per annum, or





·
            an
      amount equal to 0.75% of the Company’s consolidated earnings before
      interest, taxes, depreciation and amortization, before deduction for such
      fee,





as well
as the costs and expenses incurred by THL Managers V, LLC and its affiliates in
connection with the provision of future services under the management
agreement.  The Company expensed approximately $1,844,629 for the year
ended December 31, 2007 related to this management agreement in the consolidated
statement of operations included elsewhere herein.





Under
the management agreement, Nortek has also agreed to indemnify THL Managers V,
LLC and its affiliates from and against all losses, claims, damages and
liabilities arising out of or related to the performance by THL Managers V, LLC
of the services pursuant to the management agreement.





The
management agreement became effective upon the closing of the THL Transaction
and will continue in effect until terminated by THL Managers V,
LLC.





DirectorIndependence





As a result of the Recapitalization
which was completed on January 9, 2003, neither NTK Holdings', Nortek Holdings',
nor Nortek's securities are listed with a national exchange, and thus the
Company is not required to have any independent directors on its
board.  While the Company is not subject to the New York Stock
Exchange listing standards, the Company's board of directors has determined that
Mr. Cianciolo and Mr. Bloomberg areconsidered "independent" directors
within the meaning of the rules of the New York Stock Exchange for listed
companies.






Item
14.  Principal Accountant Fees and Services.





Audit
Fees





The
Company was billed by its principal accountant $4,451,000 and $3,564,000 for
audit services for the years ended December 31, 2007 and 2006,
respectively.  Audit fees for the year ended December 31, 2007 and
2006 include fees for the audit of the Company’s annual consolidated financial
statements, review of the financial statements included in the Company’s
quarterly reports on Form 10-Q filed during 2007 and 2006, professional services
rendered in connection with the Company’s statutory audits and fees for
professional services rendered in connection with the Company’s debt offerings
and, in 2006, the Company’s most recent registration statement on Form
S-1.  Audit fees for the year ended December 31, 2007 also include
fees of $731,380 which represent the final fees billed for the 2006
audit.





Audit-Related
Fees





The
Company was billed $365,000 and $284,000 for non-audit services that are
reasonably related to the performance of the audit or review of the Company’s
financial statements from the Company’s principal accountant during the year
ended December 31, 2007 and 2006, respectively.  Audit-related fees
billed during 2007 and 2006 include fees for the audits of the Company’s
employee benefit plans, accounting consultations and audit procedures related to
acquisitions, and consultations related to the Company’s Sarbanes-Oxley Act
Section 404 project.  Audit-related fees billed during 2007 include
final fees of $175,000 relating to 2006.





Tax
Fees





The
Company was billed $354,200 and $259,000 for professional services rendered by
the Company’s principal accountant for tax compliance, tax advice and tax
planning during the years ended December 31, 2007 and 2006,
respectively.





All
Other Fees





There
were no other fees billed by the Company’s principal accountant in 2007 or
2006.





Audit
Committee Pre-Approval Policy





Before the Company'sprincipal accountant isengaged to perform any audit services or
permitted non-audit services, such engagementis approved by the Audit
Committee.  The Company does not currently have any other pre-approval
policy or procedure.








PART
IV





Item
15.  Exhibits, Financial Statements and Schedules.





(a)           The
following documents are filed as part of this report:





1.
            Financial
      Statements





Consolidated
Statement of Operations for the years ended December 31, 2007, 2006 and
2005





Consolidated
Balance Sheet as of December 31, 2007 and 2006





Consolidated
Statement of Cash Flows for the years ended December 31, 2007, 2006 and
2005





Consolidated
Statement of Stockholder’s Investment for the years ended December 31, 2007,
2006 and 2005





Notes
to Consolidated Financial Statements





Report
of Independent Registered Public Accounting Firm





2.
            Financial
      Statement Schedules





Schedule
I                          Parent
Company Financial Statements





Schedule
II                          Valuation
and Qualifying Accounts





All
other financial statement schedules are not required or are included in the
consolidated financial statements.





3.
            The
      exhibits are listed in the Exhibit Index, which is incorporated herein by
      reference










SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on April 15, 2008.








NTK HOLDINGS, INC.








/s/ Richard L.
Bready





Richard L. Bready


Chairman of the Board







Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated, as of April 15, 2008







/s/ Richard L.
      Bready
              /s/ Joseph M. CiancioloRichard L. Bready,
      Chairman,
              Joseph M.
      CiancioloPresident and Chief
      Executive Officer
              Director/s/ Almon C.
      Hall
              /s/ Anthony J. DiNoviAlmon C. Hall, Vice
      President
              Anthony J.
      DiNoviand Chief Financial
      Officer
              Director/s/
      David V. HarkinsDavid V.
      HarkinsDirector/s/
      David B. HileyDavid B.
      HileyDirector/s/
      Kent R. WeldonKent R.
      WeldonDirector/s/
      Jeffrey C. BloombergJeffrey C.
      BloombergDirector






Consolidated
Statement of Operations





For the Years Ended December
      31,2007
              
              
              2006
              
              
              2005(Amounts in
      millions)Net
      Sales
              
              $
              2,368.2
              
              
              $
              2,218.4
              
              
              $
              1,959.2Costs and
      Expenses:Cost of products sold
      (see Note 12)
              
              
              1,679.9
              
              
              
              1,547.3
              
              
              
              1,361.4Selling, general and
      administrative expense, net (see Note 12)
              
              
              475.5
              
              
              
              381.7
              
              
              
              342.6Amortization of
      intangible assets
              
              
              27.5
              
              
              
              24.9
              
              
              
              18.32,182.9
              
              
              
              1,953.9
              
              
              
              1,722.3Operating
      earnings
              
              
              185.3
              
              
              
              264.5
              
              
              
              236.9Interest
      expense
              
              
              (183.7
              )
              
              
              (162.9
              )
              
              
              (138.6
              )Investment
      income
              
              
              2.0
              
              
              
              2.2
              
              
              
              1.8Earnings before provision for
      income taxes
              
              
              3.6
              
              
              
              103.8
              
              
              
              100.1Provision for income
      taxes
              
              
              10.6
              
              
              
              46.1
              
              
              
              43.2Net (loss)
      earnings
              
              $
              (7.0
              )
              
              $
              57.7
              
              
              $
              56.9





The
accompanying notes are an integral part of these Consolidated Financial
Statements.








Consolidated
Balance Sheet


(Dollar
amounts in millions)





December
31,2007
              
              
              2006AssetsCurrent
    Assets:Unrestricted cash and cash
      equivalents
              
              $
              53.4
              
              
              $
              57.4Restricted
    cash
              
              
              1.0
              
              
              
              1.2Accounts
      receivable, less allowancesof $12.2 and
      $9.4
              
              
              320.0
              
              
              
              328.9Inventories:Raw
      materials
              
              
              91.6
              
              
              
              83.1Work in
      process
              
              
              29.9
              
              
              
              28.7Finished
      goods
              
              
              187.1
              
              
              
              166.8308.6
              
              
              
              278.6Prepaid
      expenses
              
              
              11.7
              
              
              
              13.7Other current
      assets
              
              
              19.8
              
              
              
              24.4Prepaid income
      taxes
              
              
              28.9
              
              
              
              21.2Total current
      assets
              
              
              743.4
              
              
              
              725.4Property and Equipment, at
      Cost:Land
              
              
              10.4
              
              
              
              9.5Buildings and
      improvements
              
              
              110.1
              
              
              
              101.9Machinery and
      equipment
              
              
              217.1
              
              
              
              177.2337.6
              
              
              
              288.6Less accumulated
      depreciation
              
              
              99.7
              
              
              
              66.1Total property and
      equipment, net
              
              
              237.9
              
              
              
              222.5Other
    Assets:Goodwill
              
              
              1,528.9
              
              
              
              1,481.4Intangible assets, less
      accumulated amortizationof $80.7 and
      $52.4
              
              
              156.6
              
              
              
              150.4Deferred debt
      expense
              
              
              31.4
              
              
              
              41.7Restricted investments and
      marketable securities
              
              
              2.3
              
              
              
              3.3Other
assets
              
              
              10.3
              
              
              
              11.21,729.5
              
              
              
              1,688.0Total
Assets
              
              $
              2,710.8
              
              
              $
              2,635.9Liabilities and Stockholder’s
      InvestmentCurrent
      Liabilities:Notes payable and other short-term
      obligations
              
              $
              64.0
              
              
              $
              23.3Current maturities of long-term
      debt
              
              
              32.4
              
              
              
              20.0Accounts
      payable
              
              
              192.7
              
              
              
              188.2Accrued expenses and taxes,
      net
              
              
              248.6
              
              
              
              283.7Total current
      liabilities
              
              
              537.7
              
              
              
              515.2Other
      Liabilities:Deferred income
      taxes
              
              
              37.0
              
              
              
              35.9Other
              
              
              125.6
              
              
              
              128.8162.6
              
              
              
              164.7Notes, Mortgage Notes and
      ObligationsPayable, Less Current
      Maturities
              
              
              1,921.5
              
              
              
              1,883.2Commitments and Contingencies (see
      Note 8)Stockholder’s
      Investment:Common stock, $0.01 par value,
      authorized 3,000 shares;   3,000 issued and outstanding
      at December 31, 2007 and 2006
              
              
              ---
              
              
              
              ---Additional paid-in
      capital
              
              
              21.6
              
              
              
              21.3Retained
      earnings
              
              
              29.7
              
              
              
              39.9Accumulated other comprehensive
      income
              
              
              37.7
              
              
              
              11.6Total stockholder's
      investment
              
              
              89.0
              
              
              
              72.8Total Liabilities and
      Stockholder's Investment
              
              $
              2,710.8
              
              
              $
              2,635.9


The
accompanying notes are an integral part of these Consolidated Financial
Statements.








Consolidated
Statement of Cash Flows







For the Years Ended December
      31,2007
              
              
              2006
              
              
              2005(Amounts in
      millions)Cash Flows from operating
      activities:Net (loss)
      earnings
              
              $
              (7.0
              )
              
              $
              57.7
              
              
              $
              56.9Adjustments to reconcile net
      (loss) earningsto net cash
      provided by operating activities:Depreciation and amortization
      expense
              
              
              65.1
              
              
              
              61.2
              
              
              
              45.9Non-cash interest expense,
      net
              
              
              67.3
              
              
              
              47.6
              
              
              
              29.9Non-cash stock-based
      compensation
              
              
              0.3
              
              
              
              0.3
              
              
              
              0.3Gain from curtailment of
      post-retirement medical benefits
              
              
              ---
              
              
              
              (35.9
              )
              
              
              ---Compensation reserve
      adjustment
              
              
              ---
              
              
              
              (3.5
              )
              
              
              ---Loss (gain) on sale of property
      and equipment
              
              
              2.4
              
              
              
              1.3
              
              
              
              (1.6
              )Deferred federal income tax
      (benefit) provision
              
              
              (6.0
              )
              
              
              26.8
              
              
              
              25.3Changes in certain assets and
      liabilities, net ofeffects
      from acquisitions and dispositions:Accounts receivable,
      net
              
              
              23.7
              
              
              
              (19.6
              )
              
              
              (37.3
              )Inventories
              
              
              (16.6
              )
              
              
              (14.0
              )
              
              
              (24.3
              )Prepaids and other current
      assets
              
              
              (2.0
              )
              
              
              13.1
              
              
              
              (5.2
              )Accounts
      payable
              
              
              (8.4
              )
              
              
              (0.7
              )
              
              
              20.7Accrued expenses and
      taxes
              
              
              (16.5
              )
              
              
              18.5
              
              
              
              11.7Long-term deferred
      compensation
              
              
              ---
              
              
              
              (54.0
              )
              
              
              (57.7
              )Long-term assets, liabilities and
      other, net
              
              
              4.0
              
              
              
              (4.8
              )
              
              
              6.1Total adjustments to
      net (loss) earnings
              
              
              113.3
              
              
              
              36.3
              
              
              
              13.8Net cash provided by
      operating activities
              
              $
              106.3
              
              
              $
              94.0
              
              
              $
              70.7Cash Flows from investing
      activities:Capital
      expenditures
              
              $
              (36.4
              )
              
              $
              (42.3
              )
              
              $
              (28.9
              )Net cash paid for businesses
      acquired
              
              
              (93.5
              )
              
              
              (106.2
              )
              
              
              (117.2
              )Proceeds from the sale of property
      and equipment
              
              
              0.5
              
              
              
              5.1
              
              
              
              10.8Change in restricted cash and
      marketable securities
              
              
              1.2
              
              
              
              0.4
              
              
              
              (0.2
              )Other, net
              
              
              (1.7
              )
              
              
              (3.3
              )
              
              
              (2.2
              )Net cash used in
      investing activities
              
              $
              (129.9
              )
              
              $
              (146.3
              )
              
              $
              (137.7
              )Cash Flows from financing
      activities:Increase in
      borrowings
              
              $
              121.4
              
              
              $
              87.0
              
              
              $
              35.1Payment of
      borrowings
              
              
              (97.3
              )
              
              
              (78.8
              )
              
              
              (43.4
              )Payment in connection with the
      senior unsecured loan facility rollover
              
              
              (4.5
              )
              
              
              ---
              
              
              
              ---Borrowings under the senior
      unsecured loan facility
              
              
              ---
              
              
              
              200.8
              
              
              
              ---Sale of the 10 3/4% Senior
      Discount Notes
              
              
              ---
              
              
              
              ---
              
              
              
              244.7Dividends
              
              
              ---
              
              
              
              (174.9
              )
              
              
              (187.0
              )Other, net
              
              
              ---
              
              
              
              (1.6
              )
              
              
              (0.2
              )Net cash provided by financing
      activities
              
              
              19.6
              
              
              
              32.5
              
              
              
              49.2Net change in unrestricted cash
      and cash equivalents
              
              
              (4.0
              )
              
              
              (19.8
              )
              
              
              (17.8
              )Unrestricted cash and cash
      equivalents at the beginning of the period
              
              
              57.4
              
              
              
              77.2
              
              
              
              95.0Unrestricted cash and cash
      equivalents at the end of the period
              
              $
              53.4
              
              
              $
              57.4
              
              
              $
              77.2


The
accompanying notes are an integral part of these Consolidated Financial
Statements.








Consolidated
Statement of Stockholder’s Investment


For
the Year Ended December 31, 2005


(Dollar
amounts in millions)




(Accumulated
              
              
              AccumulatedAdditional
              
              
              Deficit)
              
              
              OtherPaid-in
              
              
              Retained
              
              
              Comprehensive
              
              
              ComprehensiveCapital
              
              
              Earnings
              
              
              Income
    (Loss)
              
              
              Income
    (Loss)Balance, December 31,
      2004
              
              $
              316.9
              
              
              $
              (4.1
              )
              
              $
              9.1
              
              
              $
              ---Net
earnings
              
              
              ---
              
              
              
              56.9
              
              
              
              ---
              
              
              
              56.9Other comprehensive income
      (loss):Currency translation
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              (1.7
              )
              
              
              (1.7
              )Minimum pension liability,
      net oftax
      of $0.1
              
              
              ---
              
              
              
              ---
              
              
              
              0.1
              
              
              
              0.1Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              55.3Dividends
              
              
              (187.0
              )
              
              
              ---
              
              
              
              ---Stock-based
      compensation
              
              
              0.3
              
              
              
              ---
              
              
              
              ---Balance, December 31,
      2005
              
              $
              130.2
              
              
              $
              52.8
              
              
              $
              7.5


The
accompanying notes are an integral part of these Consolidated Financial
Statements.





Consolidated
Statement of Stockholder’s Investment


For
the Year Ended December 31, 2006


(Dollar
amounts in millions)


AccumulatedAdditional
              
              
              
              
              
              OtherPaid-in
              
              
              Retained
              
              
              Comprehensive
              
              
              ComprehensiveCapital
              
              
              Earnings
              
              
              Income
    (Loss)
              
              
              Income
    (Loss)Balance, December 31,
      2005
              
              $
              130.2
              
              
              $
              52.8
              
              
              $
              7.5
              
              
              $
              ---Net
earnings
              
              
              ---
              
              
              
              57.7
              
              
              
              ---
              
              
              
              57.7Other comprehensive income
      (loss):Currency translation
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              5.1
              
              
              
              5.1Reversal of SFAS No.
      87 minimum pension liability,net of tax provision of $0.1
      million
              
              
              ---
              
              
              
              ---
              
              
              
              0.3
              
              
              
              0.3Effect of SFAS No.
      158 adoption, net of taxprovision of $1.8
      million
              
              
              ---
              
              
              
              ---
              
              
              
              (1.3
              )
              
              
              (1.3
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              61.8Dividends
              
              
              (104.3
              )
              
              
              (70.6
              )
              
              
              ---Adjustment of carryover basis of
      continuingmanagement investors
      in the THL Transaction
              
              
              (4.9
              )
              
              
              ---
              
              
              
              ---Stock-based
      compensation
              
              
              0.3
              
              
              
              ---
              
              
              
              ---Balance, December 31,
      2006
              
              $
              21.3
              
              
              $
              39.9
              
              
              $
              11.6




The
accompanying notes are an integral part of these Consolidated Financial
Statements.





Consolidated
Statement of Stockholder’s Investment


For
the Year Ended December 31, 2007


(Dollar
amounts in millions)




AccumulatedAdditional
              
              
              
              
              
              OtherPaid-in
              
              
              Retained
              
              
              Comprehensive
              
              
              ComprehensiveCapital
              
              
              Earnings
              
              
              Income
              
              
              Income
    (Loss)Balance, December 31,
      2006
              
              $
              21.3
              
              
              $
              39.9
              
              
              $
              11.6
              
              
              $
              ---Net loss
              
              
              ---
              
              
              
              (7.0
              )
              
              
              ---
              
              
              
              (7.0
              )Other comprehensive
      income:Currency translation
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              15.4
              
              
              
              15.4Pension liability
      adjustment, net of taxprovision of $3.9
      million
              
              
              ---
              
              
              
              ---
              
              
              
              10.7
              
              
              
              10.7Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              19.1Adoption of FIN 48 (see Note
      4)
              
              
              ---
              
              
              
              (3.2
              )
              
              
              ---Stock-based
      compensation
              
              
              0.3
              
              
              
              ---
              
              
              
              ---Balance, December 31,
      2007
              
              $
              21.6
              
              
              $
              29.7
              
              
              $
              37.7


The
accompanying notes are an integral part of these Consolidated Financial
Statements.





NTK
HOLDINGS, INC. AND SUBSIDIARIES
 Notes
to the Consolidated Financial Statements
 December
31, 2007





1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





NTK
Holdings, Inc. (the “Company” or “NTK Holdings”) is a Delaware corporation that
was formed to hold the capital stock of Nortek Holdings, Inc. (“Nortek
Holdings”).  NTK Holdings became the parent company of Nortek Holdings
on February 10, 2005 (see Note 6).





The
consolidated financial statements presented herein for the period subsequent to
August 27, 2004 and prior to February 10, 2005 reflects the financial position,
results of operations and cash flows of Nortek Holdings and all of its
wholly-owned subsidiaries (the successor company and survivor from the mergers
in connection with the THL Transaction) and the periods subsequent to February
9, 2005 reflect the financial position, results of operations and cash flows of
NTK Holdings and all of its wholly-owned subsidiaries (collectively, the
“Consolidated Financial Statements”).





The
Company is a diversified manufacturer of residential and commercial building
products, operating within three reporting segments: the Residential Ventilation
Products segment, the Home Technology Products segment and the Air Conditioning
and Heating Products segment.  Through these reporting segments, the
Company manufactures and sells, primarily in the United States, Canada and
Europe, a wide variety of products for the residential and commercial
construction, manufactured housing, and the do-it-yourself (“DIY”) and
professional remodeling and renovation markets.





On May
5, 2006, the Company filed a registration statement on Form S-1 (last amended on
September 15, 2006) with the Securities and Exchange Commission (“SEC”) for an
initial public offering of shares of its common stock.  The Company
withdrew its registration statement on Form S-1 in a filing with the SEC on
November 13, 2007 due to the unsettled market conditions.  The Company
expensed approximately $2.5 million of costs incurred in connection with the
initial public offering, which are included in selling, general and
administrative expense, net in the consolidated statement of operations for the
year ended December 31, 2006.





Principles of
Consolidation





The Consolidated Financial Statements
include the accounts of the Company and all of its wholly-owned subsidiaries
after elimination of intercompany accounts and transactions.  Certain
amounts in the prior years’ Consolidated Financial Statements have been
reclassified to conform to the current year presentation.





