UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549




Form
10-Q


(Mark
One)


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


SECURITIES EXCHANGE
ACT OF 1934







For
the quarterly period ended June 28, 2008





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 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 (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90
days.Yes [_]No [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.  See the
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act).  (Check
one):





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 August 8, 2008 was 3,000.






PART
I – FINANCIAL INFORMATION






Item
1.  Financial Statements








NTK
HOLDINGS, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEET


(Dollar
amounts in millions)





June 28,
                
                
                December
31,2008
                
                
                2007AssetsCurrent
    Assets:Unrestricted cash and cash
      equivalents
                
                $
                79.1
                
                
                $
                53.4Restricted
    cash
                
                
                1.0
                
                
                
                1.0Accounts
      receivable, less allowancesof $12.7 and
      $12.2
                
                
                368.2
                
                
                
                320.0Inventories:Raw
      materials
                
                
                101.5
                
                
                
                91.6Work in
      process
                
                
                34.9
                
                
                
                29.9Finished
      goods
                
                
                194.0
                
                
                
                187.1330.4
                
                
                
                308.6Prepaid
      expenses
                
                
                14.4
                
                
                
                11.7Other current
      assets
                
                
                19.1
                
                
                
                19.8Prepaid income
      taxes
                
                
                26.3
                
                
                
                28.9Total current
      assets
                
                
                838.5
                
                
                
                743.4Property and Equipment, at
      Cost:Land
                
                
                10.9
                
                
                
                10.4Buildings and
      improvements
                
                
                115.0
                
                
                
                110.1Machinery and
      equipment
                
                
                231.6
                
                
                
                217.1357.5
                
                
                
                337.6Less accumulated
      depreciation
                
                
                120.6
                
                
                
                99.7Total property and
      equipment, net
                
                
                236.9
                
                
                
                237.9Other
    Assets:Goodwill
                
                
                1,520.9
                
                
                
                1,528.9Intangible
      assets, less accumulated amortizationof $96.1 and
      $80.7
                
                
                151.7
                
                
                
                156.6Deferred debt
      expense
                
                
                49.8
                
                
                
                31.4Restricted investments and
      marketable securities
                
                
                2.3
                
                
                
                2.3Other
assets
                
                
                9.7
                
                
                
                10.31,734.4
                
                
                
                1,729.5Total
Assets
                
                $
                2,809.8
                
                
                $
                2,710.8Liabilities and Stockholder’s
      InvestmentCurrent
      Liabilities:Notes payable and other short-term
      obligations
                
                $
                68.4
                
                
                $
                64.0Current maturities of long-term
      debt
                
                
                15.6
                
                
                
                32.4Accounts
      payable
                
                
                250.0
                
                
                
                192.7Accrued expenses and taxes,
      net
                
                
                238.4
                
                
                
                248.6Total current
      liabilities
                
                
                572.4
                
                
                
                537.7Other
      Liabilities:Deferred income
      taxes
                
                
                40.7
                
                
                
                37.0Other
                
                
                138.4
                
                
                
                125.6179.1
                
                
                
                162.6Notes,
      Mortgage Notes and ObligationsPayable, Less
      Current Maturities
                
                
                2,021.2
                
                
                
                1,921.5Commitments and Contingencies (see
      Note G)Stockholder’s
      Investment:Common stock, $0.01 par value,
      authorized 3,000 shares;3,000 issued and
      outstanding at June 28, 2008 andDecember 31,
      2007
                
                
                ---
                
                
                
                ---Additional paid-in
      capital
                
                
                25.9
                
                
                
                21.6(Accumulated deficit) retained
      earnings
                
                
                (27.8
                )
                
                
                29.7Accumulated other comprehensive
      income
                
                
                39.0
                
                
                
                37.7Total stockholder's
      investment
                
                
                37.1
                
                
                
                89.0Total Liabilities and
      Stockholder's Investment
                
                $
                2,809.8
                
                
                $
                2,710.8


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






NTK
HOLDINGS, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS




For the second quarter
      endedJune 28,
    2008
              
              
              June 30,
    2007(Dollar amounts in
      millions)Net
      Sales
              
              $
              647.1
              
              
              $
              644.3Costs and
      Expenses:Cost of products sold
      (see Note D)
              
              
              473.3
              
              
              
              452.1Selling, general and
      administrative expense, net (see Note D)
              
              
              118.5
              
              
              
              121.1Amortization of
      intangible assets
              
              
              8.4
              
              
              
              6.4600.2
              
              
              
              579.6Operating
      earnings
              
              
              46.9
              
              
              
              64.7Interest
      expense
              
              
              (47.4
              )
              
              
              (48.7
              )Loss from debt
      retirement
              
              
              (9.9
              )
              
              
              ---Investment
      income
              
              
              0.2
              
              
              
              0.5(Loss) earnings before provision
      for income taxes
              
              
              (10.2
              )
              
              
              16.5Provision for income
      taxes
              
              
              33.3
              
              
              
              9.2Net (loss)
      earnings
              
              $
              (43.5
              )
              
              $
              7.3





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






NTK
HOLDINGS, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS




For the first six months
      endedJune 28,
    2008
              
              
              June 30,
    2007(Dollar amounts in
      millions)Net
      Sales
              
              $
              1,187.3
              
              
              $
              1,196.8Costs and
      Expenses:Cost of products sold
      (see Note D)
              
              
              864.9
              
              
              
              836.7Selling, general and
      administrative expense, net (see Note D)
              
              
              237.0
              
              
              
              238.2Amortization of
      intangible assets
              
              
              15.1
              
              
              
              12.41,117.0
              
              
              
              1,087.3Operating
      earnings
              
              
              70.3
              
              
              
              109.5Interest
      expense
              
              
              (90.4
              )
              
              
              (91.0
              )Loss from debt
      retirement
              
              
              (9.9
              )
              
              
              ---Investment
      income
              
              
              0.4
              
              
              
              0.9(Loss) earnings before provision
      for income taxes
              
              
              (29.6
              )
              
              
              19.4Provision for income
      taxes
              
              
              27.9
              
              
              
              10.9Net (loss)
      earnings
              
              $
              (57.5
              )
              
              $
              8.5




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






NTK
HOLDINGS, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS




For the first six months
      endedJune 28,
    2008
              
              
              June 30,
    2007(Dollar amounts in
      millions)Cash Flows from operating
      activities:Net (loss)
      earnings
              
              $
              (57.5
              )
              
              $
              8.5Adjustments
      to reconcile net (loss) earnings to net cashprovided by
      operating activities:Depreciation and amortization
      expense
              
              
              36.0
              
              
              
              31.1Non-cash interest expense,
      net
              
              
              35.0
              
              
              
              33.8Non-cash stock-based compensation
      expense
              
              
              0.1
              
              
              
              0.2(Gain) loss on property and
      equipment
              
              
              (2.5
              )
              
              
              0.2Loss from debt
      retirement
              
              
              9.9
              
              
              
              ---Deferred federal income tax
      provision (benefit)
              
              
              20.8
              
              
              
              (5.5
              )Changes
      in certain assets and liabilities, net ofeffects from
      acquisitions and dispositions:Accounts receivable,
      net
              
              
              (44.8
              )
              
              
              (47.2
              )Inventories
              
              
              (20.4
              )
              
              
              (33.7
              )Prepaids and other current
      assets
              
              
              (4.0
              )
              
              
              2.3Accounts
      payable
              
              
              53.9
              
              
              
              49.5Accrued expenses and
      taxes
              
              
              12.3
              
              
              
              7.6Long-term assets, liabilities and
      other, net
              
              
              5.8
              
              
              
              (0.7
              )Total adjustments to
      net (loss) earnings
              
              
              102.1
              
              
              
              37.6Net cash provided by
      operating activities
              
              
              44.6
              
              
              
              46.1Cash Flows from investing
      activities:Capital
      expenditures
              
              
              (15.9
              )
              
              
              (14.1
              )Net cash paid for businesses
      acquired
              
              
              (32.7
              )
              
              
              (76.3
              )Proceeds from the sale of property
      and equipment
              
              
              6.2
              
              
              
              0.1Change in restricted cash and
      marketable securities
              
              
              ---
              
              
              
              1.2Other, net
              
              
              (1.9
              )
              
              
              (0.6
              )Net cash used in
      investing activities
              
              
              (44.3
              )
              
              
              (89.7
              )Cash Flows from financing
      activities:Increase in
      borrowings
              
              
              133.0
              
              
              
              89.0Payment of
      borrowings
              
              
              (66.7
              )
              
              
              (23.0
              )Net proceeds from sale of the 10%
      Senior Secured Notes due 2013
              
              
              742.2
              
              
              
              ---Redemption of Nortek's senior
      secured credit facility
              
              
              (755.5
              )
              
              
              ---Fees paid in connection with new
      debt facilities
              
              
              (31.7
              )
              
              
              ---Equity investment by THL-Nortek
      Investors, LLC
              
              
              4.2
              
              
              
              ---Payment in connection with senior
      unsecured loan facility rollover
              
              
              ---
              
              
              
              (4.5
              )Other, net
              
              
              (0.1
              )
              
              
              ---Net cash provided by
      financing activities
              
              
              25.4
              
              
              
              61.5Net change in unrestricted cash
      and cash equivalents
              
              
              25.7
              
              
              
              17.9Unrestricted cash and cash
      equivalents at the beginning of the period
              
              
              53.4
              
              
              
              57.4Unrestricted cash and cash
      equivalents at the end of the period
              
              $
              79.1
              
              
              $
              75.3Supplemental disclosure of cash
      flow information:Interest
    paid
              
              $
              47.4
              
              
              $
              52.8Income taxes paid (refunded),
      net
              
              $
              6.8
              
              
              $
              (0.4
              )


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






NTK
HOLDINGS, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT


FOR
THE SECOND QUARTER ENDED JUNE 30, 2007


(Dollar
amounts in millions)





AccumulatedAdditional
              
              
              
              
              
              OtherPaid-in
              
              
              Retained
              
              
              Comprehensive
              
              
              ComprehensiveCapital
              
              
              Earnings
              
              
              Income
    (Loss)
              
              
              Income
    (Loss)Balance, March 31,
      2007
              
              $
              21.4
              
              
              $
              37.9
              
              
              $
              13.0
              
              
              $
              ---Net
earnings
              
              
              ---
              
              
              
              7.3
              
              
              
              ---
              
              
              
              7.3Other comprehensive income
      (loss):Currency translation
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              7.2
              
              
              
              7.2Pension liability
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              (0.1
              )
              
              
              (0.1
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              14.4Stock-based
      compensation
              
              
              0.1
              
              
              
              ---
              
              
              
              ---Balance, June 30,
      2007
              
              $
              21.5
              
              
              $
              45.2
              
              
              $
              20.1


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








NTK
HOLDINGS, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT


FOR
THE FIRST SIX MONTHS ENDED JUNE 30, 2007


(Dollar
amounts in millions)




AccumulatedAdditional
              
              
              
              
              
              OtherPaid-in
              
              
              Retained
              
              
              Comprehensive
              
              
              ComprehensiveCapital
              
              
              Earnings
              
              
              Income
    (Loss)
              
              
              Income
    (Loss)Balance, December 31,
      2006
              
              $
              21.3
              
              
              $
              39.9
              
              
              $
              11.6
              
              
              $
              ---Net
earnings
              
              
              ---
              
              
              
              8.5
              
              
              
              ---
              
              
              
              8.5Other comprehensive income
      (loss):Currency translation
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              8.6
              
              
              
              8.6Pension liability
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              (0.1
              )
              
              
              (0.1
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              17.0Adoption of FIN 48 (see Note
      F)
              
              
              ---
              
              
              
              (3.2
              )
              
              
              ---Stock-based
      compensation
              
              
              0.2
              
              
              
              ---
              
              
              
              ---Balance, June 30,
      2007
              
              $
              21.5
              
              
              $
              45.2
              
              
              $
              20.1





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





NTK
HOLDINGS, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT


FOR
THE SECOND QUARTER ENDED JUNE 28, 2008


(Dollar
amounts in millions)





Retained
              
              
              AccumulatedAdditional
              
              
              Earnings
              
              
              OtherPaid-in
              
              
              (Accumulated
              
              
              Comprehensive
              
              
              ComprehensiveCapital
              
              
              Deficit)
              
              
              Income
              
              
              Income
    (Loss)Balance, March 29,
      2008
              
              $
              21.6
              
              
              $
              15.7
              
              
              $
              38.1
              
              
              $
              ---Net loss
              
              
              ---
              
              
              
              (43.5
              )
              
              
              ---
              
              
              
              (43.5
              )Other comprehensive
      income:Currency translation
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              0.9
              
              
              
              0.9Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (42.6
              )Capital contribution from
      parent
              
              
              4.2
              
              
              
              ---
              
              
              
              ---Stock-based
      compensation
              
              
              0.1
              
              
              
              ---
              
              
              
              ---Balance, June 28,
      2008
              
              $
              25.9
              
              
              $
              (27.8
              )
              
              $
              39.0





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





NTK
HOLDINGS, INC. AND SUBSIDIARIES


UNAUDITED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT


FOR
THE FIRST SIX MONTHS ENDED JUNE 28, 2008


(Dollar
amounts in millions)





Retained
              
              
              AccumulatedAdditional
              
              
              Earnings
              
              
              OtherPaid-in
              
              
              (Accumulated
              
              
              Comprehensive
              
              
              ComprehensiveCapital
              
              
              Deficit)
              
              
              Income
              
              
              Income
    (Loss)Balance, December 31,
      2007
              
              $
              21.6
              
              
              $
              29.7
              
              
              $
              37.7
              
              
              $
              ---Net loss
              
              
              ---
              
              
              
              (57.5
              )
              
              
              ---
              
              
              
              (57.5
              )Other comprehensive
      income:Currency translation
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              1.3
              
              
              
              1.3Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (56.2
              )Capital contribution from
      parent
              
              
              4.2
              
              
              
              ---
              
              
              
              ---Stock-based
      compensation
              
              
              0.1
              
              
              
              ---
              
              
              
              ---Balance, June 28,
      2008
              
              $
              25.9
              
              
              $
              (27.8
              )
              
              $
              39.0








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








NTK
HOLDINGS, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
28, 2008 AND JUNE 30, 2007







(A)
            The unaudited condensed
      consolidated financial statements presented herein (the “Unaudited
      Financial Statements”) reflect the financial position, results of
      operations and cash flows of NTK Holdings, Inc. (the “Company” or “NTK
      Holdings”) and all of its wholly-owned subsidiaries.  The
      Unaudited Financial Statements include the accounts of NTK Holdings, as
      appropriate, and all of its wholly-owned subsidiaries, including Nortek,
      Inc. (“Nortek”), after elimination of intercompany accounts and
      transactions, without audit and, in the opinion of management, reflect all
      adjustments of a normal recurring nature necessary for a fair statement of
      the interim periods presented.  Although certain information and
      footnote disclosures normally included in financial statements prepared in
      accordance with U.S. generally accepted accounting principles have been
      omitted, the Company believes that the disclosures included are adequate
      to make the information presented not misleading.  Operating
      results for the second quarter and first six months ended June 28, 2008
      are not necessarily indicative of the results that may be expected for
      other interim periods or for the year ending December 31,
      2008.  Certain amounts in the prior year’s Unaudited Financial
      Statements have been reclassified to conform to the current year
      presentation.  It is suggested that these Unaudited Financial
      Statements be read in conjunction with the consolidated financial
      statements and the notes included in the Company’s latest annual report on
      Form 10-K and its latest Current Reports on Form 8-K as filed with the
      Securities and Exchange Commission
  (“SEC”).





Stock-Based Compensation of Employees,
Officers and Directors





The Company follows the
modified-prospective transition method of accounting for stock-based
compensation in accordance with SFAS No. 123R.  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.  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.





At June 28, 2008, certain employees and consultants held
approximately 23,291 C-1 units and approximately 43,811 C-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
approximately 22,991 and 22,613 were vested at June 28, 2008 and December 31,
2007, respectively.  The total fair value of the C-1 units is
approximately $1.2 million and approximately $0.1 million remains to be
amortized at June 28, 2008.  The C-2 units only vest in the event that
certain performance-based criteria, as defined, are met.  At June 28,
2008 and December 31, 2007, there was approximately $1.6 million of unamortized
stock-based employee compensation with respect to the C-2 units, which will be
recognized in 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.





The Company recorded stock-based
compensation charges in selling, general and administrative expense, net of
approximately $0.1 million in the second quarter and first six months of 2008
and approximately $0.1 million and $0.2 million for the second quarter and first
six months ended June 30, 2007, respectively, in accordance with SFAS No.
123R.





Goodwill
and Other Long-Live Assets





The following table
presents a summary of the activity in goodwill for the first six months ended
June 28, 2008:





(Amounts in
      millions)Balance
      as of December 31, 2007
            
            $
            1,528.9Purchase
      accounting adjustments
            
            
            (7.8
            )Impact of changes in foreign currency exchange rates and
    other
            
            
            (0.2
            )Balance
      as of June 28, 2008
            
            $
            1,520.9





At June 28, 2008,
the Company had an approximate carrying value of Goodwill as
follows:





(Amounts in
      millions)Segment:Residential
      Ventilation Products
            
            $
            790.5Home
      Technology Products
            
            
            415.8Air
      Conditioning and Heating Products *
            
            
            314.6$
            1,520.9





*
            Primarily
      relates to the Residential HVAC reporting
unit.






The Company has classified as goodwill
the cost in excess of fair value of the net assets (including tax attributes) of
companies acquired in purchase transactions (see Note
C).  Approximately $47.3 million of goodwill associated with certain
companies acquired during the year ended December 31, 2007 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.





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.





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 has evaluated whether there have been any
indicators of impairment as a result of the recent downturn in the economy,
including performing a second test as of December 31, 2007, as well as various
analyses through the second quarter of 2008.


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 E).  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. Based on the Company’s
estimates at June 28, 2008, 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 home technology
products reporting unit (“HTP”).  Assuming a 10% reduction in the
Company’s fair value estimates, the carrying value of HTP may exceed its fair
value, which could require the Company to perform additional testing under SFAS
No. 142 to determine if there was a goodwill impairment
for HTP.





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 currently 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 through 2009.  The Company has evaluated the carrying value
of reporting unit goodwill and long-lived assets and has determined that despite
the current difficult market environment, no impairment existed at the time
these financial statements were completed.





Fair Value





In September 2006,
the Financial Accounting Standards
Board (“FASB”) issued SFASNo. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS No.
157 was effective for the Company beginning January 1, 2008, including interim
periods within the year ending December 31, 2008.  SFAS No. 157
replaces multiple existing definitions of fair value with a single definition,
establishes a consistent framework for measuring fair value and expands
financial statement disclosures regarding fair value
measurements.  SFAS No. 157 applies only to fair value measurements
that already are required or permitted by other accounting standards and does
not require any new fair value measurements.
 