Accounting Policies and Use of
Estimates





The
preparation of these Consolidated Financial Statements in conformity with U.S.
generally accepted accounting principles involves estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of income and expense during the reporting
periods.  Certain of the Company’s accounting policies require the
application of judgment in selecting the appropriate assumptions for calculating
financial estimates.  By their nature, these judgments are subject to
an inherent degree of uncertainty.  The Company periodically evaluates
the judgments and estimates used for its critical accounting policies to ensure
that such judgments and estimates are reasonable for its interim and year-end
reporting requirements.  These judgments and estimates are based on
the Company’s historical experience, current trends and information available
from other sources, as appropriate.  If different conditions result
from those assumptions used in the Company’s judgments, the results could be
materially different from the Company’s estimates.




Recognition of Sales and Related Costs,
Incentives and Allowances





The Company recognizes sales upon the
shipment of its products net of applicable provisions for discounts and
allowances.  Allowances for cash discounts, volume rebates and other
customer incentive programs, as well as gross customer returns, among others,
are recorded as a reduction of sales at the time of sale based upon the
estimated future outcome.  Cash discounts, volume rebates and other
customer incentive programs are based upon certain percentages agreed to with
the Company’s various customers, which are typically earned by the customer over
an annual period.  The Company records periodic estimates for these
amounts based upon the historical results to date, estimated future results
through the end of the contract period and the contractual provisions of the
customer agreements.  For calendar year customer agreements, the
Company is able to adjust its periodic estimates to actual amounts as of
December 31 each year based upon the contractual provisions of the customer
agreements.  For those customers who have agreements that are not on a
calendar year cycle, the Company records estimates at December 31 consistent
with the above described methodology.  Customer returns are recorded
on an actual basis throughout the year and also include an estimate at the end
of each reporting period for future customer returns related to sales recorded
prior to the end of the period.  The Company generally estimates
customer returns based upon the time lag that historically occurs between the
date of the sale and the date of the return while also factoring in any new
business conditions that might impact the historical analysis such as new
product introduction.  The Company also provides for its estimate of
warranty, bad debts and shipping costs at the time of sale.  Shipping
and warranty costs are included in cost of products sold.  Bad debt
provisions are included in selling, general and administrative expense,
net.  The amounts recorded are generally based upon historically
derived percentages while also factoring in any new business conditions that
might impact the historical analysissuch as new product introduction for
warranty and bankruptcies of particular customers for bad debts.





Cash
and Cash Equivalents





Cash
equivalents consist of short-term highly liquid investments with original
maturities of three months or less which are readily convertible into
cash.





The
Company has classified as restricted in the accompanying consolidated balance
sheet certain cash and cash equivalents that are not fully available for use in
its operations.  At December 31, 2007 approximately $3.3 million of
cash and cash equivalents (of which approximately $2.3 million is included in
long-term assets) had been pledged as collateral or were held in pension trusts
for certain debt, insurance, employee benefits and other
requirements.  At December 31, 2006 approximately $4.5 million of cash
and cash equivalents (of which approximately $3.3 million is included in
long-term assets) had been pledged as collateral or were held in pension trusts
for certain debt, insurance, employee benefits and other
requirements.





Disclosures
about Fair Value of Financial Instruments





The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:





Cash
and Cash Equivalents --


The
carrying amount approximates fair value because of the short maturity of those
instruments.





Restricted
Investments and Marketable Securities --


The
fair value of investments is based on quoted market prices.  The fair
value of investments was not materially different from their cost basis at
December 31, 2007 or 2006.





Long-Term
Debt --


At
December 31, 2007 and December 31, 2006, the fair value of long-term
indebtedness was approximately $216.0 million lower and $34.4 million lower,
respectively, than the amount on the Company’s consolidated balance sheet,
before unamortized premium, based on available market quotations (see Note
5).





Inventories





Inventories
in the accompanying consolidated balance sheet are valued at the lower of cost
or market.  At December 31, 2007 and 2006, approximately $109.6
million and $110.3 million of total inventories, respectively, were valued on
the last-in, first-out method (“LIFO”).  Under the first-in, first-out
method (“FIFO”) of accounting, such inventories would have been approximately
$7.9 million and $8.5 million higher at December 31, 2007 and 2006,
respectively.  All other inventories were valued under the FIFO
method.  In connection with both LIFO and FIFO inventories, the
Company will record provisions, as appropriate, to write-down obsolete and
excess inventory to estimated net realizable value.  The process for
evaluating obsolete and excess inventory often requires the Company to make
subjective judgments and estimates concerning future sales levels, quantities
and prices at which such inventory will be able to be sold in the normal course
of business.  Accelerating the disposal process or incorrect estimates
of future sales potential may cause the actual results to differ from the
estimates at the time such inventory is disposed or sold.





Purchase
price allocated to the fair value of inventory is amortized over the estimated
period in which the inventory will be sold.





Depreciation
and Amortization





Depreciation
and amortization of property and equipment, including capital leases, is
provided on a straight-line basis over their estimated useful lives, which are
generally as follows:





Buildings
      and improvements
            10-35
      yearsMachinery
      and equipment, including leases
            3-15
      yearsLeasehold
      improvements
            Term
      of lease





Expenditures
for maintenance and repairs are expensed when incurred.  Expenditures
for renewals and betterments are capitalized.  When assets are sold,
or otherwise disposed, the cost and related accumulated depreciation are
eliminated and the resulting gain or loss is recognized.





Goodwill
and Intangible Assets





The following table presents a summary
of the activity in goodwill for the years ended December 31, 2007 and
2006:







(Amounts in
      millions)Balance as of December 31,
      2005
              
              $
              1,381.3Acquisitions during the year
      endedDecember 31,
      2006
              
              
              49.2Contingent earnouts related to
      acquisitions
              
              
              55.6Purchase accounting
      adjustments
              
              
              (1.7
              )Adjustment of carryover basis of
      continuingmanagement investors
      in the THL Transaction
              
              
              (4.9
              )Impact of foreign currency
      translation
              
              
              1.9Balance as of December 31,
      2006
              
              
              1,481.4Acquisitions during the year
      endedDecember 31,
      2007
              
              
              27.0Contingent earnouts related to
      acquisitions
              
              
              32.7Purchase accounting
      adjustments
              
              
              (13.5
              )Impact of foreign currency
      translation
              
              
              1.3Balance as of December 31,
      2007
              
              $
              1,528.9


At
December 31, 2007, the Company had an approximate carrying value of Goodwill as
follows:





(Amounts in
      millions)Segment:Residential
      Ventilation Products
            
            $
            798.8Home
      Technology Products
            
            
            415.6Air
      Conditioning and Heating Products *
            
            
            314.5$
            1,528.9





*
            Primarily
      relates to Residential HVAC reporting
unit.





The Company has classified as goodwill
the cost in excess of the fair value of the net assets (including tax
attributes) of companies acquired in purchase transactions (see Note
2).  Approximately $47.3 million,$62.3 millionand$56.1 million of goodwill associated
with certain companies acquired during the years ended December 31,2007,2006 and 2005, respectively,will be deductible for income tax
purposes.Purchase accounting adjustments relate
principally to final revisions resulting from the completion of fair value adjustments and adjustments to
deferred income taxes that impact goodwill.See Note 9 for a rollforward of the
activity in goodwill by reporting segment for the years ended December 31, 2007,
2006 and 2005.





The
$4.9 million non-cash “Adjustment of carryover basis of continuing management
investors in the THL Transaction” for the year ended December 31, 2006, as noted
in the table above, represents a correction to the original 2004 purchase
accounting for the 2004 Acquisition with THL resulting in a reduction of
goodwill with a corresponding reduction in stockholder’s
investment.  The $4.9 million adjustment has not been reflected in the
consolidated financial statements for prior periods as the Company has
determined that the adjustment is not material to the prior period consolidated
financial statements.





The Company
accounts for acquired goodwill and intangible assets in accordance with
Statement of Financial Standards (“SFAS”) No. 141, “Business Combinations”
(“SFAS No. 141”), SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
No. 142”) and SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”) which involves judgment with respect to the
determination of the purchase price and the valuation of the acquired assets and
liabilities in order to determine the final amount of goodwill.  The
Company believes that the estimates that it has used to record its acquisitions
are reasonable and in accordance with SFAS No. 141 (see Note 2).
 
 Under SFAS No. 142,
goodwill determined to have an indefinite useful life is not
amortized.  Instead these assets are evaluated for impairment on an
annual basis, or more frequently when an event occurs or circumstances change
between annual tests that would more likely than not reduce the fair value of
the reporting unit below its carrying value, including, among others, a
significant adverse change in the business climate.  The Company has
set the annual evaluation date as of the first day of its fiscal fourth
quarter.  The Company performed a second test as of December 31, 2007
due to continued weakness in the housing market together with a difficult
mortgage industry, resulting in continued decline in new housing activity and
consumer spending on industry-wide home remodeling and repair
expenditures.
 
 The Company
primarily utilizes a discounted cash flow approach in order to value the
Company’s reporting units required to be tested for impairment by SFAS No. 142,
which requires that the Company forecast future cash flows of the reporting
units and discount the cash flow stream based upon a weighted average cost of
capital that is derived from comparable companies within similar
industries.  The reporting units evaluated for goodwill impairment by
the Company have been determined to be the same as the Company’s operating
segments in accordance with the criteria in SFAS No. 142 for determining
reporting units (see Note 9).  The discounted cash flow calculations
also include a terminal value calculation that is based upon an expected
long-term growth rate for the applicable reporting unit.  The Company
believes that its procedures for estimating gross future cash flows, including
the terminal valuation, are reasonable and consistent with market conditions at
the time of estimation.
 
 Goodwill is
considered to be potentially impaired when the net book value of a reporting
unit exceeds its estimated fair value as determined in accordance with the
Company’s valuation procedures.  The Company believes that its
assumptions used to determine the fair value for the respective reporting units
are reasonable.  If different assumptions were to be used,
particularly with respect to estimating future cash flows, there could be the
potential that an impairment charge could result.  Actual operating
results and the related cash flows of the reporting units could differ from the
estimated operating results and related cash flows. The impact of reducing the
Company’s fair value estimates by 10% would have no impact on the Company’s
goodwill assessment for any of its reporting units, with the exception of the
Company’s residential heating, ventilating and air conditioning (“Residential
HVAC”) reporting unit.  Assuming a 10% reduction in the Company’s fair
value estimates, the carrying value of Residential HVAC may exceed fair value,
which could require the Company to perform additional testing under SFAS No. 142
to determine if there was a goodwill impairment for Residential
HVAC.
 
 In accordance with SFAS No. 144, the
Companyevaluatesthe realizability of non
indefinite-lived and non-goodwill long-lived assets, which primarily consist of
property and equipment and intangible assets (the “SFAS No. 144 Long-Lived
Assets”),on an annual
basis, or more frequently when events or business conditions warrant it,based on expectations of
non-discounted future cash flows for each subsidiary having a material amount of
SFAS No. 144 Long-Lived Assets.
 
 The Company performs the evaluation as
of the first day of its fiscal fourth quarter and more frequently if impairment
indicators are identified, for the impairment of long-lived assets, other than
goodwill, based on expectations of non-discounted future cash flows compared to
the carrying value of the subsidiary in accordance with SFAS No.
144.If the sum
of the expected non-discounted future cash flows is less than the carrying
amount of the SFAS No. 144 Long-Lived Assets, the Company would recognize an
impairment loss.The Company’s cash flow estimates are
based upon historical cash flows, as well as future projected cash flows
received from subsidiary management in connection with the annual Company wide
planning process, and include a terminal valuation for the applicable subsidiary
based upon a multiple of earnings before interest expense, net, depreciation and
amortization expense and income taxes (“EBITDA”).  The Company
estimates the EBITDA multiple by reviewing comparable company information and
other industry data.  The Company believes that its procedures for
estimating gross future cash flows, including the terminal
valuation, are reasonable and consistent with market conditions at the time of
estimation.
 
 The Company’s
businesses are experiencing a difficult market environment, due primarily to
weak residential new construction, remodeling and residential air conditioning
markets and increased commodity costs, and expect these trends to continue into
2008.  The Company has evaluated the carrying value of reporting unit
goodwill and long-lived assets and has determined, despite the current difficult
market environment, that no impairment existed at the time these financial
statements were completed.





Intangible assets consist principally of
patents, trademarks, customer relationships and non-compete
agreements.  Patents, trademarks and non-compete agreements are
amortized on a straight-line basis, while customer relationships are amortized
on an accelerated basis based upon the estimated consumption of the economic
benefits of the customer relationship.  Amortization of intangible
assets charged to operations amounted to approximately $27.5 million, $24.9
million and $18.3 million for the years ended December 31, 2007, 2006 and 2005,
respectively.  The table that follows presents the major components of
intangible assets as of December 31, 2007 and 2006:





WeightedGross
            
            
            
            
            
            Net
            
            
            AverageCarrying
            
            
            Accumulated
            
            
            Intangible
            
            
            RemainingAmount
            
            
            Amortization
            
            
            Assets
            
            
            Useful Lives(Amounts
      in millions except for useful lives)December
      31, 2007:Trademarks
            
            $
            100.2
            
            
            $
            (18.8
            )
            
            $
            81.4
            
            
            
            12.9Patents
            
            
            34.9
            
            
            
            (6.9
            )
            
            
            28.0
            
            
            
            11.0Customer
      relationships
            
            
            74.9
            
            
            
            (42.3
            )
            
            
            32.6
            
            
            
            3.6Others
            
            
            27.3
            
            
            
            (12.7
            )
            
            
            14.6
            
            
            
            3.4$
            237.3
            
            
            $
            (80.7
            )
            
            $
            156.6
            
            
            
            6.4December
      31, 2006:Trademarks
            
            $
            85.4
            
            
            $
            (12.0
            )
            
            $
            73.4
            
            
            
            13.6Patents
            
            
            31.5
            
            
            
            (4.0
            )
            
            
            27.5
            
            
            
            13.5Customer
      relationships
            
            
            58.0
            
            
            
            (28.6
            )
            
            
            29.4
            
            
            
            2.8Others
            
            
            27.9
            
            
            
            (7.8
            )
            
            
            20.1
            
            
            
            3.2$
            202.8
            
            
            $
            (52.4
            )
            
            $
            150.4
            
            
            
            5.8





As of December 31, 2007, the estimated
future intangible asset amortization expense aggregates approximately $156.6
million as follows:





Year
      Ended
            
            Annual
      AmortizationDecember 31,
            
            Expense(Amounts
      in millions)(Unaudited)2008
            
            $
            25.92009
            
            
            21.92010
            
            
            17.42011
            
            
            13.62012
            
            
            10.92013
      and thereafter
            
            
            66.9







Pensions
and Post Retirement Health Benefits





On
December 31, 2006, the Company adopted SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (“SFAS No.
158”).SFAS No.
158 requires the Company to: (a) recognize the over-funded or under-funded
status of its defined benefit post-retirement plans as an asset or liability in
its statement of financial position; (b) recognize changes in the funded status
in the year in which the changes occur through comprehensive income and (c)
measure plan assets and benefit obligations as of the date of the employer’s
fiscal year-end.  The Companywasrequired to initially recognize the
funded status of its defined benefit plans and to provide the required
disclosures for the fiscal year ended December 31, 2006.  The
requirement to measure benefit obligations as of the date of the employer’s
fiscal year-end statement of financial position is effective for the Company for
the fiscal year ended December 31, 2008.





Prior
to December 31, 2006, the Company accounted for pensions, including supplemental
executive retirement plans, and post retirement health benefit liabilities under
SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS No. 87”) and SFAS No.
106, “Employers’ Accounting for Post Retirement Benefits Other Than Pensions”
(“SFAS No. 106”), respectively.





The
accounting for pensions requires the estimating of such items as the long-term
average return on plan assets, the discount rate, the rate of compensation
increase and the assumed medical cost inflation rate.  Such estimates
require a significant amount of judgment (see Note 7 for a discussion of these
judgments).





Insurance
Liabilities





The
Company records insurance liabilities and related expenses for health, workers
compensation, product and general liability losses and other insurance reserves
and expenses in accordance with either the contractual terms of its policies or,
if self-insured, the total liabilities that are estimable and probable as of the
reporting date.  Insurance liabilities are recorded as current
liabilities to the extent they are expected to be paid in the succeeding year
with the remaining requirements classified as long-term
liabilities.  The accounting for self-insured plans requires that
significant judgments and estimates be made both with respect to the future
liabilities to be paid for known claims and incurred but not reported claims as
of the reporting date.  The Company considers historical trends when
determining the appropriate insurance reserves to record in the consolidated
balance sheet for a substantial portion of its workers compensation and general
and product liability losses.  In certain cases where partial
insurance coverage exists, the Company must estimate the portion of the
liability that will be covered by existing insurance policies to arrive at the
net expected liability to the Company (see Note 8).





Income
Taxes





In June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109)”, (“FIN 48”).  FIN 48
clarifies the criteria that an individual tax position must satisfy for some or
all of the benefits of that position to be recognized in a company’s financial
statements.  FIN 48 prescribes a recognition threshold of
“more-likely-than-not” and a measurement attribute for all tax positions taken
or expected to be taken on a tax return in order for those tax positions to be
recognized in the financial statements.  The Company adopted FIN 48 on
January 1, 2007 (see Note 4).





The
Company accounts for income taxes using the liability method in accordance with
SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), which requires
that the deferred tax consequences of temporary differences between the amounts
recorded in the Company’s Consolidated Financial Statements and the amounts
included in the Company’s federal and state income tax returns be recognized in
the balance sheet.  As the Company generally does not file its income
tax returns until well after the closing process for the December 31 financial
statements is complete, the amounts recorded at December 31 reflect estimates of
what the final amounts will be when the actual income tax returns are filed for
that fiscal year.  In addition, estimates are often required with
respect to, among other things, the appropriate state income tax rates to use in
the various states that the Company and its subsidiaries are required to file,
the potential utilization of operating and capital loss carry-forwards and
valuation allowances required, if any, for tax assets that may not be realizable
in the future.  SFAS No. 109 requires balance sheet classification of
current and long-term deferred income tax assets and liabilities based upon the
classification of the underlying asset or liability that gives rise to a
temporary difference (see Note 4).





Stock-Based
Compensation of Employees, Officers and Directors





Prior to January 1, 2006, the Company
used the fair value method of accounting for stock-based employee compensation
in accordance with Statement of Financial Standards (“SFAS”) No. 123,
“Accounting for Stock-Based Compensation” (“SFAS No. 123”).  On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payment” (“SFAS No. 123R”).





The
Company adopted SFAS No. 123R and followed the modified-prospective transition
method of accounting for stock-based compensation.  Under the
modified-prospective transition method, the Company is required to recognize
compensation cost for share-based payments to employees based on their
grant-date fair value beginning January 1, 2006.  Measurement and
attribution of compensation cost for awards that were granted prior to, but not
vested as of the date SFAS No. 123R was adopted are based on the same estimate
of the grant-date fair value and the same attribution method used previously
under SFAS No. 123.





The adoption of SFAS No. 123R did not
have a material impact on the Company’s financial position or results of
operations.





The Company recorded stock-based
compensation charges in selling, general and administrative expense, net of
approximately $0.3 million for each of the three years in the period ended
December 31, 2007, respectively, in accordance with SFAS No. 123R and SFAS No.
123.





At December 31, 2007, certain employees and
consultantsheldapproximately23,383C-1 units and approximately44,306C-2 units, which represent equity
interests in THL-Nortek Investors, LLC (“Investors LLC”), the parent of NTK
Holdings,that function
similar to stock awards.  The C-1 units vest pro rata on a quarterly
basis over a three-year period and approximately22,613and16,720were vested at December 31,2007 and2006, respectively.  The total
fair value of the C-1 units is approximately $1.1 millionand approximately $0.1million remains to be amortized atDecember 31,
2007.  The C-2
units only vest in the event that certain performance-based criteria, as
defined, are met.AtDecember 31,2007 and2006, there was approximately $1.6
million of unamortized stock-based employee compensation with respect to the C-2
units, which will berecognizedin the event that it becomes probable
that the C-2 units or any portion thereof will vest.  The C-1 and C-2
units were valued using the Black-Scholes option pricing model to determine the
freely-traded call option value based upon information from comparable public
companies, which was then adjusted to reflect the discount period, the minority
interest factor and the lack of marketability factor to arrive at the final
valuations.





Commitments
and Contingencies





The
Company provides accruals for all direct costs associated with the estimated
resolution of contingencies at the earliest date at which it is deemed probable
that a liability has been incurred and the amount of such liability can be
reasonably estimated.  Costs accrued are estimated based upon an
analysis of potential results, assuming a combination of litigation and
settlement strategies and outcomes (see Note 8).