 The adoption of SFAS No. 157 for the
Company’s financial assets and liabilities in the first quarter of 2008 did not
have a material impact on the Company’s financial position or results of
operations.  As of June 28, 2008, the Company did not have any
significant financial assets or liabilities carried at fair
value.
 
 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.  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).





The Company’s non-financial assets and
liabilities that meet the deferral criteria set forth in FSP No 157-2 include,
among others, goodwill, intangible assets, property and equipment, net and other
long-term investments.  The Company does not expect that the adoption
of SFAS No. 157 for these non-financial assets and liabilities will have a
material impact on its financial position or results of
operations.





The Company also adopted SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”) on January 1,
2008.  SFAS No. 159 permits entities to choose to measure eligible
assets and liabilities at fair value with changes in value recognized in
earnings.  Fair value treatment may be elected either upon initial
recognition of an eligible asset or liability or, for an existing asset or
liability, if an event triggers a new basis of accounting.  The
Company did not elect to re-measure any of its existing financial assets or
liabilities under the provisions of SFAS No. 159, therefore, the adoption
of SFAS No. 159 did not have a material impact on the Company’s financial
position or results of operations.





New Accounting
Pronouncements





In May 2008, the
FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (“SFAS No. 162”).  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States.  SFAS No. 162 is effective sixty days following the
SEC’s approval of PCAOB amendments to AU Section 411, “The Meaning of Presented
Fairly in Conformity With Generally Accepted Accounting
Principles”.  The Company is currently evaluating the potential
impact, if any, of the adoption of SFAS No. 162 on its consolidated financial
statements.





In March 2008, the FASB issued SFAS No.
161, “Disclosure about Derivative Instruments and Hedging Activities – An
Amendment of FASB Statement No. 133 (“SFAS No. 161”).  SFAS No. 161
requires additional disclosures about an entity’s derivative and hedging
activities in order to improve the transparency of financial
reporting.  SFAS No. 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged.  The Company expects to adopt the
provisions of SFAS No. 161 on January 1, 2009 and is currently evaluating the
impact of adopting SFAS No. 161 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 expects to adopt SFAS No. 160
effective January 1, 2009 and does not believe that the adoption will have a
material impact on its financial position or results of operations.





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 income tax expense
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 accounting
principles, approximately $14.4million of the Company’s unrecognized
tax benefits as of June 28, 2008, would reduce goodwill if
recognized.  This amount is expected to be approximately $10.0 million
at January 1, 2009, 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’s tax provision and reduce the Company’s effective
tax rate, rather than goodwill.The Company is currently
evaluating the impact of adopting SFAS No. 141(R) on its consolidated financial
statements.





(B)
              On May 20,
      2008, Nortek sold $750.0 million of its 10% Senior Secured Notes due
      December 1, 2013 (the “10% Senior Secured Notes”) at a discount of
      approximately $7.8 million, which is being amortized over the life of the
      issue.  Net proceeds from the sale of the 10% Senior Secured
      Notes, after deducting underwriting commissions and expenses, amounted to
      approximately $721.7 million.  The 10% Senior Secured Notes,
      which are guaranteed on a senior secured basis by substantially all of
      Nortek’s subsidiaries located in the United States, were issued and sold
      in a private Rule 144A offering to institutional investors.  On
      August 11, 2008, Nortek
      filed a registration statement with the SEC to exchange the 10% Senior
      Secured Notes for registered
notes.
 
 Interest on the 10%
Senior Secured Notes accrues at the rate of 10% per annum and is payable
semi-annually in arrears on June 1 and December 1, commencing on December 1,
2008, until maturity.  Interest on the 10% Senior Secured Notes
accrues from the date of original issuance or, if interest has already been
paid, from the date it was most recently paid.  Interest is computed
on the basis of a 360-day year comprised of twelve 30-day months.
 
 Prior to June 1,
2011, Nortek may redeem up to 35% of the aggregate principal amount of the 10%
Senior Secured Notes with the net cash proceeds from certain equity offerings at
a redemption price of 110.0% plus accrued and unpaid interest, provided that at
least 65% of the original aggregate principal amount of the 10% Senior Secured
Notes remains outstanding after the redemption.  After June 1, 2011
the 10% Senior Secured Notes are redeemable at the option of Nortek, in whole or
in part, at any time and from time to time, on or after June 1, 2011 at 105.0%,
declining to 102.5% on June 1, 2012 and further declining to 100.0% on June 1,
2013.  In addition, the 10% Senior Secured Notes contain a call
provision whereby not more than once during any twelve-month period Nortek may
redeem the 10% Senior Secured Notes at a redemption price equal to 103.0% plus
accrued and unpaid interest, provided that the aggregate amount of these
redemptions does not exceed $75.0 million.
 
 The 10% Senior
Secured Notes are secured by a first-priority lien on substantially all of
Nortek’s and its domestic subsidiaries’ tangible and intangible assets, except
those assets securing Nortek’s new five-year $350.0 million senior secured
asset-based revolving credit facility (the “ABL Facility”) on a first-priority
basis.  The 10% Senior Secured Notes have a second-priority lien on
the ABL Facility’s first-priority collateral and rank equally with all existing
and future senior secured indebtedness of Nortek.   If Nortek
experiences a change in control, each holder of the notes will have the right to
require Nortek to purchase the notes at a price equal to 101% of the principal
amount thereof.  In addition, a change of control may constitute an
event of default under Nortek’s new ABL Facility and would also require Nortek
to offer to purchase its 8 1/2% senior subordinated notes at 101% of the
principal amount thereof, together with accrued and unpaid
interest.
 
 The indenture
governing the 10% Senior Secured Notes contains certain restrictive financial
and operating covenants including covenants that restrict, among other things,
the payment of cash dividends, the incurrence of additional indebtedness, the
making of certain investments, mergers, consolidations and sale of assets (all
as defined in the indenture and other agreements).
 
 In connection with
the offering of the 10% Senior Secured Notes, Nortek also entered into the ABL
Facility, of which $50.0 million was drawn at closing and approximately $35.0
million remains outstanding at June 28, 2008.  Nortek incurred fees
and expenses of approximately $11.2 million, which are being recognized as
non-cash interest expense over the term of the ABL Facility.  The ABL
Facility replaced Nortek’s existing $200.0 million revolving credit facility
that was to mature on August 27, 2010 and consists of a $330.0 million U.S.
Facility (with a $60.0 million sublimit for the issuance of U.S. standby letters
of credit and a $20.0 million sublimit for U.S. swingline loans) and a $20.0
million Canadian Facility.
 
 There are
limitations on Nortek’s ability to incur the full $350.0 million of commitments
under the ABL Facility.  Availability is limited to the lesser of the
borrowing base and $350.0 million, and the covenants under the 8 1/2% senior
subordinated notes do not currently allow Nortek to incur up to the full
$350.0 million.  The borrowing base at any time will equal the sum
(subject to certain reserves and other adjustments) of:
 
 ·
              85% of the
      net amount of eligible accounts
receivable;
 ·
              85% of the
      net orderly liquidation value of eligible inventory;
  and
 ·
              available
      cash subject to certain limitations as specified in the ABL
      Facility.
 
 The interest rates
applicable to loans under Nortek’s ABL Facility are, at Nortek’s option, equal
to either an adjusted LIBOR rate for a one, two, three or six month interest
period (or a nine or twelve month period, if available) or an alternate base
rate chosen by Nortek, plus an applicable margin percentage.  The
alternate base rate will be the greater of (1) the prime rate or (2) the Federal
Funds rate plus 0.50% plus the applicable margin, which is determined based upon
the average excess borrowing availability for the previous fiscal
quarter.  Interest shall be payable at the end of the selected
interest period, but no less frequently than quarterly.
 
 If at any time the
aggregate amount of outstanding loans, unreimbursed letter of credit drawings
and undrawn letters of credit under Nortek’s ABL Facility exceeds the lesser of
(i) the commitment amount and (ii) the borrowing base, Nortek will be required
to repay outstanding loans and cash collateralize letters of credit in an
aggregate amount equal to such excess, with no reduction of the commitment
amount.  If the amount available under Nortek’s ABL Facility is less
than 15% of the lesser of the commitment amount or the borrowing base or an
event of default has occurred, Nortek will be required to deposit cash from its
material deposit accounts (including all concentration accounts) daily in a
collection account maintained with the administrative agent under Nortek’s ABL
Facility, which will be used to repay outstanding loans and cash collateralize
letters of credit.  Additionally, Nortek’s ABL Facility requires that
if excess availability (as defined) is less than the greater of $40.0
million and 12.5% of the borrowing base, Nortek will comply with a minimum fixed
charge ratio test.
 
 The net proceeds
from the 10% Senior Secured Notes and the ABL Facility were used to repay all of
the outstanding indebtedness on May 20, 2008 under Nortek’s existing senior
secured credit facility, which included approximately $675.5 million outstanding
under Nortek’s senior secured term loan and approximately $80.0 million
outstanding under the revolving portion of the senior secured credit facility
(collectively, the “May 2008 Transactions”) plus accrued interest and related
fees and expenses.  The redemption of Nortek’s senior secured term
loan resulted in a pre-tax loss of approximately $9.9 million in the second
quarter ended June 28, 2008, primarily as a result of writing off unamortized
deferred debt expense.
 
 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 reflected 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 reflected 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 to offset pressure on the
Company’s sales.  In May 2008, Moody’s affirmed its rating of B3 for
Nortek and NTK Holdings.  The rating agency also assigned a B1 rating
to Nortek’s new 10% Senior Secured Notes.
 
 In April 2008,
Standard & Poor’s lowered its ratings for Nortek and its Parent Company, NTK
Holdings, from “B” to “B-” and issued a negative outlook.  Standard
& Poor’s rating downgrade reflected the Company’s weaker overall financial
profile resulting from the challenging operating conditions in the Company’s new
residential construction and remodeling markets.  The negative outlook
reflected Standard & Poor’s concerns about the US economy, difficult credit
markets and cost inflation, and the anticipation that the Company’s credit
metrics will remain challenged for at least the next several
quarters.  In May 2008, Standard & Poor’s affirmed its corporate
credit rating of B- for Nortek and NTK Holdings, however, it removed the ratings
from negative watch.  Standard & Poor’s also assigned a B rating
to Nortek’s new 10% Senior Secured Notes.
 On May 10, 2006,
the Company borrowed an aggregate principal amount of $205.0 million under a
senior unsecured loan facility.  The senior unsecured loan facility
initially had a term of one year; however, on May 10, 2007, the Company exercised
an option to extend the maturity date of its senior unsecured loan facility to
March 1, 2014 and paid a loan extension fee of approximately $4.5
million.  As a result, the Company recorded approximately $4.5 million
as debt discount which is being amortized as non-cash interest expense using the
interest method through March 1, 2014 and recorded approximately $3.9 million of
additional non-cash interest expense in the second quarter and first six months
of 2007 related primarily to the decreasein the fair value of the
option.The Company’s 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 June 28, 2008, the senior unsecured loan facility had an
actual interest rate of approximately 9.24%.  The Company is accruing
at an effective interest rate of approximately 10.8%, 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 with respect 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 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 $5.7 million and $11.4 million of accrued
interest for the second quarter and first six months ended June 28, 2008,
respectively, and recorded approximately $5.3 million and $10.0 million of
accrued interest for the second quarter and first six monthsended June 30, 2007, respectively, as
additional indebtedness relating to the senior unsecured loan
facility.  At June 28, 2008 and December 31, 2007, the actual
outstanding principal balance on the senior unsecured loan facility was
approximately $249.4 million and $238.0 million, respectively.  The
amount recorded as of June 28, 2008 and December 31, 2007, net of unamortized
debt discount of approximately $3.8 million and $4.1 million, respectively, is
approximately $245.6 million and $233.9 million, respectively.  The
senior unsecured loan facility is not guaranteed by any of the NTK Holdings’
subsidiaries and is not secured by any assets of NTK Holdings or any of its
subsidiaries.
 
 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 June 28, 2008 and December 31,
2007, respectively.
 
 The agreements that
govern the terms of the Company’s debt, including the indentures that govern NTK
Holdings’ 10 3/4% Senior Discount Notes, Nortek’s 10% Senior Secured Notes and
Nortek’s 8 1/2% senior subordinated notes and the credit agreements that govern
NTK Holdings’ senior unsecured loan facility and Nortek’s ABL Facility, contain
covenants that restrict the Company’s ability and the ability of its
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.
 
 At June 28, 2008, the Company had
approximately $49.4million available for the payment of
cash dividends, stock purchases or other restricted paymentsunder 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.
 
 The indenturesthat governNortek’s10% Senior Secured Notesand Nortek’s 8 1/2% Senior Subordinated
NoteslimitNortek’sability to make certain payments,
including dividends to service NTK Holdings’ debt obligations, loans or
investments or the redemption or retirement of any equity interests and
indebtedness subordinated to the notes.  These limitations are based
on a calculation of net income, equity issuances, receipt of capital
contributions and return on certain investments since August 27, 2004 (as
defined). As of June 28, 2008, Nortek had the
capacity to make certain payments, including dividends to service NTK Holdings’
debt obligations, of up to approximately $145.9 million.As of June 28, 2008, Nortek’s Fixed Charge Coverage Ratio was
approximately 1.67:1.  If Nortek’s Fixed Charge Coverage Ratio was at
least 2.00:1 as of June 28, 2008, Nortek would have up to approximately $243.5
million available to make certain payments, including dividends to service NTK
Holding’s debt obligations.





(C)
            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 certain
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 theater, 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 certain assets of Personal and Recreational
Products, Inc. (“Par Safe”) for future contingent consideration of approximately
$4.6 million that was earned in 2007 and was paid in April 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 June 15, 2007,
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 seventy-five percent.  Prior to June 15, 2007 and
subsequent to January 25, 2006, Mammoth China had a sixty-percent interest in
MEG and MSH.





Acquisitions
contributed approximately $8.4 million and $1.0 million to net sales and
depreciation and amortization expense, respectively, and reduced operating
earnings by approximately $1.3 million for the second quarter ended June 28,
2008 and contributed approximately $19.6 million and $1.7 million to net sales
and depreciation and amortization expense, respectively, and reduced operating
earnings by approximately $2.6 million for the first six months ended June 28,
2008.  With the exception of Stilpol, Metaltecnica and Triangle, which
are included in the Residential Ventilation Products segment, and 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 E).





Contingent
consideration of approximately $32.7 million related to the acquisitions of Par
Safe, ABT and Magenta Research, Ltd., which was accrued for December 31, 2007,
was paid during the second quarter of 2008.  The remaining estimated
total maximum potential amount of contingent consideration that may be paid in
the future for all completed acquisitions is approximately $54.0
million.





Acquisitions are
accounted for as purchases and accordingly have been included in the Company’s
consolidated results of operations since their 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 Unaudited
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 appraising the fair value of intangible assets and property and
equipment and finalizing the integration plans for certain of the acquired
companies, which are expected to be completed during 2008.





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





(D)
            During the
      second quarter ended June 28, 2008 and June 30, 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 unaudited condensed consolidated
      statement of operations:





For the second quarter ended
    *June 28, 2008
            
            
            June 30, 2007(Amounts
      in millions)Charges
      related to the closure of the Company's NuTone, Inc. Cincinnati, OH
      facility within the RVP segment (see Note H)
            
            $
            ---
            
            
            $
            0.8Gain from the
      sale of a manufacturing facility within the RVP segment
            
            
            (2.5
            )
            
            
            ---Net charges
      related to the closure of certain RVP segment facilities (see Note H)
      (1)
            
            
            0.2
            
            
            
            ---Costs and
      expenses incurred within the RVP segment in connection with the start up
      of a range hood facility in Mexico (2)
            
            
            1.4
            
            
            
            ---Charges
      related to the closure of the Company's Mammoth, Inc. Chaska, MN facility
      within the HVAC segment (see Note H)
            
            
            ---
            
            
            
            0.3Legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland within the RVP
      segment
            
            
            ---
            
            
            
            0.3Fees,
      expenses and a reserve recorded within the HTP segment in connection with
      a contemplated settlement of a dispute with one of its former
      suppliers
            
            
            4.5
            
            
            
            ---Reserve for
      amounts due from customers within the HTP segment
            
            
            ---
            
            
            
            0.5Product
      safety upgrade reserves within the HTP segment (see Note G)
      (2)
            
            
            ---
            
            
            
            (0.2
            )Foreign
      exchange (gains) losses related to transactions, including intercompany
      debt not indefinitely invested in the Company's
    subsidiaries
            
            
            (1.5
            )
            
            
            1.7





*
            Unless
      otherwise indicated, all items noted in the table have been recorded in
      selling, general and administrative expense, net in the accompanying
      unaudited condensed consolidated statement of
  operations.







(1)
              Approximately
      $0.3 million of these charges were recorded in cost of products sold,
      offset by a reduction in reserves in selling, general and administrative
      expense, net of approximately $0.1 million related to the closure of these
      RVP segment facilities.


(2)
            The RVP and
      HTP segments recorded these charges in cost of products
    sold.





During the first
six months ended June 28, 2008 and June 30, 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 unaudited condensed consolidated statement of
operations:





For the first six months ended
      *June 28, 2008
            
            
            June 30, 2007(Amounts
      in millions)Charges
      related to the closure of the Company's NuTone, Inc. Cincinnati, OH
      facility within the RVP segment (see Note H)
            
            $
            ---
            
            
            $
            1.4Gain from the
      sale of a manufacturing facility within the RVP segment
            
            
            (2.5
            )
            
            
            ---Net charges
      related to the closure of certain RVP segment facilities (see Note H)
      (1)
            
            
            0.2
            
            
            
            ---Costs and
      expenses incurred within the RVP segment in connection with the start up
      of a range hood facility in Mexico (2)
            
            
            1.4
            
            
            
            ---Charges
      related to the closure of the Company's Mammoth, Inc. Chaska, MN facility
      within the HVAC segment (see Note H)
            
            
            ---
            
            
            
            0.3Legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland within the RVP
      segment
            
            
            ---
            
            
            
            1.3Fees,
      expenses and a reserve recorded within the HTP segment in connection with
      a contemplated settlement of a dispute with one of its former
      suppliers
            
            
            4.7
            
            
            
            ---Reserve for
      amounts due from customers within the HTP and HVAC
segments
            
            
            ---
            
            
            
            2.3Product
      safety upgrade reserves within the HTP segment (see Note G)
      (2)
            
            
            ---
            
            
            
            (0.2
            )Foreign
      exchange (gains) losses related to transactions, including intercompany
      debt not indefinitely invested in the Company's
    subsidiaries
            
            
            (1.4
            )
            
            
            2.0





*
            Unless
      otherwise indicated, all items noted in the table have been recorded in
      selling, general and administrative expense, net in the accompanying
      unaudited condensed consolidated statement of
  operations.