Research and
Development





The
Company’s research and development activities are principally new product
development and represent approximately 2.4%, 2.0% and 1.9% of the Company’s
consolidated net sales in 2007, 2006 and 2005, respectively.





Comprehensive Income
(Loss)





Comprehensive income (loss) includes net
earnings and unrealized gains and losses from currency translation, marketable
securities available for sale, SFAS No. 87 minimum pension liability adjustments
and SFAS No. 158 pension liability adjustments, net of tax
attributes.  The components of the Company’s comprehensive income
(loss) and the effect on earnings for the periods presented are detailed in the
accompanying consolidated statement of stockholder’s
investment.





The
balances of each classification, net of tax attributes, within accumulated other
comprehensive income (loss) as of the periods presented are as
follows:







SFAS No. 87
              
              
              
              
              
              TotalMinimum
              
              
              SFAS No.
158
              
              
              AccumulatedForeign
              
              
              Pension
              
              
              Post-Retirement
              
              
              OtherCurrency
              
              
              Liability
              
              
              Liability
              
              
              ComprehensiveTranslation
              
              
              Adjustment
              
              
              Adjustment
              
              
              Income
    (Loss)(Amounts in
      millions)Balance, December 31,
      2004
              
              $
              9.5
              
              
              $
              (0.4
              )
              
              $
              ---
              
              
              $
              9.1Change during the
      period
              
              
              (1.7
              )
              
              
              0.1
              
              
              
              ---
              
              
              
              (1.6
              )Balance, December 31,
      2005
              
              
              7.8
              
              
              
              (0.3
              )
              
              
              ---
              
              
              
              7.5Change during the
      period
              
              
              5.1
              
              
              
              ---
              
              
              
              ---
              
              
              
              5.1Adoption of SFAS No.
      158
              
              
              ---
              
              
              
              0.3
              
              
              
              (1.3
              )
              
              
              (1.0
              )Balance, December 31,
      2006
              
              
              12.9
              
              
              
              ---
              
              
              
              (1.3
              )
              
              
              11.6Change during the
      period
              
              
              15.4
              
              
              
              ---
              
              
              
              10.7
              
              
              
              26.1Balance, December 31,
      2007
              
              $
              28.3
              
              
              $
              ---
              
              
              $
              9.4
              
              
              $
              37.7


Foreign
Currency Translation





The
financial statements of subsidiaries outside the United States are measured
using the foreign subsidiaries’ local currency as the functional
currency.  The Company translates the assets and liabilities of its
foreign subsidiaries at the exchange rates in effect at year-end.  Net
sales, costs and expenses are translated using average exchange rates in effect
during the year.  Gains and losses from foreign currency translation
are credited or charged to accumulated other comprehensive income (loss)
included in stockholder’s investment in the accompanying consolidated balance
sheet.  Transaction gains and losses are recorded in selling, general
and administrative expense, net.





New
Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
No. 141(R)”).  SFAS No. 141(R) replaces SFAS No. 141, “Business
Combinations”, but retains the requirement that the purchase method of
accounting for acquisitions be used for all business
combinations.  SFAS No. 141(R) expands on the disclosures previously
required by SFAS No. 141, better defines the acquirer and the acquisition date
in a business combination, and establishes principles for recognizing and
measuring the assets acquired (including goodwill), the liabilities assumed and
any noncontrolling interests in the acquired business.  SFAS No.
141(R) also requires an acquirer to record an adjustment to the provision for
income taxes for changes in valuation allowances or uncertain tax positions
related to acquired businesses.  SFAS No. 141(R) is effective for all
business combinations with an acquisition date in the first annual period
following December 15, 2008; early adoption is not permitted.  The
Company will adopt this statement in fiscal year 2009.  Based upon current accountingprinciples, approximately $13.2 million of the
Company’s unrecognized tax benefits as of
December 31, 2007, would reduce goodwill if recognized.  This amount is expected to be
approximately $10.0 millionat the date of adoption.
Under the provisions of SFAS No. 141(R), if these amounts are recognized after
December 31, 2008, they would be recorded through the Company’sprovision for income taxes and reduce
the Company’seffective tax
rate, rather than through goodwill.The Company is currently
evaluating the impact of adopting SFAS No. 141(R) on its Consolidated Financial
Statements.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS No.
160”).  SFAS No. 160 requires that noncontrolling (or minority)
interests in subsidiaries be reported in the equity section of the company’s
balance sheet, rather than in a mezzanine section of the balance sheet between
liabilities and equity.  SFAS No. 160 also changes the manner in which
the net income of the subsidiary is reported and disclosed in the controlling
company’s income statement.  SFAS No. 160 also establishes guidelines
for accounting for changes in ownership percentages and for
deconsolidation.  SFAS No. 160 is effective for financial statements
for fiscal years beginning on or after December 1, 2008 and interim periods
within those years.  The
Company is currently evaluating the impact of adopting SFAS No.160on its consolidated financial
statements.





In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115” (“SFAS No.
159”).  SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value and is effective for
fiscal years beginning after November 15, 2007, or January 1, 2008 for the
Company.  The Company is currently evaluating the impact of adopting
SFAS No. 159 on its consolidated financial statements.





In
February 2008, the FASB issued FASB Staff Position (“FSP”) SFAS No. 157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and Its Related
Interpretive Accounting Pronouncements That Address Leasing Transactions” (“FSP
No. 157-1”), and FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157”
(“FSP No. 157-2”).  FSP No. 157-1 removes leasing from the scope of
SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).  FSP No.
157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually).  See SFAS No. 157 discussion
below.





In
September 2006, the FASB issued SFAS No. 157.  SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accordance with
U.S. generally accepted accounting principles and expands disclosures about fair
value measurements; however, it does not require any new fair value
measurements.  The provisions of SFAS No. 157 are effective for the
Company beginning January 1, 2008, including interim periods within the year
ending December 31, 2008, except as amended by FSP No. 157-1 and FSP No. 157-2
as previously described.  Earlier adoption is
encouraged.  The provisions of SFAS No. 157 will be applied
prospectively to fair value measurements and disclosures for financial assets
and financial liabilities and non-financial assets and non-financial liabilities
recognized or disclosed at fair value in the financial statements on at least an
annual basis beginning in the first quarter of 2008.  While the
company does not expect the adoption of SFAS No. 157 to have a material impact
on its Consolidated Financial Statements at this time, the Company will monitor
any additional implementation guidance that is issued that addresses the fair
value measurements for certain financial assets and non financial assets and
non-financial liabilities not disclosed at fair value in the financial
statements on at least an annual basis.  The Company is currently evaluating the
impact of adopting SFAS No.157on its consolidated financial
statements.





2. ACQUISITIONS





On
September 18, 2007, the Company acquired all the capital stock of Stilpol SP.
Zo.O. (“Stilpol”) and certain assets and liabilities of Metaltecnica S.r.l.
(“Metaltecnica”) for approximately $7.9 million in cash and the assumption of
indebtedness of approximately $4.1 million through its kitchen range hood
subsidiaries, based in Italy and Poland (“Best Subsidiaries”).  The
Company’s Best subsidiaries borrowed the cash portion of the purchase price from
banks in Italy.  These acquisitions supply various fabricated material
components and sub-assemblies used by the Company’s Best subsidiaries in the
manufacture of kitchen range hoods.





On
August 1, 2007, the Company, through its wholly-owned subsidiary Jensen, Inc.,
acquired the assets of Solar of Michigan, Inc. (“Triangle”) for
approximately $1.7 million of cash.  Triangle is located in
Coopersville, MI and manufactures, markets and distributes bath cabinets and
related products.





On July
27, 2007, the Company acquired all of the ownership units of HomeLogic LLC
(“HomeLogic”) for approximately $5.1 million (utilizing approximately $3.1
million of cash and issuing unsecured 6% subordinated notes totaling
approximately $2.0 million due July 2011) plus contingent consideration, which
may be payable in future years.  HomeLogic is located in Marblehead,
MA and designs and sells software and hardware that facilitates the control of
third party residential subsystems such as home theatre, whole-house audio,
climate control, lighting, security and irrigation.





On July
23, 2007, the Company, through its wholly-owned subsidiary, Linear LLC
(“Linear”), acquired the assets and certain liabilities of Aigis Mechtronics LLC
(“Aigis”) for approximately $2.8 million (utilizing approximately $2.2 million
of cash and issuing unsecured 6% subordinated notes totaling approximately $0.6
million due July 2011).  Aigis is located in Winston-Salem, NC and
manufactures and sells equipment, such as camera housings, into the
close-circuit television portion of the global security market.





On June
25, 2007, the Company, through Linear, acquired International Electronics, Inc.
(“IEI”) through a cash tender offer to purchase all of the outstanding shares of
common stock of IEI at a price of $6.65 per share.  The total purchase
price was approximately $13.8 million.  IEI is located in Canton, MA
and designs and sells security and access control components and systems for use
in residential and light commercial applications.





On
April 10, 2007, the Company, through Linear, acquired the assets and certain
liabilities of c.p. All Star Corporation (“All Star”) for approximately $2.8
million (utilizing approximately $2.3 million of cash and issuing unsecured 6%
subordinated notes totaling $0.5 million due April 2009).  All Star is
located in Downington, PA and is a leading manufacturer and distributor of
residential, commercial and industrial gate operators, garage door openers,
radio controls and accessory products for the garage door and perimeter security
industry.





On
March 26, 2007, the Company, through its wholly-owned subsidiary, Advanced
Bridging Technologies, Inc. (“ABT”), acquired the assets of Personal and
Recreational Products, Inc. (“Par Safe”) for future contingent consideration of
approximately $4.6 million that was earned in 2007 and will be paid in
2008.  Par Safe designs and sells home safes and solar LED security
lawn signs.





On
March 2, 2007, the Company, through Linear, acquired the stock of LiteTouch,
Inc. (“LiteTouch”) for approximately $10.5 million (utilizing approximately $8.0
million of cash and issuing unsecured 6% subordinated notes totaling $2.5
million due March 2009) plus contingent consideration, which may be payable in
future years.  LiteTouch is located in Salt Lake City, UT and designs,
manufactures and sells automated lighting controls for a variety of uses
including residential, commercial, new construction and retro-fit
applications.





On
December 12, 2006, the Company, through Linear, acquired the stock of Gefen,
Inc. (“Gefen”) for approximately $24.0 million (utilizing approximately $21.5
million of cash and issuing unsecured 6% subordinated notes totaling $2.5
million due December 2008) plus contingent consideration, which may be payable
in future  years.  Gefen is located in Woodland Hills, CA
and designs and sells audio and video products which extend, switch, distribute
and convert signals in a variety of formats, including high definition, for both
the residential and commercial markets.





On
November 17, 2006, the Company, through its wholly-owned subsidiary,
Broan-NuTone LLC (“Broan”), acquired the stock of Zephyr Corporation (“Zephyr”)
and Pacific Zephyr Range Hood, Inc. (“Pacific”) for approximately $26.5 million
(utilizing approximately $22.5 million of cash and issuing unsecured 6%
subordinated notes totaling $4.0 million due November 2009).  Zephyr
and Pacific are both located in San Francisco, CA.  Zephyr designs and
sells upscale range hoods, while Pacific designs, sells and installs range hoods
and other kitchen products for Asian cooking markets in the United
States.





On July
18, 2006, the Company, through Linear, acquired the stock of Magenta Research,
Ltd. (“Magenta”) for approximately $14.4 million (utilizing approximately $11.9
million of cash and issuing unsecured 6% subordinated notes totaling $2.5
million due July 2008) plus contingent consideration of approximately $16.5
million which was earned in 2007 and will be paid in 2008.  Magenta is
located in New Milford, CT and designs and sells products that distribute audio
and video signals over Category 5 and fiber optic cable to multiple display
screens.





On June
26, 2006, the Company, through Linear, acquired the stock of Secure Wireless,
Inc. (“Secure Wireless”) and Advanced Bridging Technologies, Inc. (“ABT”)
through two mergers for approximately $10.5 million, plus contingent
consideration of approximately $18.1 million that was earned in 2006 and was
paid in April 2007 and approximately $11.6 million that was earned in 2007 and
will be paid in 2008.  Additional contingent consideration may be
payable in future years.  Secure Wireless designs and sells wireless
security products for the residential and commercial markets while ABT designs
and sells innovative radio frequency control products and
accessories.  Both Secure Wireless and ABT are located in Carlsbad,
CA.





On
April 14, 2006, the Company, through two newly formed subsidiaries of its HVAC
segment, acquired the assets and certain liabilities of Huntair, Inc.
(“Huntair”) and Cleanpak International, LLC (“Cleanpak”), for approximately
$48.4 million (utilizing approximately $38.4 million of cash and issuing
unsecured 6% subordinated notes totaling $10.0 million due April 2008) plus
contingent consideration of approximately $30.0 million which was earned in 2006
and was paid in April 2007.  Both Huntair and Cleanpak are located
near Portland, OR and manufacture, market and distribute custom air handlers and
related products for commercial and cleanroom applications.





On
February 22, 2006, the Company, through Linear, acquired the assets and certain
liabilities of Furman Sound, Inc. (“Furman”) for approximately $3.3
million.  Furman is located in Petaluma, CA and designs and sells
audio and video signal processors and innovative power conditioning and surge
protection products.





On
January 25, 2006, the Company, through its wholly-owned subsidiary, Mammoth
China Ltd. (“Mammoth China”), increased its ownership interests in Mammoth
(Zhejiang) EG Air Conditioning Ltd. (“MEG”) and Shanghai Mammoth Air
Conditioning Co., Ltd. (“MSH”) to sixty-percent for approximately $2.4
million.  The majority ownership transaction relating to MSH was
finalized with the Chinese authorities in May 2006.  Prior to January
25, 2006, Mammoth China had a forty-percent minority interest in MEG and a
fifty-percent interest in MSH.  On June 15, 2007, the Company further
increased its ownership in MEG and MSH to seventy-five percent.  Prior
to January 25, 2006, the Company did not have a controlling interest and
accounted for these investments under the equity method of
accounting.





On
December 9, 2005, the Company, through Linear, acquired the stock of GTO, Inc.
(“GTO”) through a merger for approximately $28.2 million in cash, plus
contingent consideration of approximately $0.2 million which was paid in the
first quarter of 2006.  GTO is located in Tallahassee, FL and designs,
manufactures and sells automatic electric gate openers and access control
devices to enhance the security and convenience of both residential and
commercial property fences.





On
August 26, 2005, the Company, through its wholly-owned subsidiary, Elan Home
Systems, LLC (“Elan”), acquired the assets and certain liabilities of Sunfire
Corporation (“Sunfire”) for approximately $4.0 million (utilizing approximately
$3.5 million of cash and issuing an unsecured subordinated promissory note in
the amount of approximately $0.5 million) plus contingent consideration, which
may be payable in future years.  Sunfire is located in Snohomish, WA
and manufactures, sells and designs home audio and home cinema amplifiers,
receivers and subwoofers.





On
August 8, 2005, the Company, through its wholly-owned subsidiary, Nortek (UK)
Limited, acquired the stock of Imerge Limited (“Imerge”) for approximately $6.1
million in cash plus contingent consideration, which may be payable in future
years.  Imerge is located in Cambridge, United Kingdom and designs and
sells hard disk media players and multi-room audio servers.





On July
15, 2005, the Company, through Linear, acquired the assets and certain
liabilities of Niles Audio Corporation (“Niles”) for approximately $77.7
million.  In connection with the acquisition of Niles, the Company
utilized approximately $67.7 million of cash and issued an unsecured promissory
note in the amount of approximately $10.0 million.  Niles is located
in Miami, FL and manufactures, sells and designs products that provide customers
with innovative solutions for whole-house distribution and integration of audio
and video systems, including speakers, receivers, amplifiers, automation
devices, controls and accessories.





On June
13, 2005, the Company, through its wholly-owned subsidiary Nordyne Inc.
(“Nordyne”), acquired the assets and certain liabilities of International
Marketing Supply, Inc. (“IMS”) for approximately $4.6 million, utilizing
approximately $4.1 million of cash and issuing an unsecured promissory note in
the amount of approximately $0.5 million.  IMS is located in Miami, FL
and sells heating, ventilation and air conditioning equipment to customers in
Latin America and the Caribbean.





On
April 26, 2005, the Company, through Linear, acquired the stock of Panamax, Inc.
(“Panamax”) for approximately $11.8 million (utilizing approximately $9.5
million of cash and issuing an unsecured promissory note in the amount of
approximately $2.3 million) plus contingent consideration of approximately $4.5
million which was paid in the first quarter of 2006.  Panamax is
located in Petaluma, CA and sells and designs innovative power conditioning and
surge protection products that prevent loss or damage of home and small business
equipment due to power disturbances.





Acquisitions
contributed approximately $145.4 million, $16.7 million and $7.7 million to net
sales, operating earnings and depreciation and amortization expense,
respectively, for the year ended December 31, 2007.  With the
exception of Stilpol, Metaltecnica, Triangle, Zephyr and Pacific, which are
included in the Residential Ventilation Products segment, and Huntair, Cleanpak,
MEG and MSH, which are included in the Air Conditioning and Heating Products
segment, all acquisitions are included in the Home Technology Products segment
in the Company’s segment reporting (see Note 9).





Approximately
$55.6 million of contingent consideration was paid during the year ended
December 31, 2007 related to the Secure Wireless, Huntair, Cleanpak and
OmniMount acquisitions.  The remaining estimated total maximum
potential amount of contingent consideration that may be paid in the future for
all completed acquisitions is approximately $94.7 million, of which
approximately $32.7 million was accrued at December 31, 2007 and will be paid in
2008.





Acquisitions
are accounted for as purchases and accordingly have been included in the
Company’s consolidated results of operations since the acquisition
date.  For recent acquisitions, the Company has made preliminary
estimates of the fair value of the assets and liabilities of the acquired
companies, including intangible assets and property and equipment, as of the
date of acquisition, utilizing information available at the time that the
Company’s Consolidated Financial Statements were prepared and these estimates
are subject to refinement until all pertinent information has been
obtained.  The Company is in the process of obtaining appraisals of
intangible assets and property and equipment and finalizing the integration
plans for certain of the acquired companies, which are expected to be completed
by the first half of 2008.





Pro
forma results related to these acquisitions have not been presented, as the
effect is not significant to the Company’s 2007 consolidated operating
results.





3.      CASH
FLOWS





Interest paid was approximately $120.7
million, $111.2 million and $105.8 million for the years ended December 31,
2007, 2006 and 2005, respectively.





Net cash paid for acquisitions for the
three years in the period ended December 31, 2007 was as
follows:





For the Years Ended December
      31,2007
            
            
            2006
            
            
            2005(Amounts
      in millions)Fair
      value of assets acquired
            
            $
            105.7
            
            
            $
            234.7
            
            
            $
            148.3Liabilities
      assumed or created
            
            
            (67.8
            )
            
            
            (133.2
            )
            
            
            (31.1
            )Net
      assets of businesses acquired
            
            
            37.9
            
            
            
            101.5
            
            
            
            117.2Payment
      of contingent consideration
            
            
            55.6
            
            
            
            4.7
            
            
            
            ---$
            93.5
            
            
            $
            106.2
            
            
            $
            117.2





Contingent consideration of
approximately $32.7 million was earned in 2007 by certain acquired
businesses (see Note 2) and will be paid in 2008.  This amount is
included in accrued expenses and taxes, net on the accompanying consolidated
balance sheet at December 31, 2007 and has been excluded from the accompanying
consolidated statement of cash flows for the year ended December 31,
2007.





Significant
non-cash financing and investing activities excluded from the accompanying
consolidated statement of cash flows include capitalized lease additions of
approximately $4.8 million for the year ended December 31,
2005.  There were no capitalized lease additions in 2007 or
2006.





4. INCOME
TAXES





The
following is a summary of the components of earnings (loss) before provision for
income taxes:





For the Years Ended December
      31,2007
            
            
            2006
            
            
            2005(Amounts
      in millions)Domestic
            
            $
            (30.8
            )
            
            $
            80.0
            
            
            $
            73.2Foreign
            
            
            34.4
            
            
            
            23.8
            
            
            
            26.9$
            3.6
            
            
            $
            103.8
            
            
            $
            100.1





The
following is a summary of the provision for income taxes included in the
accompanying consolidated statement of operations:





For the Years Ended December
      31,2007
            
            
            2006
            
            
            2005(Amounts
      in millions)Federal
      income taxes:Current
            
            $
            0.3
            
            
            $
            0.3
            
            
            $
            0.4Deferred
            
            
            (6.0
            )
            
            
            26.8
            
            
            
            25.3(5.7
            )
            
            
            27.1
            
            
            
            25.7Foreign
            
            
            14.6
            
            
            
            14.5
            
            
            
            14.3State
            
            
            1.7
            
            
            
            4.5
            
            
            
            3.2$
            10.6
            
            
            $
            46.1
            
            
            $
            43.2





Income
tax payments, net of refunds, in the years ended December 31, 2007, 2006 and
2005 were approximately $10.9 million, $23.7 million and $15.9 million,
respectively.