(1)
            Approximately
      $0.3 million of these charges were recorded in cost of products sold,
      offset by a reduction in reserves in selling, general and administrative
      expense, net of approximately $0.1 million related to the closure of these
      RVP segment facilities.




(2)
            The RVP and
      HTP segments recorded these charges in cost of products
    sold.





The Company has a
management agreement with an affiliate of Thomas H. Lee Partners, L.P. providing
for certain financial and strategic advisory and consultancy
services.  Nortek expensed approximately $0.5 million and $0.6 million
for the second quarter ended June 28, 2008 and June 30, 2007, respectively, and
expensed approximately $1.0 million for each of the first six months ended June
28, 2008 and June 30, 2007, respectively, related to this management agreement
in the accompanying unaudited condensed consolidated statement of
operations.





(E)
            The Company
      is a leading diversified manufacturer of innovative, branded residential
      and commercial 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 businesses.  In the tables below,
      Unallocated includes corporate related items, intersegment eliminations
      and certain income and expense items not allocated to reportable
      segments.





The Company
evaluates segment performance based on operating earnings before allocations of
corporate overhead costs.  Intersegment net sales and intersegment
eliminations were not material for any of the periods presented.  The
financial statement impact of all purchase accounting adjustments, including
intangible asset amortization and goodwill, is reflected in the applicable
operating segment, which are the Company’s reporting units.




Unaudited net
sales, operating earnings and pre-tax earnings for the Company’s reporting
segments for the second quarter ended June 28, 2008 and June 30, 2007 were as
follows:




For the second quarter
      endedJune 28,
    2008
              
              
              June 30,
    2007(Dollar amounts in
      millions)Net sales:Residential ventilation
      products
              
              $
              187.0
              
              
              $
              206.1Home technology
      products
              
              
              131.2
              
              
              
              143.9Air conditioning and heating
      products
              
              
              328.9
              
              
              
              294.3Consolidated net
      sales
              
              $
              647.1
              
              
              $
              644.3Operating
      earnings:Residential ventilation products
      (1)
              
              $
              16.0
              
              
              $
              26.0Home technology products
      (2)
              
              
              7.8
              
              
              
              23.3Air conditioning and heating
      products (3)
              
              
              29.9
              
              
              
              22.7Subtotal
              
              
              53.7
              
              
              
              72.0Unallocated:Stock-based compensation
      charges
              
              
              (0.1
              )
              
              
              (0.1
              )Foreign exchange
      gains on transactions, including
      intercompany debt
              
              
              ---
              
              
              
              0.1Unallocated,
      net
              
              
              (6.7
              )
              
              
              (7.3
              )Consolidated
      operating earnings
              
              
              46.9
              
              
              
              64.7Interest
      expense
              
              
              (47.4
              )
              
              
              (48.7
              )Loss from debt
      retirement
              
              
              (9.9
              )
              
              
              ---Investment
      income
              
              
              0.2
              
              
              
              0.5(Loss) earnings
      before provision for income taxes
              
              $
              (10.2
              )
              
              $
              16.5


(1)
            The operating
      results of the RVP segment for the second quarter ended June 28, 2008
      include costs and expenses incurred in connection with the start up of a
      range hood facility in Mexico of approximately $1.4 million, a gain of
      approximately $2.5 million from the sale of a manufacturing facility, net
      foreign exchange gains of approximately $1.4 million related to
      transactions, including intercompany debt not indefinitely invested in the
      Company’s subsidiaries and approximately $0.2 million in net charges
      related to the closure of certain RVP segment
  facilities.





The operating
results of the RVP segment for the second quarter ended June 30, 2007 include an
approximate $0.8 million charge related to the closure of the Company’s NuTone,
Inc. Cincinnati, Ohio facility, legal and other professional fees and expenses
incurred in connection with matters related to certain subsidiaries based in
Italy and Poland of approximately $0.3 million and net foreign exchange losses
of approximately $0.7 million related to transactions, including intercompany
debt not indefinitely invested in the Company’s subsidiaries.





(2)
            The operating
      results of the HTP segment for the second quarter ended June 28, 2008
      include approximately $4.5 million of fees, expenses and a reserve
      recorded in connection with a contemplated settlement of a dispute with
      one of its former suppliers and net foreign exchange gains of
      approximately $0.2 million related to
  transactions.





The operating
results of the HTP segment for the second quarter ended June 30, 2007 include a
charge approximately $0.5 million related to a reserve for amounts due from
customers, a decrease in warranty expense of approximately $0.2 million related
to a product safety upgrade and net foreign exchange gains of approximately $0.1
million related to transactions.





(3)
            The operating
      results of the HVAC segment for the second quarter ended June 28, 2008
      include net foreign exchange losses of approximately $0.1 million related
      to transactions, including intercompany debt not indefinitely invested in
      the Company’s subsidiaries.





The operating
results of the HVAC segment for the second quarter ended June 30, 2007 include a
charge of approximately $0.3 million related to the planned closure of the
Company’s Mammoth, Inc. Chaska, Minnesota manufacturing facility and net foreign
exchange losses of approximately $1.2 million related to transactions, including
intercompany debt not indefinitely invested in the Company’s
subsidiaries.






Unaudited net
sales, operating earnings and pre-tax earnings for the Company’s reporting
segments for the first six months ended June 28, 2008 and June 30, 2007 were as
follows:




For the first six months
      endedJune 28,
    2008
              
              
              June 30,
    2007(Dollar amounts in
      millions)Net sales:Residential ventilation
      products
              
              $
              375.2
              
              
              $
              414.8Home technology
      products
              
              
              255.3
              
              
              
              267.1Air conditioning and heating
      products
              
              
              556.8
              
              
              
              514.9Consolidated net
      sales
              
              $
              1,187.3
              
              
              $
              1,196.8Operating
      earnings:Residential ventilation products
      (1)
              
              $
              31.9
              
              
              $
              51.2Home technology products
      (2)
              
              
              18.1
              
              
              
              39.8Air conditioning and heating
      products (3)
              
              
              34.6
              
              
              
              32.5Subtotal
              
              
              84.6
              
              
              
              123.5Unallocated:Stock-based compensation
      charges
              
              
              (0.1
              )
              
              
              (0.2
              )Foreign exchange
      gains on transactions, including
      intercompany debt
              
              
              0.1
              
              
              
              0.2Unallocated,
      net
              
              
              (14.3
              )
              
              
              (14.0
              )Consolidated
      operating earnings
              
              
              70.3
              
              
              
              109.5Interest
      expense
              
              
              (90.4
              )
              
              
              (91.0
              )Loss from debt
      retirement
              
              
              (9.9
              )
              
              
              ---Investment
      income
              
              
              0.4
              
              
              
              0.9(Loss) earnings
      before provision for income taxes
              
              $
              (29.6
              )
              
              $
              19.4





(1)
            The operating
      results of the RVP segment for the first six months ended June 28, 2008
      include costs and expenses incurred in connection with the start up of a
      range hood facility in Mexico of approximately $1.4 million, a gain of
      approximately $2.5 million from the sale of a manufacturing facility, net
      foreign exchange gains of approximately $0.9 million related to
      transactions, including intercompany debt not indefinitely invested in the
      Company’s subsidiaries and approximately $0.2 million in net charges
      related to the closure of certain RVP segment
  facilities.





The operating
results of the RVP segment for the first six months ended June 30, 2007 include
an approximate $1.4 million charge related to the closure of the Company’s
NuTone, Inc. Cincinnati, Ohio facility, legal and other professional fees and
expenses incurred in connection with matters related to certain subsidiaries
based in Italy and Poland of approximately $1.3 million and net foreign exchange
losses of approximately $0.9 million related to transactions, including
intercompany debt not indefinitely invested in the Company’s
subsidiaries.





(2)
            The operating
      results of the HTP segment for the first six months ended June 28, 2008
      include approximately $4.7 million of fees, expenses and a reserve
      recorded in connection with a contemplated settlement of a dispute with
      one of its former suppliers and net foreign exchange gains of
      approximately $0.2 million related to
  transactions.





The operating
results of the HTP segment for the first six months ended June 30, 2007 include
a charge approximately $0.5 million related to a reserve for amounts due from
customers, a decrease in warranty expense of approximately $0.2 million related
to a product safety upgrade and net foreign exchange gains of approximately $0.1
million related to transactions.





(3)
            The operating
      results of the HVAC segment for the first six months ended June 28, 2008
      include net foreign exchange gains of approximately $0.2 million related
      to transactions, including intercompany debt not indefinitely invested in
      the Company’s subsidiaries.





The operating
results of the HVAC segment for the first six months ended June 30, 2007 include
a charge of approximately $0.3 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 a reserve for amounts due from customers
and net foreign exchange losses of approximately $1.4 million related to
transactions, including intercompany debt not indefinitely invested in the
Company’s subsidiaries.