The
table that follows reconciles the federal statutory income tax dollar amount to
the actual income tax provision for the years ended December 31, 2007, 2006 and
2005, respectively.





For the Years Ended December
      31,2007
            
            
            2006
            
            
            2005(Amounts
      in millions)Income
      tax provision at the federal statutory rate
            
            $
            1.3
            
            
            $
            36.3
            
            
            $
            35.0Net
      change from statutory rate:State
      income tax provision, net of federal income tax effect
            
            
            1.1
            
            
            
            2.9
            
            
            
            2.1Non-deductible
      expenses, net
            
            
            0.9
            
            
            
            3.3
            
            
            
            1.0Tax
      effect resulting from foreign activities and foreign
    dividends
            
            
            5.9
            
            
            
            2.9
            
            
            
            4.9Interest
      on uncertain tax positions
            
            
            1.3
            
            
            
            ---
            
            
            
            ---Other,
      net
            
            
            0.1
            
            
            
            0.7
            
            
            
            0.2$
            10.6
            
            
            $
            46.1
            
            
            $
            43.2





The
table that follows reconciles the federal statutory income tax rate to the
actual income tax effective tax rate of approximately 294.5%, 44.4% and 43.2%
for the years ended December 31, 2007, 2006 and 2005, respectively.





For the year ended December
    31,2007
            
            
            2006
            
            
            2005Effective
      tax rate%:Income
      tax provision at the federal statutory rate
            
            
            35.0
            %
            
            
            35.0
            %
            
            
            35.0
            %Net
      change from statutory rate:State
      income tax provision, net of federal income tax effect
            
            
            30.7
            
            
            
            2.8
            
            
            
            2.1Non-deductible
      expenses, net
            
            
            24.5
            
            
            
            3.2
            
            
            
            1.0Tax
      effect resulting from foreign activities and foreign
    dividends
            
            
            165.7
            
            
            
            2.8
            
            
            
            4.9Interest
      on uncertain tax positions
            
            
            35.2
            
            
            
            ---
            
            
            
            ---Other,
      net
            
            
            3.4
            
            
            
            0.6
            
            
            
            0.2294.5
            %
            
            
            44.4
            %
            
            
            43.2
            %





The tax
effect of temporary differences which give rise to significant portions of
deferred income tax assets and liabilities as of December 31, 2007 and December
31, 2006 are as follows:





December 31,2007
            
            
            2006(Amounts
      in millions)Prepaid
      Income Tax Assets (classified current)Arising
      From:Accounts
      receivable
            
            $
            3.0
            
            
            $
            2.9Inventories
            
            
            3.4
            
            
            
            (4.3
            )Insurance
      reserves
            
            
            4.6
            
            
            
            8.3Warranty
      accruals
            
            
            8.0
            
            
            
            6.2Net
      operating loss and tax credits
            
            
            3.2
            
            
            
            2.4Other
      reserves and assets, net
            
            
            6.7
            
            
            
            5.7$
            28.9
            
            
            $
            21.2Deferred
      Income Tax Assets (Liabilities)(classified
      non-current)Arising
      From:Property
      and equipment, net
            
            $
            (17.6
            )
            
            $
            (20.6
            )Intangible
      assets, net
            
            
            (40.2
            )
            
            
            (32.7
            )Pension
      and other benefit accruals
            
            
            5.2
            
            
            
            14.0Insurance
      reserves
            
            
            12.1
            
            
            
            7.5Warranty
      accruals
            
            
            6.6
            
            
            
            6.0Capital
      loss and net loss carry forwards
            
            
            14.3
            
            
            
            13.2Valuation
      allowances
            
            
            (20.0
            )
            
            
            (20.5
            )Other
      reserves and assets, net
            
            
            2.6
            
            
            
            (2.8
            )$
            (37.0
            )
            
            $
            (35.9
            )





The
Company has established valuation allowances related to certain reserves that
will result in capital losses and foreign net operating loss
carry-forwards.  Included in the deferred tax asset valuation
allowance of approximately $20.0 at December 31, 2007 are valuation allowances
of approximately $13.7 million, which will reduce goodwill in the future, should
the tax assets they relate to be realized, as these tax assets existed at the
date of the 2004 Acquisition with THL.  The Company has not provided
United States income taxes or foreign withholding taxes on unremitted foreign
earnings of approximately $70.0 million as those amounts are considered
indefinitely invested.  In addition, the Company has approximately
$45.0 million of foreign net operating loss carry-forwards that if utilized
would offset future foreign tax payments.  The Company has established
a valuation allowance related to these losses, which is included in the $20.0
million valuation allowance noted in the above table.




The
Company has a federal net operating loss carryforward of approximately $4.0
million, and has an alternative minimum tax credit carryforward of approximately
$2.3 million at December 31, 2007.  The federal net operating loss
carryforward is subject to limitation of approximately $1.5 million per year
under Internal Revenue Code Section 382.





As
indicated in Note 1, the Company adopted the provisions of FIN 48 effective
January 1, 2007.  As a result of the adoption of this standard, the
Company recorded a charge to retained earnings of approximately $3.2 million and
also increased goodwill related to pre-acquisition tax uncertainties by
approximately $3.8 million.





As of January 1,
2007, after the adoption of FIN 48, the Company has provided a liability of
approximately $38.2 million for unrecognized tax benefits related to various
federal, foreign and state tax income tax matters.  The amount of
unrecognized tax benefits at December 31, 2007 was approximately $36.3 million,
of which approximately $9.1 million would impact the effective tax
rate.  The difference between the total amount of unrecognized tax
benefits and the amount that would impact the effective rate consists of items
that would adjust deferred tax assets and liabilities of approximately $7.6
million, items that, if recognized prior to January 1, 2009, would result in
adjustments to goodwill of approximately $13.2 million (see Note 1 for SFAS No.
141(R) discussion), and the federal benefit of state tax items of approximately
$6.4 million.





A
reconciliation of the beginning and ending amounts of unrecognized tax benefits
is as follows:





(Amounts
      in millions)Amount
      established upon adoption of FIN 48
            
            $
            38.2Gross
      increases related to positions taken in 2007
            
            
            4.3Gross
      increases related to positions taken in prior periods
            
            
            0.2Decreases
      related to settlements with taxing authorities
            
            
            (1.2
            )Decreases
      due to lapse of statutes of limitation related to state tax
      items
            
            
            (5.2
            )Balance
      at December 31, 2007
            
            $
            36.3





As of
December 31, 2007, the Company has approximately $4.0 million in unrecognized
benefits relating to various state income tax issues, for which the statute of
limitation is expected to expire late in 2008.  Of this amount,
approximately $3.0 million will reduce goodwill if recognized.  The
decreases in the unrecognized tax benefits due to the lapse in the statute of
limitations resulted in a net reduction to goodwill of approximately $3.8
million at December 31, 2007.





The
Company is currently under audit by the Internal Revenue Service for the tax
periods from January 1, 2004 to August, 2004 and from August 2004 to December
31, 2004 and for the year ended December 31, 2005.  The Company and
its subsidiaries federal, foreign and state income tax returns are generally
subject to audit for all tax periods beginning in 2003 through the present
year.





As of
January 1, 2007, the Company has accrued approximately $4.7 million of interest
related to uncertain tax positions.  As of December 31, 2007, the
total amount of accrued interest related to uncertain tax positions is
approximately $6.1 million. The Company accounts for interest and penalties
related to uncertain tax positions as part of its provision for federal and
state taxes.





5.
            NOTES,
      MORTGAGE NOTES AND OBLIGATIONS
PAYABLE





Short-term
bank obligations at December 31, 2007 and 2006 consist of the
following:





December 31,2007
            
            
            2006(Amounts
      in millions)Secured
      lines of credit and bank advances of the Company’s:Foreign
      subsidiaries
            
            $
            29.0
            
            
            $
            13.3Revolving
      portion of senior secured credit facility
            
            
            35.0
            
            
            
            10.0$
            64.0
            
            
            $
            23.3





Short-term
bank obligations of the Company’s foreign subsidiaries are secured by accounts
receivable and buildings of the Company’s foreign subsidiaries with an aggregate
net book value of approximately $29.0 million and have a weighted average
interest rate of approximately 5.23% at December 31, 2007.





As
part of the Nortek senior secured credit facility, Nortek has a $200.0 million
revolving credit facility that matures in August 2010 and includes both a letter
of credit sub-facility and swing line loan sub-facility.





At December 31, 2007, Nortek had
approximately $35.0 million outstanding (with an interest rate of
approximately 7.45%) and approximately $133.4 million of
available borrowing capacity under theU.S.revolving portion of its senior secured
credit facility, with approximately $21.6 million in outstanding letters of
credit.  Borrowings under the revolving portion of the senior secured
credit facility are usedfor general corporate purposes, including
borrowings to fund working capital requirements.  Under the Canadian revolving portion of
its senior secured credit facility, Nortek had no outstanding borrowings and
approximately $10.0 million of available borrowing
capacity.  Letters of credit have been issued under Nortek’s
revolving credit facility as additional security for (1) approximately $17.2
million relating to certain of the Company’s insurance programs, (2)
approximately $3.6 million relating to leases outstanding for certain of the
Company’s manufacturing facilities and (3) approximately $0.8 million relating
to certain of the subsidiaries’ purchases and other
requirements.  Letters of credit reduce borrowing availability under
Nortek’s revolving credit facility on a dollar for dollar basis.




Notes,
mortgage notes and obligations payable, included in the accompanying
consolidated balance sheet at December 31, 2007 and 2006, consist of the
following:





December 31,2007
            
            
            2006(Amounts
      in millions)NTK
      Holdings 10 3/4% Senior Discount Notes due 2014 (the “10 3/4% Senior
      Discount Notes”), net of unamortized
              discount of approximately $64.4 million and $98.1 million at December 31,
      2007 and 2006, respectively
            
            $
            338.6
            
            
            $
            304.9NTK
      Holdings senior unsecured loan facility, including approximately $33.0
      million and $11.0 million at
              December 31, 2007and
      2006, respectively, of debt accretion related to the PIK option
      *
            
            
            233.9
            
            
            
            216.0Nortek
      9 7/8% Senior Subordinated Notes due 2011 (“9 7/8% Notes”), including
      unamortized premium
            
            
            10.0
            
            
            
            10.0Nortek
      8 1/2% Senior Subordinated Notes due 2014 (“8 1/2% Notes”)
            
            
            625.0
            
            
            
            625.0Nortek
      Senior Secured Credit Facility
            
            
            677.3
            
            
            
            684.3Mortgage
      notes payable
            
            
            4.7
            
            
            
            3.9Other
            
            
            64.4
            
            
            
            59.11,953.9
            
            
            
            1,903.2Less
      amounts included in current liabilities
            
            
            32.4
            
            
            
            20.0$
            1,921.5
            
            
            $
            1,883.2





*
            Also
      net of approximately $4.1 million of unamortized debt discount at December
      31, 2007.





On May
10, 2007, the Company exercised an option to extend the maturity date of its
senior unsecured loan facility to March 1, 2014 (the “Option”) and paid a loan
extension fee of approximately $4.5 million.  As a result, the Company
recorded approximately $4.5 million as debt discount and recorded approximately
$3.9 million of additional non-cash interest expense in the second quarter of
2007 related primarily to the decrease in the fair value of the
Option.  The debt discount is being amortized as non-cash interest
expense using the interest method through March 1, 2014.





The
senior unsecured loan facility bears interest at LIBOR plus a spread, which
spread increases over time, subject to a cap on the overall interest rate of 11%
per annum.  At December 31, 2007, the senior unsecured loan facility
had an actual interest rate of approximately 10.4%.  The Company is
accruing at an effective interest rate of approximately 10.94%, reflecting the
estimated average interest rate over the remaining term of the senior unsecured
loan facility.  NTK Holdings has the option to pay interest in cash
(“Cash Option”) or by adding interest to the principal amount of the loans under
the senior unsecured loan facility (“PIK Option”).  If the Company
exercises the PIK Option withrespect to any interest period, an
amount equal to the unpaid interest accrued will be added to the principal
amount of the senior unsecured loan facility and such accrued interest will be
deemed to have been paid.  Following an increase in the principal
amount of the senior unsecured loan facility as a result of the payment through
the PIK Option, the senior unsecured loan facility will bear interest on such
increased principal amount.  The Company must elect the form of
interest payment for each interest period.Since the initial borrowing on May 10,
2006, the Company haselected the PIK option to increase the
principal amount of the senior unsecured loan facility for the interest accrued
during theapplicable
interest periods.  As a result of exercising
this PIK Option, the Company recorded approximately $22.0millionand $11.0 millionof accrued interest forthe year ended December 31, 2007 and the
period from May 10, 2006 to December 31, 2006, respectively,as additional indebtedness relating to
the senior unsecured loan facility.  At December 31,2007 and2006, theactualoutstanding principal balance on the
senior unsecured loan facility was approximately$238.0 million and$216.0 million, respectively.The amount recorded as of December 31,
2007, net of unamortized debt discount of approximately $4.1 million, is
approximately $233.9 million.The senior unsecured loan facility is
not guaranteed by any of the NTK Holdings’ subsidiariesand is not secured byany assets of NTK Holdings or any of
its subsidiaries.




At December 31, 2007,Nortek’s long-term borrowings under theseniorsecuredcreditfacilityhada variable interest rate of
approximately 7.1%andmature at various times
through 2011.  The obligations under the senior secured credit
facility are guaranteed by Nortek Holdings and by all of Nortek’s existing and
future significant domestic “restricted subsidiaries” (as defined in the credit
facility) and are secured by substantially all of Nortek’s assets and the assets
of the guarantors, whether now owned or later acquired, including a pledge of
all of the Company’s capital stock, the capital stock of certain of the
Company’s domestic subsidiaries and 65% of the capital stock of each of the
Company’s significant foreign subsidiaries that is directly owned by the Company
or a guarantor subsidiary.
 
 Nortek's senior
secured credit facility contains two financial maintenance covenants, which
become more restrictive over time, and the Company cannot assure that these
covenants will always be met particularly given the further deterioration of the
new residential construction and repair and remodeling industries, plus the
instability in the overall credit markets.  These two covenants
require that Nortek maintain at the end of each quarter, calculated based on the
last twelve months, a Leverage Ratio and an Interest Coverage Ratio, each as
defined.  The Leverage Ratio must not exceed a defined ratio amount
and the Interest Coverage Ratio must not be less than a defined ratio
amount.  The Leverage Ratio is calculated by dividing Nortek's total
indebtedness, net of cash, (as defined) by EBITDA (as defined) and the Interest
Coverage Ratio is calculated by dividing EBITDA (as defined) by interest
expense, net (as defined).  At December 31, 2007 Nortek was required
to maintain a Leverage Ratio not greater than 5.85:1 and an Interest Coverage
Ratio of not less than 2.10:1.  At December 31, 2007 Nortek was in
compliance with the Leverage Ratio and the Interest Coverage Ratio
covenants.  At December 31, 2007, Nortek’s Leverage Ratio was 5.37:1
and its Interest Coverage Ratio was 2.32:1.  The Leverage Ratio
requirement of 5.85:1 at December 31, 2007 tightens to 5.60:1 at the end of the
second quarter of 2008 and further tightens to 5.25:1 at December 31, 2008,
while the Interest Coverage Ratio requirement of 2.10:1 at December 31, 2007
tightens to 2.20:1 at the end of the first quarter of 2008 through December 31,
2008.  Should Nortek not satisfy either of these covenants, Nortek's
senior secured credit facility allows a cure, whereby a subsequent cash equity
investment equal to the EBITDA shortfall, will be treated as EBITDA for purposes
of the compliance calculations in the current and future periods.  The
senior secured credit facility allows for such a cure to occur twice within a
consecutive twelve-month period.  The Company expects that Nortek’s
financial statements for the first quarter of 2008, which will be filed with its
quarterly report on Form 10-Q on or about May 15, 2008, will indicate that its
EBITDA for such quarter (as calculated in accordance with the senior secured
credit facility) will be below the level necessary to be in compliance with the
Interest Coverage Ratio and the Leverage Ratio covenants as of the end of
such quarter.  Any such shortfall is not expected to be significant
and Nortek plans to utilize the equity cure right under its senior secured
credit facility to avoid any default otherwise arising out of such
shortfall.  The Company expects that Nortek may also encounter events
of non-compliance with the Interest Coverage Ratio and the Leverage Ratio
covenants as of the end of the second quarter of 2008 and anticipates that
Nortek may seek to use the equity cure right again to remedy any such
non-compliance.  Based upon the Company’s current forecast regarding
Nortek’s operating results for the balance of 2008 following the second quarter,
the Company does not anticipate further events of non-compliance with the
Interest Coverage Ratio and Leverage Ratio covenants as of the end of the third
and fourth quarters of 2008.  To the extent Nortek experiences events
of non-compliance with such covenants, which are not resolved through the use of
the equity cure feature or other alternatives, Nortek would need to seek waivers
or amendments from the lenders under its senior secured credit facility or
refinance such facility.  Should an event of non-compliance occur,
Nortek will not be permitted to borrow under its credit facility until such time
that a cure happens.  If these events of non-compliance were to occur,
and were not cured, an event of default would exist under Nortek's senior
secured credit facility and would allow the lenders to accelerate the payment of
indebtedness outstanding.  In addition, an event of default under the
credit facility would result in a cross default under substantially all of the
Company’s other senior and senior subordinated indebtedness.  In light
of the instability and uncertainty that currently exists within the financial
and credit markets and the tightening of credit standards, Nortek may not be
able to obtain any such waivers or amendments or any such refinancing on
acceptable terms.  In addition, any such waivers, amendments or
refinancing may involve terms which would have a further adverse effect on the
future cash flows of the Company.  Based upon the application of
equity cures, other potential equity investments and Nortek’s forecast of its
financial results for 2008, the Company has determined that it is probable that
Nortek will be in compliance with the terms of its senior secured credit
facility through December 31, 2008 and as a result the Company has classified
Nortek’s long-term indebtedness as a long-term liability in its consolidated
balance sheet at December 31, 2007.





A
breach of the covenants under the indentures that govern NTK Holdings' 10 3/4%
senior discount notes, and Nortek's 8 1/2% senior subordinated notes or under
the agreements that govern NTK Holdings' senior unsecured loan facility and
Nortek's senior secured credit facility could result in an event of default
under the applicable indebtedness.  Such default may allow the
creditors to accelerate the related debt and may result in the acceleration of
any other debt to which a cross-acceleration or cross-default provision
applies.  In addition, an event of default under Nortek's senior
secured credit facility would permit the lenders to terminate all commitments to
extend further credit under that facility.  Furthermore, if Nortek was
unable to repay the amounts due and payable under its senior secured credit
facility, those lenders could proceed against the collateral granted to them to
secure that indebtedness.  In the event the Company’s lenders or
noteholders accelerate the repayment of their borrowings, the Company cannot
assure that the Company and its subsidiaries would have sufficient assets to
repay such indebtedness.  The Company’s future financing arrangements
will likely contain similar or more restrictive covenants.  As a
result of these restrictions, the Company may be:





·
            limited
      in how the Company conducts its
business,


·
            unable
      to raise additional debt or equity financing to operate during general
      economic or business downturns, or


·
            unable
      to compete effectively or to take advantage of new business
      opportunities.





Such restrictions if imposed, would
affect the Company’s ability to grow in accordance with its
plans.





Mortgage
notes payable of approximately $4.7 million outstanding at December 31, 2007
includes various mortgage notes and other related indebtedness payable in
installments through 2019.  These notes bear interest at rates ranging
from approximately 4.6% to 8.0% and are collateralized by property and equipment
with an aggregate net book value of approximately $8.1 million at December 31,
2007.





Other
obligations of approximately $64.4 million outstanding at December 31, 2007
include borrowings relating to equipment purchases, notes payable issued for
acquisitions and other borrowings bearing interest at rates ranging from
approximately 2.9% to 14.0% and maturing at various dates through
2018.  Approximately $20.3 million of such indebtedness is
collateralized by property and equipment with an aggregate net book value of
approximately $23.5 million at December 31, 2007.





At December 31,
2007, the Company’s Best subsidiary was not in compliance with a maintenance
covenant with respect to two loan agreements with two banks with aggregate
borrowings outstanding of approximately $9.4 million.  The Company’s
Best subsidiary obtained waivers from the two banks, which indicated that the
Company’s Best subsidiary was not required to comply with the maintenance
covenant as of December 31, 2007.  The next measurement date for the
maintenance covenant is for the year ended December 31, 2008 and the Company
believes that it is probable that its Best subsidiary will be in compliance with
the maintenance covenant when their assessment of the required calculation is
completed in the first quarter of 2009.  As a result, the Company has
classified the outstanding borrowings under such agreements as a long-term
liability in its consolidated balance sheet at December 31,
2007.





The
indentures and other agreements governing the Company and its subsidiaries’
indebtedness (including the credit agreement for the senior secured credit
facility) contain certain restrictive financial and operating covenants,
including covenants that restrict the ability of the Company and its
subsidiaries to complete acquisitions, pay dividends, incur indebtedness, make
investments, sell assets and take certain other corporate actions.





At December 31, 2007, the Company had
approximately $64.4million available for the payment of
cash dividends, stock purchases or other restricted payments (“Restricted
Payments”) under the terms
of the indenture governing the Company’s 10 3/4% Senior Discount Notes’ and the
agreement governing the Company’s senior unsecured loan
facility.  Restricted Payments to NTK Holdings and Nortek Holdings
from Nortek are limited by
the terms of Nortek’s most restrictive loan agreement, Nortek’s senior secured
credit facility.  The amount available for such payments under
Nortek’s senior secured credit facility was approximately $172.2million atDecember 31,2007.





At
December 31, 2007, the maturities for the Company’s notes, mortgage notes and
obligations payable, excluding unamortized debt discount of approximately $4.1
million, were:





Year
      Ended
            
            Debt
      ObligationDecember 31,
            
            Maturities(Amounts
      in millions)2008
            
            $
            32.42009
            
            
            20.52010
            
            
            177.42011
            
            
            511.52012
            
            
            3.7Thereafter
            
            
            1,212.5





In March 2008,
Moody’s downgraded the debt ratings for Nortek and its Parent Company, NTK
Holdings, from “B2” to “B3” and issued a negative outlook.  Moody’s
rating downgrade reflects the Company’s high leverage, reduced financial
flexibility and the anticipated pressure of the difficult new home construction
market and home values on the Company’s 2008 financial
performance.  The negative ratings outlook reflects Moody’s concern
that the market for the Company’s products will remain under significant
pressure so long as new housing starts do not rebound and that the repair and
remodeling market could contract meaningfully in 2008 and possibly in
2009.  Additionally, Moody’s was concerned whether the Company’s cost
cutting initiatives would be successful enough so as to offset pressure on the
Company’s sales.  Also in March 2008, Standard and Poors affirmed the
Company’s “B” corporate rating with a negative outlook.





6.  COMMON
STOCK, DEFERRED COMPENSATION AND DIVIDENDS





On November 20, 2002, Nortek reorganized
into a holding company structure and each outstanding share of capital stock of
Nortek was converted into an identical share of capital stock of the former
Nortek Holdings.  The former Nortek Holdings became the successor
public company, and Nortek became a wholly-owned subsidiary of the former Nortek
Holdings.  As of November 20, 2002, there is no established public
trading market for Nortek’s capital stock.





NTK
Holdings was formed to hold the capital stock of Nortek
Holdings.  Prior to February 10, 2005, Nortek Holdings was a direct
wholly-owned subsidiary of THL-Nortek Investors, LLC (“Investors
LLC”).  On February 10, 2005, NTK Holdings issued 3,000 shares of
capital stock to Investors LLC in exchange for Investor LLC’s 3,000 shares of
capital stock of Nortek Holdings.  As of April 11, 2008, there were
3,000 shares of common stock of the Company authorized and outstanding, all of
which are owned by Investors LLC.





On May
5, 2006, the Company filed a registration statement on Form S-1 (last amended on
September 15, 2006) with the SEC for an initial public offering of shares of its
common stock.  The Company withdrew its registration statement on Form
S-1 in a filing with the SEC on November 13, 2007 due to the unsettled market
conditions.  The Company expensed approximately $2.5 million of costs
incurred in connection with the initial public offering, which are included in
selling, general and administrative expense, net in the consolidated statement
of operations for the year ended December 31, 2006.





On May
10, 2006 and February 18, 2005, NTK Holdings paid dividends of approximately
$174.9 million and $187.0 million, respectively, to Investors
LLC.  Additionally, on these same dates, Nortek Holdings made
distributions of approximately $54.0 million and $57.7 million, respectively, to
participants in the 2004 Nortek Holdings, Inc. Deferred Compensation Plan
(including certain of the Company’s executive officers) in accordance with the
terms of that plan.  As a result of these distributions, the holders
of the Class A membership interests in Investors LLC and the participants in the
2004 Nortek Holdings, Inc. Deferred Compensation Plan are not entitled to any
further distributions.





7.
            PENSION,
      PROFIT SHARING AND OTHER POST RETIREMENT
  BENEFITS





The
Company and its subsidiaries have various pension, supplemental retirement plans
for certain officers, profit sharing and other post retirement benefit plans
requiring contributions to qualified trusts and union administered
funds.





Pension,
profit sharing and other post retirement health benefit expense charged to
operations aggregated approximately $8.3 million, $8.5 million (excluding a
curtailment gain of $35.9 million on the termination of benefits to certain
employees of NuTone under a post retirement medical and life insurance plan) and
$12.0 million for the years ended December 31, 2007, 2006 and 2005,
respectively.  The decrease in the pension, profit sharing and other
post retirement health benefit expense for December 31, 2007 as compared to
December 31, 2006 is primarily due to a change in the discount rate from 5.25%
to 5.75%, a reduction in the service cost component of net periodic benefit
costs including the freezing of benefit accruals due to a plant shutdown and
lower expense assumptions for the Companies defined benefit pension
plans.  These decreases were partially offset by the full recognition
of approximately $19.5 million of prior service costs in connection with the
curtailment gain of approximately $35.9 million in 2006.  The decrease
in pension, profit sharing and other post retirement health benefit expense at
December 31, 2006 as compared to December 31, 2005 is primarily due to a
reduction in the service cost component of net periodic benefit costs and the
termination of benefits under a post-retirement medical and life insurance
plan.





The
Company’s policy is to generally fund currently at least the minimum required
annual contribution of its various qualified defined benefit
plans.  In 2008, the Company expects to contribute approximately $3.6
million (unaudited) to its defined benefit pension plans.





For the
year ended December 31, 2007 and 2006, the Company used a September 30
measurement date for its plans.  The table that follows provides a
reconciliation of benefit obligations, plan assets and funded status of plans in
the accompanying consolidated balance sheet at December 31, 2007 and
2006:







Pension
      BenefitsFor the Years Ended December
      31,2007
              
              
              2006(Amounts in
      millions)Change in benefit
      obligation:Benefit obligation at
      October 1,
              
              $
              177.3
              
              
              $
              175.2Service
      cost
              
              
              0.5
              
              
              
              1.0Interest
      cost
              
              
              9.6
              
              
              
              9.0Loss due to foreign
      exchange
              
              
              0.6
              
              
              
              4.8Actuarial (gain) loss
      excluding assumption changes
              
              
              (4.7
              )
              
              
              2.6Actuarial gain due to
      assumption changes
              
              
              (5.3
              )
              
              
              (4.3
              )Benefits and expenses
      paid
              
              
              (11.2
              )
              
              
              (11.0
              )Benefit obligation at September
      30,
              
              $
              166.8
              
              
              $
              177.3Change in plan
      assets:Fair value of plan
      assets at October 1,
              
              $
              132.3
              
              
              $
              119.7Actual return on plan
      assets
              
              
              14.9
              
              
              
              8.5Gain due to foreign
      exchange
              
              
              0.4
              
              
              
              3.3Employer
      contribution
              
              
              9.6
              
              
              
              11.8Benefits and expenses
      paid
              
              
              (11.2
              )
              
              
              (11.0
              )Fair value of plan assets at
      September 30,
              
              $
              146.0
              
              
              $
              132.3Funded status and statement of
      financial position:Fair value of plan
      assets at September 30,
              
              $
              146.0
              
              
              $
              132.3Benefit obligation at
      September 30,
              
              
              166.8
              
              
              
              177.3Funded status at
      September 30,
              
              
              (20.8
              )
              
              
              (45.0
              )Amount contributed
      during fourth quarter
              
              
              0.3
              
              
              
              1.2Funded status at December
      31,
              
              $
              (20.5
              )
              
              $
              (43.8
              )




The
following amounts were recognized in the accompanying consolidated balance sheet
for the Company’s defined benefit plans at December 31, 2007 and
2006:





Pension
      BenefitsDecember 31,2007
            
            
            2006(Amounts
      in millions)Current
      liabilities
            
            $
            0.6
            
            
            $
            0.6Non-current
      liabilities
            
            
            19.9
            
            
            
            43.2$
            20.5
            
            
            $
            43.8





The
following amounts were recognized in accumulated other comprehensive income in
the accompanying consolidated balance sheet at December 31, 2007 and
2006:





Pension
      BenefitsDecember 31,2007
            
            
            2006(Amounts
      in millions)Actuarial
      gain (loss), net of tax provision of approximately $5.4 million and
              $1.5 million at December 31, 2007 and 2006, respectively
            
            $
            9.0
            
            
            $
            (1.8
            )





The
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets for the pension plans with accumulated benefit obligations in excess
of plan assets were approximately $166.8 million, $165.1 million and $146.0
million, respectively as of December 31, 2007 and were approximately $177.3
million, $170.2 million and $132.3 million, respectively, as of December 31,
2006.





At December 31, 2007,
the expected
future benefit payments for the Company’s defined benefit plans were asfollows:





Year
      Ended
            
            Defined
      BenefitDecember 31,
            
            Plan Payments(Amounts
      in millions)2008
            
            $
            11.22009
            
            
            11.22010
            
            
            11.22011
            
            
            11.32012
            
            
            11.52013-2017
            
            
            58.5





Plan
assets primarily consist of cash and cash equivalents, common stock, U.S.
Government securities, corporate debt and mutual funds, as well as other
investments, and include certain commingled funds.  At December 31,
2007 and 2006, the Company has recorded as long-term restricted investments and
marketable securities held by pension trusts, in the accompanying consolidated
balance sheet, approximately $2.1 million and $1.9 million, respectively, which
have been contributed to trusts.  These assets are not included in the
amount of fair value of plan assets at December 31, 2007 and 2006 but are
available to fund certain of the benefit obligations included in the table above
relating to certain supplemental retirement plans.





The
assumptions used in determining pension, supplemental retirement plans and post
retirement costs and the projected benefit obligation are as
follows:





For the year ended December
    31,2007
            2006
            2005Discount
      rate for projected benefit obligation
            5.80%
      - 6.25%
            5.00%
      - 5.75%
            5.00%
      - 5.25%Discount
      rate for pension costs
            5.00%
      - 5.75%
            5.00%
      - 5.25%
            5.25%
      - 5.75%Expected
      long-term average return on plan assets
            7.00%
      - 7.75%
            7.00%
      - 7.75%
            7.00%
      - 7.75%Rate
      of compensation increase
            3.75%
      - 5.00%
            3.75%
      - 5.00%
            3.75%
      - 5.00%





The Company utilizeslong-term investment-grade bond yields
as the basis forselecting a discount rate by which plan
obligations are measured.Ananalysis of projected cash flows for
each planis performedin order to
determineplan-specific duration.Discount ratesare selectedbased on highquality corporate bond yields of similar
durations.





The
Company’s net periodic benefit cost for its defined benefit plans for the three
years ended December 31, 2007 consist of the following components:





For the year ended December
    31,2007
            
            
            2006
            
            
            2005(Amounts
      in millions)Service
      cost
            
            $
            0.5
            
            
            $
            1.0
            
            
            $
            1.4Interest
      cost
            
            
            9.6
            
            
            
            9.0
            
            
            
            8.9Expected
      return on plan assets
            
            
            (10.0
            )
            
            
            (9.1
            )
            
            
            (8.5
            )Net
      periodic benefit cost
            
            $
            0.1
            
            
            $
            0.9
            
            
            $
            1.8





The adjustment to
accumulated other comprehensive income represents the net unrecognized actuarial
gains and losses.  These amounts will be recognized in future periods
as components of net periodic pension cost.  The estimated net gain
for the defined benefit pension plans that will be amortized from accumulated
other comprehensive income into net periodic benefit cost over the next fiscal
year is $0.2 million.
 
 Other changes in
assets and obligations recognized in other comprehensive income for the year
ended December 31, 2007 consists of net gains of approximately $10.8 million,
net of tax provision of approximately $4.0 million.





The
Company used a September 30 measurement date for its plans.  The
Company’s pension plan weighted-average asset allocations at December 31, 2007
and 2006, by asset category are as follows:





Plan Assets at December 31,Asset Category
            
            2007
            
            
            2006Cash
      and cash equivalents
            
            
            3.7
            %
            
            
            6.4
            %Equity
      securities
            
            
            69.6
            
            
            
            56.1Fixed
      income securities
            
            
            26.5
            
            
            
            37.3Other
            
            
            0.2
            
            
            
            0.2100.0
            %
            
            
            100.0
            %





The
Company’s domestic qualified defined benefit plans’ assets are invested to
maximize returns without undue exposure to risk.  The investment
objectives are also to produce a total return exceeding the median of a universe
of portfolios with similar average asset allocation and investment style
objectives, and to earn a return, net of fees, greater or equal to the long-term
rate of return used by the Company in determining pension expense.





Risk is
controlled by maintaining a portfolio of assets that is diversified across a
variety of asset classes, investment styles and investment
managers.  The plans’ asset allocation policies are consistent with
the established investment objectives and risk tolerances.  The asset
allocation policies are developed by examining the historical relationships of
risk and return among asset classes, and are designed to provide the highest
probability of meeting or exceeding the return objectives at the lowest possible
risk.  For 2008, the target allocation is 56.5% for equity securities,
42.0% for fixed income securities and 1.5% for cash.





The
table that follows provides a reconciliation of the benefit obligations, plan
assets and funded status of the Company’s post retirement health benefit plans
included in the accompanying consolidated balance sheet at December 31, 2007 and
2006:







Non-Pension
      PostRetirement Health
      BenefitsFor the Years Ended December
      31,2007
              
              
              2006(Amounts in
      millions)Change in benefit
      obligation:Benefit obligation at
      October 1,
              
              $
              6.2
              
              
              $
              26.0Service
      cost
              
              
              ---
              
              
              
              0.1Interest
      cost
              
              
              0.3
              
              
              
              0.7Amendments
              
              
              ---
              
              
              
              (20.3
              )Actuarial gain
      excluding assumption changes
              
              
              (0.1
              )
              
              
              (0.1
              )Benefits and expenses
      paid
              
              
              (0.1
              )
              
              
              (0.2
              )Benefit obligation at September
      30,
              
              $
              6.3
              
              
              $
              6.2Change in plan
      assets:Fair value of plan
      assets at October 1,
              
              $
              ---
              
              
              $
              ---Employer
      contribution
              
              
              0.1
              
              
              
              0.2Benefits and expenses
      paid
              
              
              (0.1
              )
              
              
              (0.2
              )Fair value of plan assets at
      September 30,
              
              $
              ---
              
              
              $
              ---Funded status and statement of
      financial position:Fair value of plan
      assets at September 30,
              
              $
              ---
              
              
              $
              ---Benefit obligation at
      September 30,
              
              
              6.3
              
              
              
              6.2Funded status at
      September 30,
              
              
              (6.3
              )
              
              
              (6.2
              )Unrecognized
      actuarial loss
              
              
              ---
              
              
              
              ---Amount contributed
      during fourth quarter
              
              
              ---
              
              
              
              ---Accrued post-retirement benefit
      cost at December 31,
              
              $
              (6.3
              )
              
              $
              (6.2
              )


The
following amounts were recognized in the accompanying consolidated balance sheet
for the Company’s post retirement health benefit plans at December 31, 2007 and
2006:





Non-PensionPost
      RetirementHealth
      BenefitsDecember 31,2007
            
            
            2006(Amounts
      in millions)Current
      liabilities
            
            $
            0.3
            
            
            $
            0.4Non-current
      liabilities
            
            
            6.0
            
            
            
            5.8$
            6.3
            
            
            $
            6.2





The
following amounts were recognized in accumulated other comprehensive income
(loss) in the accompanying consolidated balance sheet at December 31, 2007 and
2006:





Non-PensionPost
      RetirementHealth
      BenefitsDecember 31,2007
            
            
            2006(Amounts
      in millions)Actuarial
      loss, net of tax benefit of approximately $0.1 million and$0.2 million,
      respectively
            
            $
            (0.2
            )
            
            $
            (0.2
            )Prior service
      cost, net of tax provision of approximately $0.4 million and$0.5 million,
      respectively
            
            
            0.6
            
            
            
            0.7$
            0.4
            
            
            $
            0.5





During
2005, the Company notified certain retirees that post retirement medical
benefits would no longer be continued by the Company effective July 31,
2005.  Such retirees were offered medical benefits through other means
at their expense.  This resulted in a negative plan amendment in 2005
to the NuTone, Inc. (“NuTone”) post retirement medical plan and the plan
reflected a deferred actuarial gain of approximately $22.2 million which was
being amortized (until July 2006 – see below) into income by the Company over a
six year period.





In the
second quarter of 2006 in connection with union negotiations with certain
employees of the Company’s NuTone, Inc. Cincinnati, OH facility, the Company
presented its final proposal to the union bargaining committee.  This
final proposal did not provide the NuTone union members with post-retirement
medical and life insurance benefits.  This final offer subsequently
became implemented and the Company recorded a curtailment gain of approximately
$35.9 million ($22.3 million, net of tax) in the second quarter of
2006.  These curtailment gains are included in selling, general and
administrative expense, net on the accompanying consolidated statement of
operations in 2006.





At
December 31, 2007, the expected post retirement health benefit payments for the
Company were as follows:





Post
      RetirementYear
      Ended
            
            Health
      BenefitDecember 31,
            
            Payments(Amounts
      in millions)2008
            
            $
            0.32009
            
            
            0.32010
            
            
            4.02011
            
            
            0.32012
            
            
            0.32013-2017
            
            
            1.2





The
Company’s net periodic benefit cost for its post retirement health benefit plans
for the three years ended December 31, 2007 consists of the following
components:





For the year ended December
    31,2007
            
            
            2006
            
            
            2005(Amounts
      in millions)Service
      cost
            
            $
            ---
            
            
            $
            0.1
            
            
            $
            0.4Interest
      cost
            
            
            0.3
            
            
            
            0.7
            
            
            
            2.1Amortization
      of prior service cost
            
            
            (0.2
            )
            
            
            (1.5
            )
            
            
            (1.4
            )Recognized
      actuarial loss
            
            
            ---
            
            
            
            ---
            
            
            
            0.1Curtailment
      gain
            
            
            ---
            
            
            
            (35.9
            )
            
            
            ---Net
      periodic post-retirement health benefit cost (income)
            
            $
            0.1
            
            
            $
            (36.6
            )
            
            $
            1.2





The adjustment to
accumulated other comprehensive income represents the net unrecognized actuarial
gains and losses.  These amounts will be recognized in future periods
as components of net periodic pension cost.  The estimated net prior
service credit for the post retirement medical plans that will be amortized from
accumulated other comprehensive income into net periodic benefit cost over the
next fiscal year is $0.2 million.
 
 Other changes in
assets and obligations recognized in other comprehensive income for the
year ended December 31, 2007 consists of amortization of prior service cost
credit of $0.1 million, net of tax provision of approximately $0.1
million.





For
purposes of calculating the post retirement health benefit cost, a medical
inflation rate of 9.0% and 10.0% was assumed for 2007 and 2006,
respectively.  For both 2007 and 2006, the rate was assumed to
decrease gradually to an ultimate rate of 5.0% by 2013.





A one
percentage point change in assumed health care cost trends does not have a
significant effect on the amount of liabilities recorded in the Company’s
Consolidated Balance Sheet at December 31, 2007.





8.  COMMITMENTS
AND CONTINGENCIES





The
Company provides accruals for all direct costs associated with the estimated
resolution of contingencies at the earliest date at which it is deemed probable
that a liability has been incurred and the amount of such liability can be
reasonably estimated.