Unaudited
depreciation expense, amortization expense and capital expenditures for the
Company’s reporting segments for the second quarter ended June 28, 2008 and June
30, 2007 were as follows:




For the second quarter
      endedJune 28,
    2008
              
              
              June 30,
    2007(Dollar amounts in
      millions)Depreciation
      Expense:Residential ventilation
      products
              
              $
              4.1
              
              
              $
              4.1Home technology
      products
              
              
              1.6
              
              
              
              1.4Air conditioning and heating
      products
              
              
              4.4
              
              
              
              4.5Other
              
              
              0.1
              
              
              
              0.1Consolidated
      depreciation expense
              
              $
              10.2
              
              
              $
              10.1Amortization
      expense:Residential ventilation
      products
              
              $
              3.4
              
              
              $
              1.3Home technology
      products
              
              
              3.3
              
              
              
              3.2Air conditioning and heating
      products
              
              
              1.5
              
              
              
              1.8Other
              
              
              0.2
              
              
              
              0.1Consolidated
      amortization expense
              
              $
              8.4
              
              
              $
              6.4Capital
      Expenditures:Residential ventilation
      products
              
              $
              3.3
              
              
              $
              3.3Home technology
      products
              
              
              0.7
              
              
              
              1.4Air conditioning and heating
      products
              
              
              4.6
              
              
              
              2.6Consolidated capital
      expenditures
              
              $
              8.6
              
              
              $
              7.3


Unaudited
depreciation expense, amortization expense and capital expenditures for the
Company’s reporting segments for the first six months ended June 28, 2008 and
June 30, 2007 were as follows:




For the first six months
      endedJune 28,
    2008
              
              
              June 30,
    2007(Dollar amounts in
      millions)Depreciation
      Expense:Residential ventilation
      products
              
              $
              8.3
              
              
              $
              7.1Home technology
      products
              
              
              3.2
              
              
              
              2.7Air conditioning and heating
      products
              
              
              9.1
              
              
              
              8.6Other
              
              
              0.3
              
              
              
              0.3Consolidated
      depreciation expense
              
              $
              20.9
              
              
              $
              18.7Amortization
      expense:Residential ventilation
      products
              
              $
              5.3
              
              
              $
              2.6Home technology
      products
              
              
              6.6
              
              
              
              5.9Air conditioning and heating
      products
              
              
              2.9
              
              
              
              3.7Other
              
              
              0.3
              
              
              
              0.2Consolidated
      amortization expense
              
              $
              15.1
              
              
              $
              12.4Capital
      Expenditures:Residential ventilation
      products
              
              $
              7.4
              
              
              $
              5.7Home technology
      products
              
              
              1.5
              
              
              
              2.6Air conditioning and heating
      products
              
              
              7.0
              
              
              
              5.8Consolidated capital
      expenditures
              
              $
              15.9
              
              
              $
              14.1




(F)
            The Company
      provided income taxes on an interim basis based upon the effective tax
      rate through June 28, 2008.  The following reconciles the
      federal statutory income tax rate to the effective tax rate of
      approximately (94.3)% and 56.2% for the first six months ended June 28,
      2008 and June 30, 2007:





For the first six months
    endedJune 28, 2008
            
            
            June 30, 2007Income tax at
      the federal statutory rate
            
            
            35.0
            %
            
            
            35.0
            %Net change
      from federal statutory rate:Interest
      related to uncertain tax positions, net of federal income tax
      effect
            
            
            (4.1
            )
            
            
            5.8State income
      tax provision, net of federalincome tax
      effect
            
            
            (6.1
            )
            
            
            5.1Tax effect
      resulting from foreign activities
            
            
            (0.6
            )
            
            
            7.9Non-deductible
      expenses
            
            
            (1.8
            )
            
            
            1.5Increase in
      valuation allowance related to deferred tax assets
            
            
            (116.3
            )
            
            
            ---Other,
      net
            
            
            (0.4
            )
            
            
            0.9Income tax at
      effective rate
            
            
            (94.3
            )%
            
            
            56.2
            %






During the second
quarter ended June 28, 2008, the Company evaluated the realizability of its
domestic deferred tax assets as a result of recent economic conditions, the
Company’s recent operating results and the Company’s revised forecast, including
the increase in future interest expense as a result of the May 2008
Transactions.  As a result of this analysis, the Company established a
valuation allowance of approximately $17.0 million against domestic deferred tax
assets in existence as of December 31, 2007.  In addition, for the
first six months ended June 28, 2008, the Company recorded a valuation allowance
against certain tax assets related to domestic operating losses generated in the
period of approximately $17.4 million.  In assessing the need for a
valuation allowance, the Company has assessed the available means of recovering
its deferred tax assets, including the ability to carry back net operating
losses, available deferred tax liabilities, tax planning strategies and
projections of future taxable income.  The Company has concluded that
it is more likely than not, based upon all available evidence, that a valuation
allowance is required for substantially all of its net domestic deferred tax
assets.
 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,
2008, the Company had provided a liability of approximately $36.3 million for
unrecognized tax benefits related to various federal, foreign and state tax
income tax matters.  The amount of unrecognized tax benefits at June
28, 2008 was approximately $41.4 million.  The amount of unrecognized
tax benefits that impact the effective tax rate, if recognized, is approximately
$19.0 million.  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 $8.0 million and items that, if recognized prior to January
1, 2009 (see Note A for SFAS No. 141(R) discussion) and would result in
adjustments to goodwill of approximately $14.4 million.
 
 As of June 28,
2008, the Company has approximately $4.1 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
$3.1 million will reduce goodwill if recognized.
 
 The Company is
currently under audit by the Internal Revenue Service for the tax periods from
January 1, 2004 to August 27, 2004 and from August 28, 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,
2008, the Company had accrued approximately $6.1 million of interest related to
uncertain tax positions.  As of June 28, 2008, the total amount of
accrued interest related to uncertain tax positions is approximately $7.9
million.  The Company accounts for interest and penalties related to
uncertain tax positions as part of its provision for federal and state
taxes.


(G)
            At June 28,
      2008, the Company’s former subsidiary, Ply Gem, has guaranteed
      approximately $18.3 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 June 28, 2008 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 $11.0 million and $11.1
million at June 28, 2008 and December 31, 2007,
respectively.  Approximately $5.0 million of short-term liabilities
and approximately $6.0 million of long-term liabilities are recorded in accrued
expenses and other long-term liabilities, respectively, in the accompanying
unaudited condensed consolidated balance sheet at June 28, 2008 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 $58.5
million of recorded insurance liabilities at June 28, 2008 relate to product
liability accruals of approximately $37.9 million.





Changes in the Company’s combined
short-term and long-term product liability accruals during the second quarter
ended June 28, 2008 and June 30, 2007 are as follows:





For the second quarter
      endedJune 28,
    2008
            
            
            June 30,
    2007(Amounts in
      millions)Balance, beginning of the
      period
            
            $
            35.8
            
            
            $
            29.6Provision during the
      period
            
            
            3.3
            
            
            
            2.3Payments made during the
      period
            
            
            (1.4
            )
            
            
            (1.9
            )Other
      adjustments
            
            
            0.2
            
            
            
            0.7Balance, end of the
      period
            
            $
            37.9
            
            
            $
            30.7





Changes in the Company’s combined
short-term and long-term product liability accruals during the first six months
ended June 28, 2008 and June 30, 2007 are as follows:





For the first six months
      endedJune 28,
    2008
            
            
            June 30,
    2007(Amounts in
      millions)Balance, beginning of the
      period
            
            $
            35.0
            
            
            $
            27.8Provision during the
      period
            
            
            6.2
            
            
            
            5.6Payments made during the
      period
            
            
            (3.5
            )
            
            
            (3.5
            )Other
      adjustments
            
            
            0.2
            
            
            
            0.8Balance, end of the
      period
            
            $
            37.9
            
            
            $
            30.7





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 accruals during the second
quarter ended June 28, 2008 and June 30, 2007 are as follows:





For the second quarter
      endedJune 28,
    2008
            
            
            June 30,
    2007(Amounts in
      millions)Balance, beginning of the
      period
            
            $
            48.7
            
            
            $
            41.5Warranties provided during the
      period
            
            
            8.7
            
            
            
            7.8Settlements made during the
      period
            
            
            (7.4
            )
            
            
            (7.0
            )Changes in liability estimate,
      including expirations and acquisitions
            
            
            0.6
            
            
            
            1.1Balance, end of the
      period
            
            $
            50.6
            
            
            $
            43.4







Changes in the
Company’s combined short-term and long-term warranty accruals during the first
six months ended June 28, 2008 and June 30, 2007 are as follows:





For the first six months
      endedJune 28,
    2008
            
            
            June 30,
    2007(Amounts in
      millions)Balance, beginning of the
      period
            
            $
            47.3
            
            
            $
            41.2Warranties provided during the
      period
            
            
            16.0
            
            
            
            13.3Settlements made during the
      period
            
            
            (13.9
            )
            
            
            (12.6
            )Changes in liability estimate,
      including expirations and acquisitions
            
            
            1.2
            
            
            
            1.5Balance, end of the
      period
            
            $
            50.6
            
            
            $
            43.4







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.





During the second
quarter and first six months ended June 28, 2008, the Company recorded
approximately $4.5 million and $4.7 million, respectively, of fees, expenses and
a reserve recorded within the HTP segment in connection with a contemplated
settlement of a dispute with one of its former suppliers.




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.





(H)
            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.





During the second
quarter and first six months ended June 30, 2007, the Company recorded
liabilities and expensed into selling, general and administrative expense, net
approximately $0.8 million and $1.4 million, respectively, in the accompanying
unaudited condensed 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.  The Company does not anticipate recording any further
expenses associated with this shutdown during 2008.





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 expensed to selling, general and
administrative expense, net related to the severance paid to the union
employees.  It is estimated that an additional approximate $0.8
million will be expensed in 2008 related to this shutdown, none of which was
incurred during the first six months ended June 28, 2008.





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 made to 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 second quarter of 2008, the Company
recorded a reduction to this reserve of approximately $0.1 million to selling,
general and administrative expense, net.