At
December 31, 2007, the Company and its subsidiaries are obligated under lease
agreements for the rental of certain real estate and machinery and equipment
used in its operations.  At December 31, 2007, future minimum rental
obligations aggregated approximately $88.9 million and are payable as
follows:





Year
      Ended
            
            Future
      MinimumDecember 31,
            
            Rental Obligations(Amounts
      in millions)2008
            
            $
            20.82009
            
            
            16.72010
            
            
            13.12011
            
            
            10.92012
            
            
            9.6Thereafter
            
            
            17.8





Certain
of these lease agreements provide for increased payments based on changes in the
consumer price index.  Rental expense charged to continuing operations
in the accompanying consolidated statement of operations was approximately $31.0
million, $26.5 million and $21.6 million for the years ended December 31, 2007,
2006 and 2005, respectively.  Under certain of these lease agreements,
the Company or its subsidiaries are also obligated to pay insurance and
taxes.





At
December 31, 2007, the Company’s former subsidiary, Ply Gem, has guaranteed
approximately $19.4 million of third party obligations relating to rental
payments through June 30, 2016 under a facility leased by a former subsidiary,
which was sold on September 21, 2001.  The Company has indemnified
these guarantees in connection with the sale of Ply Gem on February 12, 2004 and
has recorded an estimated liability related to this indemnified guarantee of
approximately $0.8 million at December 31, 2007 in accordance with
Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN
45”).  The buyer of the former subsidiary has provided certain
indemnifications and other rights to Nortek for any payments that it might be
required to make pursuant to this guarantee.  Should the buyer of the
former subsidiary cease making payments then the Company may be required to make
payments on its indemnification.





The
Company has indemnified third parties for certain matters in a number of
transactions involving dispositions of former subsidiaries.  The
Company has recorded liabilities in relation to these indemnifications,
including the indemnified guarantee noted above, of approximately $11.1 million
and $12.0 million at December 31, 2007 and 2006,
respectively.  Approximately $5.0 million of short-term liabilities
and approximately $6.1 million of long-term liabilities are recorded in accrued
expenses and other long-term liabilities, respectively, in the accompanying
consolidated balance sheet at December 31, 2007 related to these
indemnifications.





The
Company records insurance liabilities and related expenses for health, workers
compensation, product and general liability losses and other insurance reserves
and expenses in accordance with either the contractual terms of its policies or,
if self-insured, the total liabilities that are estimable and probable as of the
reporting date.  Insurance liabilities are recorded as current
liabilities to the extent payments are expected to be made in the succeeding
year by the Company with the remaining requirements classified as long-term
liabilities.  The accounting for self-insured plans requires that
significant judgments and estimates be made both with respect to the future
liabilities to be paid for known claims and incurred but not reported claims as
of the reporting date.  The Company considers historical trends when
determining the appropriate insurance reserves to record in the consolidated
balance sheet.  In certain cases where partial insurance coverage
exists, the Company must estimate the portion of the liability that will be
covered by existing insurance policies to arrive at the net expected liability
to the Company.  The majority of the Company’s approximate $54.5
million of recorded insurance liabilities at December 31, 2007 relate to product
liability accruals of approximately $32.7 million.





Changes
in the Company’s combined short-term and long-term product liability accruals
(see Note 10) during the year ended December 31, 2007 and 2006 are as
follows:





For the year ended December
    31,2007
            
            
            2006(Amounts
      in millions)Balance,
      beginning of the period
            
            $
            26.8
            
            
            $
            18.1Provision
      during the period
            
            
            12.4
            
            
            
            14.2Payments
      made during the period
            
            
            (5.7
            )
            
            
            (6.5
            )Other
      adjustments
            
            
            (0.8
            )
            
            
            1.0Balance,
      end of the period
            
            $
            32.7
            
            
            $
            26.8





The
Company sells a number of products and offers a number of warranties including
in some instances, extended warranties for which the Company receives
proceeds.  The specific terms and conditions of these warranties vary
depending on the product sold and the country in which the product is
sold.  The Company estimates the costs that may be incurred under its
warranties, with the exception of extended warranties, and records a liability
for such costs at the time of sale.  Deferred revenue from extended
warranties is recorded at the estimated fair value and is amortized over the
life of the warranty and reviewed to ensure that the amount recorded is equal to
or greater than estimated future costs.  Factors that affect the
Company’s warranty liability include the number of units sold, historical and
anticipated rates of warranty claims, cost per claim and new product
introduction.  The Company periodically assesses the adequacy of its
recorded warranty claims and adjusts the amounts as necessary.





Changes
in the Company’s combined short-term and long-term warranty liabilities (see
Note 10) during the years ended December 31, 2007 and 2006 are as
follows:





For the year ended December
    31,2007
            
            
            2006(Amounts
      in millions)Balance,
      beginning of period
            
            $
            41.2
            
            
            $
            34.8Warranties
      provided during period
            
            
            30.7
            
            
            
            27.4Settlements
      made during period
            
            
            (26.7
            )
            
            
            (22.6
            )Changes
      in liability estimate, including expirations and
    acquisitions
            
            
            2.1
            
            
            
            1.6Balance,
      end of period
            
            $
            47.3
            
            
            $
            41.2





The
Company is subject to other contingencies, including legal proceedings and
claims arising out of its businesses that cover a wide range of matters,
including, among others, environmental matters, contract and employment claims,
product liability, warranty and modification and adjustment or replacement of
component parts of units sold, which include product recalls.  Product
liability, environmental and other legal proceedings also include matters with
respect to businesses previously owned.  The Company has used various
substances in its products and manufacturing operations which have been or may
be deemed to be hazardous or dangerous, and the extent of its potential
liability, if any, under environmental, product liability and workers’
compensation statutes, rules, regulations and case law is
unclear.  Further, due to the lack of adequate information and the
potential impact of present regulations and any future regulations, there are
certain circumstances in which no range of potential exposure may be reasonably
estimated.





In 2007, certain sole source suppliers of various
fabricated material components and sub-assemblies to the Company’sBest Subsidiariesexperienced financial difficulties and
subsequently filed forsettlement with creditors to prevent
bankruptcy.The Company
secured alternative sources for all but two of these suppliers and negotiated
the purchase of the two remaining businesses, Stilpol and
Metaltecnica,from the
trusteeappointed by the
local courtinthe settlement procedures.As discussed in Note 2, the closing of these two acquisitions
occurred on September 18, 2007 for approximately $7.9millionin cash andthe assumption of indebtednessofapproximately $4.1million.The Company’s Best subsidiaries borrowed
the cash portion of the purchase price from banks inItaly.The Company has not experienced any
significant disruption in the manufacture of its products or
shipmentsto its customers as a result of these
supplier difficultiesand
believes it can successfully integrate these acquired businesses into its
existing operations.
 
 The Company recorded approximately $16.0
million of estimated losses in the RVP segment in the fourth quarter of 2006 in
selling, general and administrative expense, net,resulting from the likelihood that
these supplierswouldbeunable to repay the advances from our
subsidiaries based in Italy and Poland and amounts due under other
arrangements.In
the fourth quarter of 2007, the Company revised its estimate of the losses
related to these suppliers and recorded a favorable adjustment to selling,
general and administrative expense, net of approximately $6.7
million.  Additionally, the Company has incurred approximately $2.1
million of legal and other professional fees and expenses in connection with
these matters in the year ended December 31, 2007.





While
it is impossible to ascertain the ultimate legal and financial liability with
respect to contingent liabilities, including lawsuits, the Company believes that
the aggregate amount of such liabilities, if any, in excess of amounts provided
or covered by insurance, will not have a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.  It is possible, however, that future results of operations
for any particular future period could be materially affected by changes in the
Company’s assumptions or strategies related to these contingencies or changes
that are not within the Company’s control.





9.   SEGMENT
INFORMATION AND CONCENTRATION OF CREDIT RISK





The
Company is a diversified manufacturer of residential and commercial building
products, which is organized within three reporting segments: the Residential
Ventilation Products (“RVP”) segment, the Home Technology Products (“HTP”)
segment and the Air Conditioning and Heating Products (“HVAC”)
segment.  The HVAC segment combines the results of the Company’s
residential and commercial heating, ventilating and air conditioning (“HVAC”)
businesses.  In the tables below, Unallocated includes corporate
related items, intersegment eliminations and certain income and expense items
not allocated to reportable segments.





The RVP
segment manufactures and distributes built-in products primarily for the
residential new construction, DIY and professional remodeling and replacement
markets.  The principal products sold by the segment include: kitchen
range hoods, exhaust fans (such as bath fans and fan, heater and light
combination units) and indoor air quality products.  The HTP segment
manufactures and distributes products that provide convenience and security in
residential and light commercial applications.  The principal products
sold by the segment include: audio / video distribution and control equipment,
speakers and subwoofers, security and access control products, power
conditioners and surge protectors, audio / video wall mounts and fixtures and
structured wiring.  The HVAC segment principally manufactures and
sells HVAC systems for site-built and manufactured residential housing
applications and for custom-designed commercial applications.





The
accounting policies of the segments are the same as those described in Note 1
Summary of Significant Accounting Policies.  The Company evaluates
segment performance based on operating earnings before allocations of corporate
overhead costs.  Intersegment net sales and intersegment eliminations
are not material for any of the periods presented.  The financial
statement impact of all purchase accounting adjustments, including intangible
assets amortization and goodwill, are reflected in the applicable operating
segment, which are the Company’s reporting units.  Unallocated assets
consist primarily of cash and cash equivalents, marketable securities, prepaid
and deferred income taxes, deferred debt expense and long-term restricted
investments and marketable securities.




The Company
operates internationally and is exposed to market risks from changes in foreign
exchange rates.  Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist principally of temporary cash
investments and trade receivables.  The Company places its temporary
cash investments with high credit quality financial institutions and limits the
amount of credit exposure to any one financial
institution.  Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company’s customer base and their dispersion across many different geographical
regions.  Accounts receivable from customers related to foreign
operations increased approximately 11.5% to $110.2 million at December 31, 2007
from December 31, 2006, of which approximately $10.2 million related to the
effect of changes in foreign currency exchange rates.  These risks are
not significantly dissimilar among the Company’s three reporting
segments.




Net
sales and operating earnings for the Company’s segments and pre-tax earnings for
the Company are presented in the table that follows for the three years ended
December 31, 2007:









For the Years Ended December
      31,2007
              
              
              2006
              
              
              2005(Amounts in
      millions)Net sales:Residential ventilation
      products
              
              $
              828.8
              
              
              $
              821.0
              
              
              $
              794.7Home technology
      products
              
              
              570.2
              
              
              
              484.5
              
              
              
              354.8Air conditioning and heating
      products
              
              
              969.2
              
              
              
              912.9
              
              
              
              809.7Consolidated net
      sales
              
              $
              2,368.2
              
              
              $
              2,218.4
              
              
              $
              1,959.2Operating earnings
      (loss):Residential ventilation products
      (1)
              
              $
              102.9
              
              
              $
              139.5
              
              
              $
              123.9Home technology products
      (2)
              
              
              76.3
              
              
              
              83.9
              
              
              
              71.0Air conditioning and heating
      products (3)
              
              
              31.1
              
              
              
              64.9
              
              
              
              66.3Subtotal
              
              
              210.3
              
              
              
              288.3
              
              
              
              261.2Unallocated:Stock-based compensation
      charges
              
              
              (0.3
              )
              
              
              (0.3
              )
              
              
              (0.3
              )Foreign exchange gains (losses) on
      transactions,including intercompany
      debt
              
              
              0.4
              
              
              
              1.2
              
              
              
              (0.9
              )Expenses of a terminated
      IPO
              
              
              ---
              
              
              
              (2.5
              )
              
              
              ---Compensation reserve
      adjustment
              
              
              ---
              
              
              
              3.5
              
              
              
              ---Gain on legal
      settlement
              
              
              ---
              
              
              
              ---
              
              
              
              1.4Unallocated,
      net
              
              
              (25.1
              )
              
              
              (25.7
              )
              
              
              (24.5
              )Consolidated
      operating earnings
              
              
              185.3
              
              
              
              264.5
              
              
              
              236.9Interest
      expense
              
              
              (183.7
              )
              
              
              (162.9
              )
              
              
              (138.6
              )Investment
      income
              
              
              2.0
              
              
              
              2.2
              
              
              
              1.8Earnings before
      provision for income taxes
              
              $
              3.6
              
              
              $
              103.8
              
              
              $
              100.1


(1)
            The operating
      results of the RVP segment for the year ended December 31, 2007 include a
      favorable adjustment to selling, general and administrative expense, net
      based upon the Company’s revised estimate of reserves provided in 2006 for
      certain suppliers in Italy and Poland of approximately $6.7 million, a
      charge to warranty expense of approximately $0.5 million related to a
      product safety upgrade, an approximate $1.8 million charge related to the
      closure of the Company’s NuTone, Inc. Cincinnati, Ohio facility, an
      approximate $1.1 million charge related to the closure of the Company’s
      Jensen, Inc. Vernon, California facility, legal and other professional
      fees and expenses incurred in connection with matters related to certain
      subsidiaries based in Italy and Poland of approximately $2.1 million, an
      approximate $1.9 million loss related to the settlement of litigation, a
      charge of approximately $0.4 million related to a reserve for amounts due
      from a customer and net foreign exchange losses of approximately $1.0
      million related to transactions, including intercompany debt not
      indefinitely invested in the Company’s subsidiaries.  The
      operating results of the RVP segment for the year ended December 31, 2006
      include an approximate $35.9 million curtailment gain related to
      post-retirement medical and life insurance benefits, reserves of
      approximately $16.0 million related to estimated losses as a result of the
      unlikelihood that certain suppliers to our kitchen range hood subsidiaries
      based in Italy and Poland will be able to repay advances and amounts due
      under other arrangements, an approximate $3.5 million charge related to
      the closure of the Company’s NuTone, Inc. Cincinnati, Ohio facility and an
      increase in warranty expense in the first quarter of 2006 of approximately
      $1.5 million related to a product safety upgrade.  The operating
      results of the RVP segment for the year ended December 31, 2005 include a
      non-cash foreign exchange loss of approximately $1.2 million related to
      intercompany debt not indefinitely invested in the Company’s
      subsidiaries.





(2)
            The
      operating results of the HTP segment for the year ended December 31, 2007
      include a charge of approximately $0.5 million related to a reserve for
      amounts due from a customer, a reduction in warranty expense of
      approximately $0.7 million related to a product safety upgrade and
      approximately $2.0 million of fees and expenses incurred in connection
      with a dispute with a supplier.  The operating results of the
      HTP segment for the year ended December 31, 2006 include an increase in
      warranty expense of approximately $2.3 million related to a product safety
      upgrade.  The operating results of the HTP segment for the year ended
      December 31, 2005 include a gain of approximately $1.6 million related to
      the sale of a corporate office building of one of the Company’s
      subsidiaries.





(3)
            The
      operating results of the HVAC segment for the year ended December 31, 2007
      include a charge of approximately $3.7 million related to the planned
      closure of the Company’s Mammoth, Inc. Chaska, Minnesota manufacturing
      facility, a charge of approximately $1.8 million related to reserves for
      amounts due from customers and net foreign exchange losses of
      approximately $2.5 million related to transactions, including intercompany
      debt not indefinitely invested in the Company’s
      subsidiaries.  The operating results of the HVAC segment for the
      year ended December 31, 2006 include an approximate $1.6 million gain
      related to the favorable settlement of litigation, a charge of
      approximately $1.2 million, net of minority interest of approximately $0.8
      million, related to a reserve for amounts due from a customer in China
      related to a Chinese construction project and net foreign exchange gains
      of approximately $0.4 million related to transactions, including
      intercompany debt not indefinitely invested in the Company’s
      subsidiaries.




See
Notes 1, 2, 8, 11 and 12 with respect to restructuring charges and certain other
income (expense) items affecting segment earnings (loss).





Segment
assets, depreciation expense, amortization expense and capital expenditures for
the Company’s segments are presented in the table that follows for the three
years ended December 31, 2007:







For the Years Ended December
      31,2007
              
              
              2006
              
              
              2005(Amounts in
      millions)Segment
    Assets:Residential ventilation
      products
              
              $
              1,202.7
              
              
              $
              1,168.2
              
              
              $
              1,139.3Home technology
      products
              
              
              704.0
              
              
              
              628.4
              
              
              
              525.6Air conditioning and heating
      products
              
              
              673.5
              
              
              
              693.6
              
              
              
              584.42,580.2
              
              
              
              2,490.2
              
              
              
              2,249.3Unallocated:Cash and cash equivalents,
      includingcurrent restricted
      cash
              
              
              54.4
              
              
              
              58.6
              
              
              
              77.2Prepaid income
      taxes
              
              
              28.9
              
              
              
              21.2
              
              
              
              21.0Other assets, including long-term
      restrictedinvestments and
      marketable securities
              
              
              47.3
              
              
              
              65.9
              
              
              
              57.1Consolidated assets
              
              $
              2,710.8
              
              
              $
              2,635.9
              
              
              $
              2,404.6Depreciation
      Expense:Residential ventilation
      products
              
              $
              14.3
              
              
              $
              12.9
              
              
              $
              11.3Home technology
      products
              
              
              5.8
              
              
              
              4.4
              
              
              
              2.4Air conditioning and heating
      products
              
              
              16.8
              
              
              
              15.0
              
              
              
              12.1Unallocated
              
              
              0.7
              
              
              
              0.7
              
              
              
              0.9Consolidated depreciation expense
              
              $
              37.6
              
              
              $
              33.0
              
              
              $
              26.7Amortization
      expense:Residential ventilation products
      (1)
              
              $
              6.3
              
              
              $
              6.4
              
              
              $
              8.2Home technology products
      (2)
              
              
              13.3
              
              
              
              11.4
              
              
              
              7.5Air conditioning and heating
      products (3)
              
              
              7.4
              
              
              
              9.9
              
              
              
              3.2Unallocated
              
              
              0.5
              
              
              
              0.5
              
              
              
              0.3Consolidated amortization expense
              
              $
              27.5
              
              
              $
              28.2
              
              
              $
              19.2Capital Expenditures
      (4):Residential ventilation
      products
              
              $
              13.7
              
              
              $
              20.2
              
              
              $
              13.3Home technology
      products
              
              
              5.5
              
              
              
              6.2
              
              
              
              2.6Air conditioning and heating
      products
              
              
              17.1
              
              
              
              15.7
              
              
              
              17.3Unallocated
              
              
              0.1
              
              
              
              0.2
              
              
              
              0.5Consolidated capital expenditures
              
              $
              36.4
              
              
              $
              42.3
              
              
              $
              33.7


(1)
            Includes
      amortization of approximately $0.3 million and $0.4 million for the years
      ended December 31, 2006 and 2005, respectively, of excess purchase price
      allocated to inventory recorded as a non-cash charge to cost of products
      sold.


(2)
            Includes
      amortization of approximately $0.2 million and $0.5 million for the years
      ended December 31, 2006 and 2005, respectively, of excess purchase price
      allocated to inventory recorded as a non-cash charge to cost of products
      sold.


(3)
            Includes
      amortization of approximately $2.8 million for the year ended December 31,
      2006 of excess purchase price allocated to inventory recorded as a
      non-cash charge to cost of products
sold.


(4)
            Includes
      capital expenditures financed under capital leases of approximately $4.8
      million for the year ended December 31, 2005.  There were no
      expenditures financed under capital leases in 2007 or
  2006.





The
following table presents a summary of the activity in goodwill by reporting
segment for the years ended December 31, 2007 and 2006:







AirResidential
              
              
              Home
              
              
              ConditioningVentilation
              
              
              Technology
              
              
              and HeatingProducts
              
              
              Products
              
              
              Products
              
              
              Consolidated(Amounts in
      millions)Balance as of December 31,
      2005
              
              $
              778.7
              
              
              $
              326.4
              
              
              $
              276.2
              
              
              $
              1,381.3Acquisitions during the year endedDecember
      31, 2006
              
              
              23.6
              
              
              
              17.2
              
              
              
              8.4
              
              
              
              49.2Contingent earnouts related to
      acquisitions
              
              
              ---
              
              
              
              25.6
              
              
              
              30.0
              
              
              
              55.6Purchase accounting
      adjustments
              
              
              (0.6
              )
              
              
              (0.4
              )
              
              
              (0.7
              )
              
              
              (1.7
              )Adjustment of carryover basis of
      continuingmanagement investors
      in the THL Transaction
              
              
              (2.8
              )
              
              
              (0.9
              )
              
              
              (1.2
              )
              
              
              (4.9
              )Impact of foreign currency
      translation
              
              
              (0.9
              )
              
              
              0.4
              
              
              
              2.4
              
              
              
              1.9Balance as of December 31,
      2006
              
              
              798.0
              
              
              
              368.3
              
              
              
              315.1
              
              
              
              1,481.4Acquisitions during the year endedDecember
      31, 2007
              
              
              7.8
              
              
              
              19.2
              
              
              
              ---
              
              
              
              27.0Contingent earnouts related to
      acquisitions
              
              
              ---
              
              
              
              32.7
              
              
              
              ---
              
              
              
              32.7Purchase accounting
      adjustments
              
              
              (8.4
              )
              
              
              (4.6
              )
              
              
              (0.5
              )
              
              
              (13.5
              )Impact of foreign currency
      translation
              
              
              1.4
              
              
              
              ---
              
              
              
              (0.1
              )
              
              
              1.3Balance as of December 31,
      2007
              
              $
              798.8
              
              
              $
              415.6
              
              
              $
              314.5
              
              
              $
              1,528.9






In
accordance with SFAS No. 141 and SFAS No. 142, the Company allocated the effect
of the 2004 Acquisition with THL on goodwill to its reportable segments (see
Note 1).  Purchase accounting adjustments relate principally to fair
value revisions resulting from the completion of the final valuation of assets
and liabilities and adjustments to deferred income taxes that affect
goodwill.





Foreign net sales were approximately
21.5%, 19.5% and 18.5% of consolidated net sales for the years ended December
31, 2007, 2006 and 2005, respectively.  Foreign Long-Lived Assets were
approximately7.8% and 6.7% of consolidated Long-Lived Assets for the years
ended December 31, 2007 and 2006,respectively.  Foreign net
sales are attributed based on the location of the Company’s subsidiary
responsible for the sale.  As required, Long-Lived Assets exclude
financial instruments and deferred income taxes.





No
single customer accounts for 10% or more of consolidated net sales or accounts
receivable.







10.   ACCRUED
EXPENSES AND TAXES, NET





Accrued
expenses and taxes, net, included in current liabilities in the accompanying
consolidated balance sheet, consist of the following at December 31, 2007 and
2006:





December 31,2007
            
            
            2006(Amounts
      in millions)Payroll,
      pension and employee benefits
            
            $
            56.0
            
            
            $
            51.4Contingent
      consideration
            
            
            32.7
            
            
            
            55.6Insurance
      and employee health benefit accruals
            
            
            17.4
            
            
            
            18.6Interest
            
            
            19.4
            
            
            
            22.5Product
      warranty
            
            
            27.3
            
            
            
            23.2Sales
      and marketing
            
            
            33.6
            
            
            
            33.8Other,
      net
            
            
            62.2
            
            
            
            78.6$
            248.6
            
            
            $
            283.7





Accrued
expenses, included in other long-term liabilities in the accompanying
consolidated balance sheet, consist of the following at December 31, 2007 and
2006:





December 31,2007
            
            
            2006(Amounts
      in millions)Employee
      pension retirement benefit obligation
            
            $
            19.9
            
            
            $
            43.2Product
      warranty
            
            
            20.0
            
            
            
            18.0Post
      retirement health benefit obligations
            
            
            6.0
            
            
            
            5.8Insurance
            
            
            37.1
            
            
            
            33.0Other,
      net
            
            
            42.6
            
            
            
            28.8$
            125.6
            
            
            $
            128.8





11.   RESTRUCTURING
CHARGES





The Company records restructuring costs
primarily in connection with operations acquired or facility closings which
management plans to eliminate in order to improve future operating results of
the Company.





In late
June 2006, the Company informed the union located at the Cincinnati, OH location
of its subsidiary NuTone, that the Company would close the manufacturing
operations at the facility on or about August 30, 2006.  As a result
of this closure, the Company, through its RVP segment, recorded an approximate
$3.5 million charge to operations in 2006 (of which approximately $1.8 million
was recorded in cost of goods sold and approximately $1.7 million was recorded
in selling, general and administrative expense, net) consisting of severance of
approximately $2.2 million and write-offs related to equipment sales and
disposals of approximately $1.3 million.





During
the year ended December 31, 2007, the Company recorded liabilities and expensed
into selling, general and administrative expense, net approximately $1.8 million
in the accompanying consolidated statement of operations related to the closure
of its NuTone Cincinnati, OH facility and the relocation of such operations to
certain other subsidiaries of the Company within the RVP segment.  The
NuTone facility was shutdown in the third quarter of 2007 and approximately 59
employees were terminated.  Prior to August 2006, this facility
supported manufacturing, warehousing and distribution activities for
NuTone.





During the second quarter of 2007, after
meeting and negotiating with the bargaining committee of the Teamsters Local
970, representing approximately 127 union employees of the Company’s
wholly-owned subsidiary Mammoth, Inc. (“Mammoth”) located in Chaska, Minnesota,
it was decided to shut down manufacturing operations at the Chaska plant and
relocate such operations to other manufacturing facilities within the Commercial
HVAC Group.  During the second quarter of 2007, Mammoth finalized its
negotiations with the union over the severance benefits associated with the
shutdown and approximately $0.3 million was paid related to severance to the
union employees.  In addition to the severance paid in the second
quarter of 2007 related to the union employees, the Company recorded
approximately $3.4millionin selling, general and administrative,
netduring the year ended December 31,
2007related to shutdown
costs and asset write-offs associated with the anticipated cessation of
manufacturing operations at Chaska during the fourth quarter of
2007.It is
estimated that an additional approximate $0.8 million will be expensed in 2008
related to this shutdown.





On August 8, 2007, after negotiating
with the bargaining committee of the Steel, Paper House, Chemical Drivers and
Helpers, Local No. 578, which represented approximately 64 union employees
located at the Vernon, CA manufacturing facility of the Company’s wholly-owned
subsidiary Jensen, Inc. (“Jensen”),the decision was madeto shut down manufacturing operations
and relocate such operations to other manufacturing facilities within the RVP
segment.  Additionally, on such date, Jensen finalized its
negotiations with the union over the severance benefits associated with this
shutdown.During
the year ended December 31, 2007, the Company recorded in selling, general and
administrative expense, net approximately $0.8 million related tothe shutdown, including severance,
relocation expenses, facility lease costs and asset write-offsand expensed an additional $0.3 million
to cost of products sold related to severance associated with the
shutdown.  The Company does not anticipate recording any further
expenses associated with this shutdown in 2008.





The following table sets forth
restructuring activity in accordance with SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities (“SFAS No. 146”) in the accompanying
consolidated statement of operations for the periods presented.  These
costs are included in cost of goods sold and selling, general and administrative
expense, net in the accompanying consolidated statement of operations of the
Company.







Employee
              
              
              
              
              
              TotalSeparation
              
              
              
              
              
              RestructuringExpenses
              
              
              Other
              
              
              Costs(Amounts in
      millions)Balance as of December 31,
      2004
              
              $
              3.2
              
              
              $
              ---
              
              
              $
              3.2Provision
              
              
              (0.1
              )
              
              
              0.3
              
              
              
              0.2Payment and asset write
      downs
              
              
              (2.1
              )
              
              
              ---
              
              
              
              (2.1
              )Balance as of December 31,
      2005
              
              
              1.0
              
              
              
              0.3
              
              
              
              1.3Provision
              
              
              ---
              
              
              
              0.5
              
              
              
              0.5Payment and asset write
      downs
              
              
              (1.0
              )
              
              
              (0.7
              )
              
              
              (1.7
              )Balance as of December 31,
      2006
              
              
              ---
              
              
              
              0.1
              
              
              
              0.1Provision
              
              
              2.9
              
              
              
              4.4
              
              
              
              7.3Payment and asset write
      downs
              
              
              (1.3
              )
              
              
              (3.5
              )
              
              
              (4.8
              )Balance as of December 31,
      2007
              
              $
              1.6
              
              
              $
              1.0
              
              
              $
              2.6


Employee separation expenses are
comprised of severance, vacation, outplacement and retention bonus
payments.  Other restructuring costs include expenses associated with
terminating other contractual arrangements, costs to prepare facilities for
closure, costs to move equipment and products to other facilities and write-offs
related to equipment sales and disposals.








12. INCOME
AND EXPENSE ITEMS





For the
three years ended December 31, 2007, the Company’s results of operations include
the following (income) and expense items recorded in cost of products sold and
selling, general and administrative expense, net in the accompanying
consolidated statement of operations:




For the Years Ended December 31,
      *2007
              
              
              2006
              
              
              2005(Amounts in
      millions)Gain from curtailment of
      post-retirement medical and life insurance benefits
              
              $
              ---
              
              
              $
              (35.9
              )
              
              $
              ---Charges related to the closure of
      the Company's NuTone, Inc.Cincinnati, OH facility (1)
      (see Note 11)
              
              
              1.8
              
              
              
              3.5
              
              
              
              ---Charges related to the closure of
      the Company's Mammoth, Inc.Chaska, MN
      facility  (see Note 11)
              
              
              3.7
              
              
              
              ---
              
              
              
              ---Charges related to the closure of
      the Company's Jensen, Inc.Vernon, CA facility (see Note
      11)
              
              
              1.1
              
              
              
              ---
              
              
              
              ---(Gains) losses related to certain
      suppliers based in Italy and Poland (see Note 8)
              
              
              (6.7
              )
              
              
              16.0
              
              
              
              ---Compensation reserve
      adjustment
              
              
              ---
              
              
              
              (3.5
              )
              
              
              ---Write-off of expenses of the
      Offering (see Note 1)
              
              
              ---
              
              
              
              2.5
              
              
              
              ---Legal and other professional fees
      and expenses incurred in connection withmatters related to
      certain subsidiaries based in Italy and Poland (see Note
      8)
              
              
              2.1
              
              
              
              ---
              
              
              
              ---Fees and expenses incurred in the
      HTP segment in connection with a disputewith one of its
      suppliers
              
              
              2.0
              
              
              
              ---
              
              
              
              ---Product safety upgrade reserves in
      the RVP and HTP segments (2)
              
              
              (0.2
              )
              
              
              3.8
              
              
              
              ---Reserve for amounts due from
      customers in the RVP, HTP and HVAC segments
              
              
              2.7
              
              
              
              1.2
              
              
              
              ---Loss on settlement of litigation
      in the RVP segment
              
              
              1.9
              
              
              
              ---
              
              
              
              ---Gain on settlement of litigation
      in the HVAC segment and Unallocated
              
              
              ---
              
              
              
              (1.6
              )
              
              
              (1.4
              )Gain on the sale of a corporate
      office building of one of the Company'ssubsidiaries in the HTP
      segment
              
              
              ---
              
              
              
              ---
              
              
              
              (1.6
              )Foreign
      exchange losses (gains) related to transactions, including intercompanydebt not indefinitely
      invested in the Company's subsidiaries
              
              
              3.1
              
              
              
              (1.7
              )
              
              
              2.1$
              11.5
              
              
              $
              (15.7
              )
              
              $
              (0.9
              )




*
            Unless
      otherwise indicated, all items noted in the above table have been recorded
      in selling, general and administrative expense, net in the accompanying
      consolidated statement of
operations.





(1)
            Approximately,
      $1.8 million of the NuTone restructuring costs in 2006 was recorded in
      cost of products sold and approximately $1.7 million was recorded in
      selling, general and administrative expense, net (see Note
      11).





(2)
            The
      RVP and HTP segments recorded these product safety upgrade reserves in
      cost of products sold (see Note 8).





The Company has a management agreement
with an affiliate ofTHLproviding for certain
financial and strategic advisory and consultancy services.  Nortek
expensed approximately$1.8
million,$2.3million and $2.2million for the years ended December
31,2007,2006 and 2005, respectively, related to
this management agreement in the accompanying Consolidated Statement of
Operations.





13.  SUMMARIZED
QUARTERLY FINANCIAL DATA (UNAUDITED)





The
tables that follow summarize unaudited quarterly financial data for the years
ended December 31, 2007 and December 31, 2006:





For
      the Quarter EndedMarch 31
            
            
            June 30
            
            
            September 29
            
            
            December 31(Amounts
      in millions)2007Net
      sales
            
            $
            552.5
            
            
            $
            644.3
            
            
            $
            602.2
            
            
            $
            569.2Gross
      profit
            
            
            167.9
            
            
            
            192.2
            
            
            
            169.2
            
            
            
            159.0Selling,
      general and administrative expense, net
            
            
            117.1
            
            
            
            121.1
            
            
            
            125.1
            
            
            
            112.2Depreciation
      expense
            
            
            8.6
            
            
            
            10.1
            
            
            
            9.3
            
            
            
            9.6Amortization
      expense
            
            
            6.0
            
            
            
            6.4
            
            
            
            6.5
            
            
            
            8.6Operating
      earnings
            
            
            44.8
            
            
            
            64.7
            
            
            
            37.6
            
            
            
            38.2Net
      earnings (loss)
            
            
            1.2
            
            
            
            7.3
            
            
            
            (8.7
            )
            
            
            (6.8
            )







As noted below, the Company recorded approximately $16.0
million of estimated losses in the RVP segment in the fourth quarter of 2006 in
selling, general and administrative expense, net,resulting from the likelihood
thatcertainsupplierswouldbeunable to repay advances from our
subsidiaries based in Italy and Poland and amounts due under other
arrangements.In
the fourth quarter of 2007, the Company revised its estimate of the losses
related to these suppliers and recorded a favorable adjustment to selling,
general and administrative expense, net of approximately $6.7
million.


For
      the Quarter EndedApril 1
            
            
            July 1
            
            
            September 30
            
            
            December 31(Amounts
      in millions)2006Net
      sales
            
            $
            534.5
            
            
            $
            563.8
            
            
            $
            579.0
            
            
            $
            541.1Gross
      profit
            
            
            164.0
            
            
            
            170.1
            
            
            
            174.8
            
            
            
            162.2Selling,
      general and administrative expense, net
            
            
            95.3
            
            
            
            67.3
            
            
            
            101.1
            
            
            
            118.0Depreciation
      expense
            
            
            7.9
            
            
            
            8.2
            
            
            
            8.7
            
            
            
            8.2Amortization
      expense
            
            
            4.3
            
            
            
            7.9
            
            
            
            7.2
            
            
            
            8.8Operating
      earnings
            
            
            64.5
            
            
            
            97.0
            
            
            
            67.5
            
            
            
            35.5Net
      earnings (loss)
            
            
            17.8
            
            
            
            33.9
            
            
            
            15.2
            
            
            
            (9.2
            )





During
the second quarter ended April 1, 2006, the Company recorded an approximate
$35.9 million curtailment gain related to post-retirement medical and life
insurance benefits (see Note 7) and in the fourth quarter ended December 31,
2006, the Company recorded reserves of approximately $16.0 million related to
estimated losses as a result of the unlikelihood that certain suppliers to our
kitchen range hood subsidiaries based in Italy and Poland will be able to repay
advances and amounts due under other arrangements.





See
Notes 1, 2, 4, 5, 9, 11, and 12 and Management’s Discussion and Analysis of
Financial Condition and Results of Operations, Item 7 of Part II of this report,
regarding certain other quarterly transactions which impact the operating
results in the above tables including financing activities, new accounting
pronouncements, income taxes, acquisitions, sales volume, material costs,
rationalization and relocation of manufacturing operations, material procurement
strategies and other items.







Report
of Independent Registered Public Accounting Firm





To the Board of Directors and
Shareholder of NTK Holdings, Inc.:





We have audited the accompanying
consolidated balance sheets of NTK Holdings, Inc. (aDelawarecorporation) and subsidiaries as of
December 31, 2007 and 2006, and the related consolidated statements of
operations, stockholder’s investment, and cash flows for the years ended
December 31, 2007, 2006 and 2005.  Our audits also included the
financial statement schedules listed in the Index at Item
15(a).  These financial statements and schedules are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these financial statements and schedules 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 consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of NTK Holdings, Inc. and subsidiaries at
December 31, 2007 and 2006, and the consolidated results of their operations and
their cash flows for the years ended December 31, 2007, 2006 and 2005, in
conformity with U.S. generally accepted accounting principles.  Also,
in our opinion, the related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.





As discussed in Notes 1 and 4 to the
consolidated financial statements, in 2007 NTK Holdings, Inc. adopted FASB
Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes.”As
discussed in Notes 1 and 7 to the consolidated financial statements, in 2006 NTK
Holdings, Inc. adopted Statement of Financial Accounting Standards (“SFAS”) No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans – an amendment of FASB Statements No. 87, 88, 106, and
132(R)”.





ERNST & YOUNG
LLP





Boston,Massachusetts


April14, 2008





NTK
HOLDINGS, INC. (PARENT COMPANY)
 SCHEDULE
I
 CONDENSED
FINANCIAL INFORMATION OF NTK HOLDINGS, INC.





CONDENSED
BALANCE SHEET


(Dollar
amounts in millions, except share data)





December
31,2007
              
              
              2006ASSETS:Investments and Other
      Assets:Net intercompany balance and
      investment in subsidiaries
              
              $
              658.8
              
              
              $
              585.9Deferred debt
      expense
              
              
              4.0
              
              
              
              8.6Total other long-term
      assets
              
              
              662.8
              
              
              
              594.5Total assets
              
              $
              662.8
              
              
              $
              594.5LIABILITIES AND STOCKHOLDER'S
      INVESTMENT:Current
      Liabilities:Accrued expenses and taxes,
      net
              
              $
              1.3
              
              
              $
              0.8Long-term
    debt
              
              
              572.5
              
              
              
              520.9Commitments and Contingencies
      (Note 2)Common stock, $0.01 par value,
      authorized 3,000 shares;3,000 issued and outstanding
      at December 31, 2007 and 2006
              
              
              ---
              
              
              
              ---Additional paid-in
      capital
              
              
              21.6
              
              
              
              21.3Retained
      earnings
              
              
              29.7
              
              
              
              39.9Accumulated other comprehensive
      income
              
              
              37.7
              
              
              
              11.6Total stockholder's
      investment
              
              
              89.0
              
              
              
              72.8Total liabilities and stockholder's investment
              
              $
              662.8
              
              
              $
              594.5




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






CONDENSED
STATEMENT OF OPERATIONS






For the Years Ended December
      31,2007
              
              
              2006
              
              
              
              2005*(Amounts in
      millions)Expenses:Selling, general and
      administrative expense
              
              $
              0.2
              
              
              $
              2.6
              
              
              $
              0.2Interest
      expense
              
              
              61.7
              
              
              
              42.2
              
              
              
              24.661.9
              
              
              
              44.8
              
              
              
              24.8Loss before equity in
      subsidiaries' earnings
              
              
              (61.9
              )
              
              
              (44.8
              )
              
              
              (24.8
              )Equity in subsidiaries' earningsbefore
      provision for income taxes
              
              
              65.5
              
              
              
              148.6
              
              
              
              120.4Earnings before provision for
      income taxes
              
              
              3.6
              
              
              
              103.8
              
              
              
              95.6Provision for income
      taxes
              
              
              10.6
              
              
              
              46.1
              
              
              
              41.8Net (loss)
      earnings
              
              $
              (7.0
              )
              
              $
              57.7
              
              
              $
              53.8


* The
year ended December 31, 2005 represents the period from February 10, 2005
through December 31, 2005.




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






CONDENSED
STATEMENT OF CASH FLOWS





For the Years Ended December
      31,2007
              
              
              2006
              
              
              
              2005*(Amounts in
      millions)Cash flows from operating
      activities:Net (loss)
      earnings
              
              $
              (7.0
              )
              
              $
              57.7
              
              
              $
              53.8Adjustments to reconcile net
      earnings to cash:Non-cash interest
      expense
              
              
              61.7
              
              
              
              42.2
              
              
              
              24.6Equity in subsidiaries' earnings
      before provision for income taxes
              
              
              (65.5
              )
              
              
              (148.6
              )
              
              
              (120.4
              )Current income tax
      provision
              
              
              16.6
              
              
              
              19.3
              
              
              
              17.3Deferred federal income tax
      (benefit) provision
              
              
              (6.0
              )
              
              
              26.8
              
              
              
              24.5Changes in certain assets and
      liabilities, net of effects fromacquisitions
      and dispositions:Accrued expenses and
      taxes
              
              
              0.2
              
              
              
              2.6
              
              
              
              0.2Total adjustments to
      net earnings
              
              
              7.0
              
              
              
              (57.7
              )
              
              
              (53.8
              )Net
      cash provided by operating activities
              
              
              ---
              
              
              
              ---
              
              
              
              ---Cash flows from investing
      activities:Capital contribution to Nortek
      Holdings, Inc.
              