During the second
quarter ended June 28, 2008, the Company recorded liabilities and expensed into
cost of products sold approximately $0.3 million in the accompanying unaudited
condensed consolidated statement of operations related to the closure of its
Aubrey Manufacturing, Inc. Union, IL facility and the relocation of such
operations to certain other subsidiaries of the Company within the RVP
segment.  It is anticipated that the Aubrey facility will be shutdown
during the fourth quarter of 2008 and approximately 115 employees will be
terminated.  The Company anticipates recording additional expenses
related to severance associated with this shutdown of approximately $0.4 million
during the remainder of 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
      Separation Expenses
            
            
            Other
            
            
            Total
              Restructuring
              Costs(Dollar
      amounts in millions)Balance
      at December 31, 2007
            
            $
            1.6
            
            
            $
            1.0
            
            
            $
            2.6Payments and
      asset write downs
            
            
            (1.1
            )
            
            
            (0.3
            )
            
            
            (1.4
            )Other
            
            
            (0.1
            )
            
            
            0.1
            
            
            
            ---Balance
      at March 29, 2008
            
            
            0.4
            
            
            
            0.8
            
            
            
            1.2Provision
            
            
            0.4
            
            
            
            (0.1
            )
            
            
            0.3Payments and
      asset write downs
            
            
            (0.4
            )
            
            
            (0.3
            )
            
            
            (0.7
            )Balance
      at June 28, 2008
            
            $
            0.4
            
            
            $
            0.4
            
            
            $
            0.8







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.





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





Pension and profit sharing expense
charged to operations aggregated approximately $1.9 million and $2.0 million for
the second quarter ended June 28, 2008 and June 30, 2007, respectively and
aggregated approximately $3.5 million and $4.4 million for the first six months
ended June 28, 2008 and June 30, 2007, respectively.





The Company’s policy is to generally
fund currently at least the minimum required annual contribution of its various
qualified defined benefit plans.  At June 28, 2008, the Company
estimated that approximately $3.3 million would be contributed to the Company’s
defined benefit pension plans in 2008, of which approximately $1.4 million was
made through the first six months of 2008.  The Company estimates that
approximately $1.0 million will be paid in the third quarter of 2008 and
approximately $0.9 million will be paid in the fourth quarter of
2008.




The Company’s
unaudited net periodic benefit (income) cost for its defined benefit plans for
the second quarter ended June 28, 2008 and June 30, 2007 consists of the
following components:





For the second quarter
endedJune 28, 2008
            
            
            June 30, 2007(Dollar
      amounts in millions)Service
      cost
            
            $
            0.2
            
            
            $
            0.2Interest
      cost
            
            
            3.4
            
            
            
            2.4Expected
      return on plan assets
            
            
            (3.7
            )
            
            
            (2.5
            )Net periodic
      benefit (income) cost
            
            $
            (0.1
            )
            
            $
            0.1







The Company’s
unaudited net periodic benefit (income) cost for its defined benefit plans for
the first six months ended June 28, 2008 and June 30, 2007 consists of the
following components:





For the first six months
    endedJune 28, 2008
            
            
            June 30, 2007(Dollar
      amounts in millions)Service
      cost
            
            $
            0.3
            
            
            $
            0.3Interest
      cost
            
            
            5.9
            
            
            
            4.8Expected
      return on plan assets
            
            
            (6.4
            )
            
            
            (5.0
            )Net periodic
      benefit (income) cost
            
            $
            (0.2
            )
            
            $
            0.1







The Company’s
unaudited net periodic benefit cost for its subsidiary’s Post-Retirement Health
Benefit Plan for the second quarter ended June 28, 2008 and June 30, 2007
consists of the following components:





For the second quarter
endedJune 28, 2008
            
            
            June 30, 2007(Dollar
      amounts in millions)Interest
      cost
            
            $
            0.1
            
            
            $
            ---Net periodic
      post-retirement health cost
            
            $
            0.1
            
            
            $
            ---





The Company’s
unaudited net periodic benefit cost for its subsidiary’s Post-Retirement Health
Benefit Plan for the first six months ended June 28, 2008 and June 30, 2007
consists of the following components:





For the first six months
    endedJune 28, 2008
            
            
            June 30, 2007(Dollar
      amounts in millions)Interest
      cost
            
            $
            0.2
            
            
            $
            0.1Net periodic
      post-retirement health cost
            
            $
            0.2
            
            
            $
            0.1









NTK HOLDINGS, INC. AND
SUBSIDIARIES
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 OF
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SECOND QUARTER AND FIRST SIX MONTHS ENDED JUNE 28, 2008
 AND
THE SECOND QUARTER AND FIRST SIX MONTHS ENDED JUNE 30,
2007





Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





NTK Holdings, Inc.
and its wholly-owned subsidiaries (individually and collectively the “Company”
or “NTK Holdings”) are leading diversified global manufacturers 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 (“DIY”)
market.





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.





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 this 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 this 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,


·
            lighting and
      home automation controls, and


·
            structured
      wiring.





The Air
Conditioning and Heating Products segment manufactures and sells heating,
ventilating and air conditioning systems for site-built residential and
manufactured housing structures, custom-designed commercial applications and
standard light commercial products.  The principal products sold by
this segment include:





·
            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 and others, the Company has incurred a significant amount of
indebtedness.  For further discussion, see “Liquidity and Capital
Resources”.





Financial
Statement Presentation





The unaudited condensed consolidated
financial statements presented herein (the “Unaudited Financial Statements”)
reflect the financial position, results of operations and cash flows of NTK
Holdings, Inc. and all of its wholly-owned subsidiaries.





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, 2007:





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 theater, 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.
            HTP






Critical
Accounting Policies





The Company’s
discussion and analysis of its financial condition and results of operations are
based upon the Company’s Unaudited Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States.  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.  The Company’s critical accounting policies
include:





·
            Revenue
      Recognition, Accounts Receivable and Related
  Expenses


·
            Inventory
      Valuation


·
            Income
      Taxes


·
            Goodwill and
      Other Long-Lived Assets


·
            Pensions and
      Post-Retirement Health Benefits


·
            Warranty,
      Product Recalls and Safety Upgrades


·
            Insurance
      Liabilities, including Product Liability,
and


·
            Contingencies





Further detail
regarding the Company’s critical accounting policies can be found in the
consolidated financial statements and the notes included in the Company’s latest
annual report on Form 10-K as filed with the Securities and Exchange Commission
(“SEC”).





The “Results of
Operations” and “Liquidity and Capital Resources” sections which follow contain
various tables that are intended to assist the reader in reconciling current
results with the prior period.




Results
of Operations





The following table
presents the financial information for the Company’s reporting segments for the
second quarter ended June 28, 2008 and June 30, 2007:





For the second quarter
      ended
              
              
              Net
  ChangeJune 28,
    2008
              
              
              June 30,
    2007
              
              
              $
              
              
              
              %(Dollar amounts in
      millions)Net sales:Residential ventilation
      products
              
              $
              187.0
              
              
              $
              206.1
              
              
              $
              (19.1
              )
              
              
              (9.3
              )
      %Home technology
      products
              
              
              131.2
              
              
              
              143.9
              
              
              
              (12.7
              )
              
              
              (8.8
              )Air conditioning and heating
      products
              
              
              328.9
              
              
              
              294.3
              
              
              
              34.6
              
              
              
              11.8Consolidated net
      sales
              
              $
              647.1
              
              
              $
              644.3
              
              
              $
              2.8
              
              
              
              0.4
              %Operating
      earnings:Residential ventilation products
      (1)
              
              $
              16.0
              
              
              $
              26.0
              
              
              $
              (10.0
              )
              
              
              (38.5
              )
      %Home technology products
      (2)
              
              
              7.8
              
              
              
              23.3
              
              
              
              (15.5
              )
              
              
              (66.5
              )Air conditioning and heating
      products (3)
              
              
              29.9
              
              
              
              22.7
              
              
              
              7.2
              
              
              
              31.7Subtotal
              
              
              53.7
              
              
              
              72.0
              
              
              
              (18.3
              )
              
              
              (25.4
              )Unallocated:Stock-based compensation
      charges
              
              
              (0.1
              )
              
              
              (0.1
              )
              
              
              ---
              
              
              
              ---Foreign exchange
      gains on transactions, including
      intercompany debt
              
              
              ---
              
              
              
              0.1
              
              
              
              (0.1
              )
              
              
              (100.0
              )Unallocated,
      net
              
              
              (6.7
              )
              
              
              (7.3
              )
              
              
              0.6
              
              
              
              8.2Consolidated
      operating earnings
              
              $
              46.9
              
              
              $
              64.7
              
              
              $
              (17.8
              )
              
              
              (27.5
              )
      %Depreciation and amortization
      expense:Residential ventilation
      products
              
              $
              7.5
              
              
              $
              5.4
              
              
              $
              2.1
              
              
              
              38.9
              %Home technology
      products
              
              
              4.9
              
              
              
              4.6
              
              
              
              0.3
              
              
              
              6.5Air conditioning and heating
      products
              
              
              5.9
              
              
              
              6.3
              
              
              
              (0.4
              )
              
              
              (6.3
              )Unallocated
              
              
              0.3
              
              
              
              0.2
              
              
              
              0.1
              
              
              
              50.0$
              18.6
              
              
              $
              16.5
              
              
              $
              2.1
              
              
              
              12.7
              %Operating earnings
      margin:Residential ventilation products
      (1)
              
              
              8.6
              %
              
              
              12.6
              %Home technology products
      (2)
              
              
              5.9
              
              
              
              16.2Air conditioning and heating
      products (3)
              
              
              9.1
              
              
              
              7.7Consolidated
              
              
              7.2
              
              
              
              10.0Depreciation
      and amortization expense as a %
      of net sales:Residential ventilation
      products
              
              
              4.0
              %
              
              
              2.6
              %Home technology
      products
              
              
              3.7
              
              
              
              3.2Air conditioning and heating
      products
              
              
              1.8
              
              
              
              2.1Consolidated
              
              
              2.9
              
              
              
              2.6







(1)
              The operating
      results of the RVP segment for the second quarter ended June 28, 2008
      include costs and expenses incurred in connection with the start up of a
      range hood facility in Mexico of approximately $1.4 million, a gain of
      approximately $2.5 million from the sale of a manufacturing facility, net
      foreign exchange gains of approximately $1.4 million related to
      transactions, including intercompany debt not indefinitely invested in the
      Company’s subsidiaries and approximately $0.2 million in net charges
      related to the closure of certain RVP segment
  facilities.