              
              ---
              
              
              
              (25.9
              )
              
              
              (57.7
              )Net cash used in
      investing activities
              
              
              ---
              
              
              
              (25.9
              )
              
              
              (57.7
              )Cash flows from financing
      activities:Borrowings under the senior
      unsecured loan facility
              
              
              ---
              
              
              
              200.8
              
              
              
              ---Sale of the 10 3/4% Senior
      Discount Notes
              
              
              ---
              
              
              
              ---
              
              
              
              244.7Dividends
              
              
              ---
              
              
              
              (174.9
              )
              
              
              (187.0
              )Net cash provided by
      financing activities
              
              
              ---
              
              
              
              25.9
              
              
              
              57.7Net change in unrestricted cash
      and cash equivalents
              
              
              ---
              
              
              
              ---
              
              
              
              ---Unrestricted cash and cash
      equivalents at the beginning of the period
              
              
              ---
              
              
              
              ---
              
              
              
              ---Unrestricted cash and cash
      equivalents at the end of the period
              
              $
              ---
              
              
              $
              ---
              
              
              $
              ---




* The
year ended December 31, 2005 represents the period from February 10, 2005
through December 31, 2005.




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







NTK
HOLDINGS, INC. (PARENT COMPANY)
 SCHEDULE
I
 CONDENSED
FINANCIAL INFORMATION OF NTK HOLDINGS, INC.
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 For
the years ended December 31, 2007 and 2006 and the period from Feb. 10, 2005 to
Dec. 31, 2005


1.
            On
      February 10, 2005, NTK Holdings, Inc (“NTK Holdings” or the “Company”), a
      Delaware Corporation, issued 3,000 shares of capital stock to Investors
      LLC in exchange for Investor LLC’s shares of capital stock of Nortek
      Holdings (the “NTK Holdings Formation”).  As a result of this
      exchange, Nortek Holdings became a wholly-owned subsidiary of NTK Holdings
      and NTK Holdings became a wholly-owned subsidiary of Investors
      LLC.





NTK
Holdings, Inc. (Parent Company) — Schedule I — Condensed Financial Information
of NTK Holdings, Inc., included in this Form 10-K, provides all parent company
information for the periods subsequent to the NTK Holdings Formation, when NTK
Holdings became the parent company, that are required to be presented in
accordance with SEC rules and regulations for financial statement
schedules.  The Nortek Holdings, Inc. (Parent Company) — Schedule I —
Condensed Financial Information of Nortek Holdings, Inc., which covers the 2005
period prior to the NTK Holdings Formation is included elsewhere in this Form
10-K and is incorporated herein by reference.  The accompanying
condensed financial statements have been prepared in accordance with the reduced
disclosure requirements permitted by Form 10-K, Item 15, Schedule I — Condensed
Financial Information of the Registrant.  The NTK Holdings, Inc. and
Subsidiaries Consolidated Financial Statements are included elsewhere in this
Form 10-K and are incorporated herein by reference.





2.
            Descriptions
      of material contingencies, significant provisions of long-term debt
      obligations and commitments of NTK Holdings and its subsidiaries are
      included in Notes 1, 5 and 8 of the Notes to the NTK Holdings, Inc. and
      Subsidiaries Consolidated Financial Statements, which are incorporated
      herein by reference.





3.
            At December 31, 2007 and 2006, NTK
      Holdings’ subsidiaries, principally Nortek, had unrestricted cash and
      investments of approximately $53.4 million and $57.4 million,
      respectively.





4.
            As of December 31, 2007, the
      Company had approximately $64.4 million available for the payment of cash
      dividends, stock purchases or other restricted payments (“Restricted
      Payments”) under the terms of the indenture governing the Company’s 10
      3/4% Senior Discount Notes’ and the agreement governing the Company’s
      senior unsecured loan facility.  Restricted Payments to NTK
      Holdings and Nortek Holdings from Nortek are limited by the terms of
      Nortek’s most restrictive loan agreement, Nortek’s senior secured credit
      facility.  The amount available for such payments under Nortek’s
      senior secured credit facility was approximately $172.3 million at
      December 31, 2007.





5.
            The combined liabilities,
      excluding deferred income taxes and intercompany payables to the Company,
      of NTK Holdings’ subsidiaries as of December 31, 2007 were approximately
      $2,008.7 million consisting of approximately $1,445.4 million of short and
      long-term debt, approximately $192.7 million of accounts payable and
      approximately $370.6 million of short and long-term accruals, taxes and
      other obligations (of which approximately $247.1 million are classified as
      short-term).












NORTEK
HOLDINGS, INC. (PARENT COMPANY)
 SCHEDULE
I
 CONDENSED
FINANCIAL INFORMATION OF NORTEK HOLDINGS, INC.






CONDENSED
STATEMENT OF OPERATIONS




For the Period
      FromJanuary 1, 2005
      -February 9,
      2005(Amounts in
      millions)Expenses:Interest
      expense
              
              $
              0.70.7Loss from continuing operations
      before equity insubsidiaries'
      earnings
              
              
              (0.7
              )Equity in subsidiaries' earnings
      before provision for income taxes
              
              
              5.2Earnings from continuing
      operations beforeprovision for income
      taxes
              
              
              4.5Provision for income
      taxes
              
              
              1.4Net
earnings
              
              $
              3.1


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






CONDENSED
STATEMENT OF CASH FLOWS





For the Period
      FromJanuary 1, 2005
      -February 9,
      2005(Amounts in
      millions)Cash flows from operating
      activities:Net
earnings
              
              $
              3.1Adjustments to reconcile net
      earnings to cash:Non-cash interest
      expense
              
              
              0.7Equity in subsidiaries' earnings
      before provision for income taxes
              
              
              (5.2
              )Current income tax provision from
      continuing operations
              
              
              0.6Deferred federal income tax
      provision from continuing operations
              
              
              0.8Total adjustments to
      net earnings
              
              
              (3.1
              )Net
      cash provided by operating activities
              
              
              ---Net change in unrestricted cash
      and cash equivalents
              
              
              ---Unrestricted cash and cash
      equivalents at the beginning of the period
              
              
              ---Unrestricted cash and cash
      equivalents at the end of the period
              
              $
              ---




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




NORTEK
HOLDINGS, INC. (PARENT COMPANY)
 SCHEDULE
I
 CONDENSED
FINANCIAL INFORMATION OF NORTEK HOLDINGS, INC.
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 For
the period from January 1, 2005 to February 9, 2005





1.
            On
      February 10, 2005, NTK Holdings, Inc (“NTK Holdings” or the “Company”), a
      newly formed Delaware Corporation, issued 3,000 shares of capital stock to
      Investors LLC in exchange for Investor LLC’s shares of capital stock of
      Nortek Holdings (the “NTK Holdings Formation”).  As a result of
      this exchange, Nortek Holdings became a wholly-owned subsidiary of NTK
      Holdings and NTK Holdings became a wholly-owned subsidiary of Investors
      LLC.





Nortek
Holdings, Inc. (Parent Company) — Schedule I — Condensed Financial Information
of Nortek Holdings, Inc., included in this Form 10-K, provides all parent
company information for the 2005 period prior to the NTK Holdings Formation,
when NTK Holdings became the parent company, that are required to be presented
in accordance with SEC rules and regulations for financial statement
schedules.  The NTK Holdings, Inc. (Parent Company) — Schedule I —
Condensed Financial Information of NTK Holdings, Inc., which cover the required
periods subsequent to the NTK Holdings Formation is included elsewhere in this
Form 10-K and is incorporated herein by reference.  The accompanying
condensed financial statements have been prepared in accordance with the reduced
disclosure requirements permitted by Form 10-K, Item 15, Schedule I — Condensed
Financial Information of the Registrant.  The NTK Holdings, Inc. and
Subsidiaries Consolidated Financial Statements are included elsewhere in this
Form 10-K and are incorporated herein by reference.





2.
            Descriptions
      of material contingencies, significant provisions of long-term debt
      obligations and commitments of NTK Holdings and its subsidiaries are
      included in Notes 1, 5 and 8 of the Notes to the NTK Holdings, Inc. and
      Subsidiaries Consolidated Financial Statements, which are incorporated
      herein by reference.











NTK
HOLDINGS, INC. AND SUBSIDIARIES


SCHEDULE
II


VALUATION
AND QUALIFYING ACCOUNTS





Balance
      at
            
            
            
            
            
            Charge
      to
            
            
            Deduction
            
            
            Balance
      atBeginning
            
            
            Charged
      to Cost
            
            
            Other
            
            
            from
            
            
            End
      ofClassification
            
            of Year
            
            
            and Expense
            
            
            Accounts
            
            
            Reserves
            
            
            Year(Amounts
      in millions)For
      the year-ended December 31, 2005Allowance
      for doubtful accounts and sales allowances
            
            $
            5.5
            
            
            $
            2.9
            
            
            $
            1.1
            (b)
            
            $
            (2.9
            )  (a)
            
            $
            6.6For
      the year-ended December 31, 2006Allowance
      for doubtful accounts and sales allowances
            
            $
            6.6
            
            
            $
            6.1
            
            
            $
            0.6
            (b)
            
            $
            (3.9
            )  (a)
            
            $
            9.4For
      the year-ended December 31, 2007Allowance
      for doubtful accounts and sales allowances
            
            $
            9.4
            
            
            $
            11.8
            
            
            $
            1.7
            (b)
            
            $
            (10.7
            )  (a)
            
            $
            12.2





(a)
            Amounts
      written off, net of recoveries


(b)
            Other,
      including acquisitions and the effect of changes in foreign currency
      exchange rates








EXHIBIT
INDEX


Exhibits
marked with an asterisk (*) are filed herewith.  The remainder of the
exhibits has heretofore been filed with the Commission and is incorporated
herein by reference.  Exhibits marked with a double asterisk (**)
identify each management contract or compensatory plan or
arrangement.





2.1
            Stock
      Purchase Agreement among CI Investment Holdings, Inc., Nortek, Inc. and
      WDS LLC dated as of December 19, 2003 (Exhibit 2.1 to Nortek Form 8-K
      filed December 22, 2003).2.2
            Stock
      Purchase Agreement among Kelso Investment Associates VI, L.P., the other
      sellers named therein, THL Buildco Holdings, Inc. and THL Buildco, Inc.
      dated as of July 15, 2004 (Exhibit 2.1 to Nortek Form 8-K filed July 16,
      2004).2.3
            Amendment
      No. 1 to Stock Purchase Agreement by and among Kelso & Company, L.P.,
      Third party Stockholders, Richard L. Bready, as the Management
      Representative on behalf of the Management Stockholders and the Option
      Sellers, and THL Buildco, Inc. dated August 27, 2004 (Exhibit 10.1 to
      Nortek Form 8-K filed September 1, 2004).2.4
            THL
      Buildco, Inc. and Nortek, Inc. $625,000,000 8 1⁄2% Senior Subordinated Notes
      due 2014 Purchase Agreement dated August 12, 2004 by and among Initial
      Issuer and the Initial Purchasers (Exhibit 2.9 for Nortek Form S-4 filed
      October 22, 2004).2.5
            Purchase
      Agreement, dated as of February 10, 2005 (Exhibit 2.10 to NTK Holdings S-4
      filed July 5, 2005).3.1
            Amended
      and Restated Certificate of Incorporation of Nortek, Inc. (Exhibit 3.1 for
      Nortek Form S-4 filed October 22, 2004).3.2
            By-Laws
      of Nortek, Inc. (Exhibit 3.2 to Nortek Form S-4 filed October 22,
      2004).3.3
            Certificate
      of Incorporation of NTK Holdings (Exhibit 3.1 to NTK Holdings S-4 filed
      July 5, 2005).3.4
            By-Laws
      of NTK Holdings, Inc. (Exhibit 3.2 to NTK Holdings S-4 filed July 5,
      2005).4.1
            Indenture
      dated as of June 12, 2001 between Nortek, Inc. and State Street Bank and
      Trust Company, as Trustee, relating to the 9 7/8% Senior Subordinated
      Notes due 2011 (Exhibit 4.1 to Nortek Registration Statement No. 333-64120
      filed July 11, 2001).4.2
            Indenture
      dated as of August 27, 2004 between THL Buildco, Inc., Guarantors named
      therein and U.S. Bank National Association, relating to the 8 1⁄2% Senior
      Subordinated Notes due 2014 (Exhibit 4.1 to Nortek Form 8-K filed
      September 1 2004).4.3
            First
      Supplemental Indenture dated as of August 5, 2004 between Nortek, Inc. and
      U.S. Bank National Association as the successor in interest to State
      Street Bank and Trust Company, as Trustee under the Indenture dated June
      12, 2001 (Exhibit 4.3 to Nortek Form S-4 filed October 22,
      2004).4.4
            Registration
      Rights Agreement dated as of August 27, 2004 by and among THL Buildco,
      Inc., Nortek, Inc., the Guarantors and UBS Securities LLC and Credit
      Suisse First Boston LLC, Banc of America Securities LLC, Bear, Stearns
      & Co. Inc., and Sovereign Securities Corporation, LLC as Initial
      Purchasers of 8 1⁄2% Senior Subordinated Notes due 2014 (Exhibit 4.1 to
      Nortek Form 8-K filed September 1, 2004).4.5
            Indenture
      dated as of February 15, 2005 between NTK Holdings, Inc. and U.S. Bank
      National Association relating to the 103⁄4% Senior Discount Notes due 2014
      (Exhibit 4.5 to NTK Holdings S-4 filed July 5, 2005).4.6
            Registration
      Rights Agreement dated as of February 15, 2005 by and among NTK Holdings,
      Inc. and Credit Suisse First Boston LLC, as Representative and Banc of
      America Securities LLC and UBS Securities LLC as Initial Purchasers for
      the 103⁄4% Senior Discount Notes due 2014 (Exhibit 4.6 to NTK Holdings S-4
      filed July 5, 2005).4.7
            Securityholders
      Agreement dated as of August 27, 2004 among THL-Nortek Investors, LLC, THL
      Buildco Holdings, Inc., Thomas H. Lee Equity Fund V, L.P., Thomas H. Lee
      Parallel Fund V, L.P., Thomas H. Lee Cayman Fund V, L.P., 1997 Thomas H.
      Lee Nominee Trust, Thomas H. Lee Investors Limited Partnership, Putnam
      Investments Employees’ Securities Company I LLC, Putnam Investments
      Employees’ Securities Company II LLC, Putnam Investments Holdings, LLC,
      Third Party Investors and the securityholders listed therein
      (Exhibit 4.7 to NTK Holdings S-1/A filed May 16,
      2006).4.8
            First
      Amendment, dated as of February 10, 2005, to Securityholders Agreement
      dated as of August 27, 2004 among THL-Nortek Investors, LLC, Nortek
      Holdings, Inc., THL Buildco Holdings, Inc., Thomas H. Lee Equity Fund V,
      L.P., Thomas H. Lee Parallel Fund V, L.P., Thomas H. Lee Cayman Fund V,
      L.P., 1997 Thomas H. Lee Nominee Trust, Thomas H. Lee Investors Limited
      Partnership, Putnam Investments Employees’ Securities Company I LLC,
      Putnam Investments Employees’ Securities Company II LLC, Putnam
      Investments Holdings, LLC, Third Party Investors and the securityholders
      listed therein (Exhibit 4.9 to NTK Holdings S-1/A filed June 9,
      2006).**
            10.1
            Form
      of Indemnification Agreement between Nortek, Inc. and its directors and
      certain officers (Appendix C to Nortek Proxy Statement dated March 23,
      1987 for Annual Meeting of Nortek Stockholders, File No.
      1-6112).**
            10.2
            Nortek,
      Inc. Supplemental Executive Retirement Plan C, dated December 18, 2003
      (Exhibit 10.23 to Nortek Form 10-K filed March 30,
  2004).**
            10.3
            Amended
      and Restated Employment Agreement of Richard L. Bready, dated as of August
      27, 2004 (Exhibit 10.2 to Nortek Form 8-K filed September 1,
      2004).**
            10.4
            Amended
      and Restated Employment Agreement of Almon C. Hall, III, dated as of
      August 27, 2004 (Exhibit 10.3 to Nortek Form 8-K filed September 1,
      2004).**
            10.5
            Amended
      and Restated Employment Agreement of Kevin W. Donnelly, dated as of August
      27, 2004 (Exhibit 10.4 to Nortek Form 8-K filed September 1,
      2004).10.6
            Consulting
      Agreement with David B. Hiley, dated as of August 27, 2004 (Exhibit 10.5
      to Nortek Form 8-K filed September 1, 2004).10.7
            Nortek,
      Inc. Second Amended and Restated Change in Control Severance Benefit Plan
      for Key Employees and dated August 27, 2004 (Exhibit 10.7 to Nortek From
      8-K filed September 1, 2004).10.8
            Deferred
      Compensation Plan of Nortek Holdings, Inc. dated August 27, 2004 (Exhibit
      10.8 to Nortek Form 8-K filed September 1, 2004).10.9
            Management
      Agreement among Nortek Holdings, Inc., Nortek, Inc. and THL Managers V,
      LLC dated August 27, 2004 (Exhibit 10.9 to Nortek From 8-K filed September
      1, 2004).10.10
            Credit
      Agreement dated August 27, 2004 among Nortek, Inc., Nortek Holdings, Inc.
      (f/k/a THL Buildco, Inc., THL Buildco Holdings, Inc.), UBS AG, Stamford
      Branch, UBS AG Canada Branch, Bank of America N.A., Bank of America N.A.
      (Canada Branch), and certain other Lenders Party thereto (Exhibit 10.10 to
      Nortek Form 8-K filed September 1, 2004).**
            10.11
            First
      Amendment to Nortek, Inc. Supplemental Executive Retirement Plan C, dated
      December 6, 2004. (Exhibit 10.12 to Nortek Form 10-K filed March 29,
      2005).10.12
            Bryan
      Kelln Employment Offer Letter dated May 19, 2005 (Exhibit 99 to Nortek
      Form 8-K filed June 6, 2005).10.13
            Amendment
      No. 1, dated as of March 29, 2005, to Credit Agreement dated August 27,
      2004 among Nortek, Inc., Nortek Holdings, Inc. (f/k/a THL Buildco, Inc.,
      THL Buildco Holdings, Inc.), UBS AG, Stamford Branch, UBS AG Canada
      Branch, Bank of America N.A., Bank of America N.A. (Canada Branch), and
      certain other Lenders Party thereto (Exhibit 10.15 to NTK Holdings, Inc.
      S-4 filed July 5, 2005).**
            10.14
            Limited
      Liability Company Agreement of THL-Nortek Investors, LLC dated as of
      August 27, 2004. (Exhibit 10.14 to Nortek Form 10-K filed March 9,
      2006).**
            10.15
            First
      Amendment to Limited Liability Company Agreement of THL-Nortek Investors,
      LLC dated as of February 10, 2005. (Exhibit 10.15 to Nortek Form 10-K
      filed March 9, 2006).10.16
            Amendment
      No. 1 to Management Agreement among Nortek Holdings, Inc., Nortek, Inc.
      and THL Managers V, LLC dated February 10, 2005. (Exhibit 10.16 to Nortek
      Form 10-K filed March 9, 2006).10.17
            Amended
      and Restated Credit Agreement dated April 3, 2006 among Nortek, Inc. (as
      successor to THL Buildco, Inc.), Nortek Holdings, Inc., UBS AG, Stamford
      Branch, UBS AG Canada Branch, Bank of America N.A., Bank of America N.A.
      (Canada Branch), and certain other Lenders Party thereto (Exhibit 10.1 to
      Nortek Form 8-K filed April 3, 2006).10.18
            Bridge
      Loan Agreement dated May 10, 2006 among NTK Holdings, Inc., The Lenders
      Party hereto, and Goldman Sachs Credit Partners L.P., as Administrative
      Agent, Goldman Sachs Credit Partners L.P. and Credit Suisse Securities
      (USA) LLC, as Joint Lead Arrangers and Joint Bookrunners, Credit Suisse
      Securities (USA) LLC, as Syndication Agent and Banc of America Bridge LLC
      and UBS Securities LLC, as Documentation Agents (Exhibit 10.1 to NTK
      Holdings Form 8-K filed May 10, 2006).**
            10.19
            Third
      Amendment to the Nortek, Inc. Supplemental Executive Retirement Plan B
      (Exhibit 10.19 to Nortek Form 10-K filed April 2,
2007).*
            14.1
            Code
      of Ethics.*
            21.1
            List
      of subsidiaries.*
            31.1
            Certificate
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.*
            31.2
            Certificate
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.*
            32
            Certificate
      of Chief Executive Officer and Chief Financial Officer Pursuant to Section
      1350, Chapter 63 of Title 18, United States code, as Adopted Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002.