The operating
results of the RVP segment for the second quarter ended June 30, 2007 include an
approximate $0.8 million charge related to the closure of the Company’s NuTone,
Inc. Cincinnati, Ohio facility, legal and other professional fees and expenses
incurred in connection with matters related to certain subsidiaries based in
Italy and Poland of approximately $0.3 million and net foreign exchange losses
of approximately $0.7 million related to transactions, including intercompany
debt not indefinitely invested in the Company’s subsidiaries.





(2)
            The operating
      results of the HTP segment for the second quarter ended June 28, 2008
      include approximately $4.5 million of fees, expenses and a reserve
      recorded in connection with a contemplated settlement of a dispute with
      one of its former suppliers and net foreign exchange gains of
      approximately $0.2 million related to
  transactions.





The operating
results of the HTP segment for the second quarter ended June 30, 2007 include a
charge approximately $0.5 million related to a reserve for amounts due from
customers, a decrease in warranty expense of approximately $0.2 million related
to a product safety upgrade and net foreign exchange gains of approximately $0.1
million related to transactions.





(3)
            The operating
      results of the HVAC segment for the second quarter ended June 28, 2008
      include net foreign exchange losses of approximately $0.1 million related
      to transactions, including intercompany debt not indefinitely invested in
      the Company’s subsidiaries.





The operating
results of the HVAC segment for the second quarter ended June 30, 2007 include a
charge of approximately $0.3 million related to the planned closure of the
Company’s Mammoth, Inc. Chaska, Minnesota manufacturing facility and net foreign
exchange losses of approximately $1.2 million related to transactions, including
intercompany debt not indefinitely invested in the Company’s
subsidiaries.






The following table
presents the financial information for the Company’s reporting segments for the
first six months ended June 28, 2008 and June 30, 2007:





For the first six months
      ended
              
              
              Net
  ChangeJune 28,
    2008
              
              
              June 30,
    2007
              
              
              $
              
              
              
              %(Dollar amounts in
      millions)Net sales:Residential ventilation
      products
              
              $
              375.2
              
              
              $
              414.8
              
              
              $
              (39.6
              )
              
              
              (9.5
              )
      %Home technology
      products
              
              
              255.3
              
              
              
              267.1
              
              
              
              (11.8
              )
              
              
              (4.4
              )Air conditioning and heating
      products
              
              
              556.8
              
              
              
              514.9
              
              
              
              41.9
              
              
              
              8.1Consolidated net
      sales
              
              $
              1,187.3
              
              
              $
              1,196.8
              
              
              $
              (9.5
              )
              
              
              (0.8
              )
      %Operating
      earnings:Residential ventilation products
      (1)
              
              $
              31.9
              
              
              $
              51.2
              
              
              $
              (19.3
              )
              
              
              (37.7
              )
      %Home technology products
      (2)
              
              
              18.1
              
              
              
              39.8
              
              
              
              (21.7
              )
              
              
              (54.5
              )Air conditioning and heating
      products (3)
              
              
              34.6
              
              
              
              32.5
              
              
              
              2.1
              
              
              
              6.5Subtotal
              
              
              84.6
              
              
              
              123.5
              
              
              
              (38.9
              )
              
              
              (31.5
              )Unallocated:Stock-based compensation
      charges
              
              
              (0.1
              )
              
              
              (0.2
              )
              
              
              0.1
              
              
              
              50.0Foreign exchange
      gains on transactions, including
      intercompany debt
              
              
              0.1
              
              
              
              0.2
              
              
              
              (0.1
              )
              
              
              (50.0
              )Unallocated,
      net
              
              
              (14.3
              )
              
              
              (14.0
              )
              
              
              (0.3
              )
              
              
              (2.1
              )Consolidated
      operating earnings
              
              $
              70.3
              
              
              $
              109.5
              
              
              $
              (39.2
              )
              
              
              (35.8
              )
      %Depreciation and amortization
      expense:Residential ventilation
      products
              
              $
              13.6
              
              
              $
              9.7
              
              
              $
              3.9
              
              
              
              40.2
              %Home technology
      products
              
              
              9.8
              
              
              
              8.6
              
              
              
              1.2
              
              
              
              14.0Air conditioning and heating
      products
              
              
              12.0
              
              
              
              12.3
              
              
              
              (0.3
              )
              
              
              (2.4
              )Unallocated
              
              
              0.6
              
              
              
              0.5
              
              
              
              0.1
              
              
              
              20.0$
              36.0
              
              
              $
              31.1
              
              
              $
              4.9
              
              
              
              15.8
              %Operating earnings
      margin:Residential ventilation products
      (1)
              
              
              8.5
              %
              
              
              12.3
              %Home technology products
      (2)
              
              
              7.1
              
              
              
              14.9Air conditioning and heating
      products (3)
              
              
              6.2
              
              
              
              6.3Consolidated
              
              
              5.9
              
              
              
              9.2Depreciation
      and amortization expense as a %
      of net sales:Residential ventilation
      products
              
              
              3.6
              %
              
              
              2.3
              %Home technology
      products
              
              
              3.8
              
              
              
              3.2Air conditioning and heating
      products
              
              
              2.2
              
              
              
              2.4Consolidated
              
              
              3.0
              
              
              
              2.6






(1)
              The operating
      results of the RVP segment for the first six months ended June 28, 2008
      include costs and expenses incurred in connection with the start up of a
      range hood facility in Mexico of approximately $1.4 million, a gain of
      approximately $2.5 million from the sale of a manufacturing facility, net
      foreign exchange gains of approximately $0.9 million related to
      transactions, including intercompany debt not indefinitely invested in the
      Company’s subsidiaries and approximately $0.2 million in net charges
      related to the closure of certain RVP segment
  facilities.




The operating
results of the RVP segment for the first six months ended June 30, 2007 include
an approximate $1.4 million charge related to the closure of the Company’s
NuTone, Inc. Cincinnati, Ohio facility, legal and other professional fees and
expenses incurred in connection with matters related to certain subsidiaries
based in Italy and Poland of approximately $1.3 million and net foreign exchange
losses of approximately $0.9 million related to transactions, including
intercompany debt not indefinitely invested in the Company’s
subsidiaries.





(2)
            The operating
      results of the HTP segment for the first six months ended June 28, 2008
      include approximately $4.7 million of fees, expenses and a reserve
      recorded in connection with a contemplated settlement of a dispute with
      one of its former suppliers and net foreign exchange gains of
      approximately $0.2 million related to
  transactions.





The operating
results of the HTP segment for the first six months ended June 30, 2007 include
a charge approximately $0.5 million related to a reserve for amounts due from
customers, a decrease in warranty expense of approximately $0.2 million related
to a product safety upgrade and net foreign exchange gains of approximately $0.1
million related to transactions.





(3)
            The operating
      results of the HVAC segment for the first six months ended June 28, 2008
      include net foreign exchange gains of approximately $0.2 million related
      to transactions, including intercompany debt not indefinitely invested in
      the Company’s subsidiaries.





The operating
results of the HVAC segment for the first six months ended June 30, 2007 include
a charge of approximately $0.3 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 a reserve for amounts due from customers
and net foreign exchange losses of approximately $1.4 million related to
transactions, including intercompany debt not indefinitely invested in the
Company’s subsidiaries.








The following table
presents the financial information for the second quarter ended June 28, 2008
and June 30, 2007.  The results of operations for the second quarter
ended June 28, 2008 are not necessarily indicative of the results of operations
to be expected for any other interim period or the full year.




Change in earnings
      inthe second quarter of
      2008as compared to
      theFor the second quarter
      ended
              
              
              second quarter of
      2007June 28,
    2008
              
              
              June 30,
    2007
              
              
              $
              
              
              
              %(Dollar amounts in
      millions)Net sales
              
              $
              647.1
              
              
              $
              644.3
              
              
              $
              2.8
              
              
              
              0.4
              %Cost of products
      sold
              
              
              473.3
              
              
              
              452.1
              
              
              
              (21.2
              )
              
              
              (4.7
              )Selling, general and
      administrative expense, net
              
              
              118.5
              
              
              
              121.1
              
              
              
              2.6
              
              
              
              2.1Amortization of intangible
      assets
              
              
              8.4
              
              
              
              6.4
              
              
              
              (2.0
              )
              
              
              (31.3
              )Operating
      earnings
              
              
              46.9
              
              
              
              64.7
              
              
              
              (17.8
              )
              
              
              (27.5
              )Interest
      expense
              
              
              (47.4
              )
              
              
              (48.7
              )
              
              
              1.3
              
              
              
              2.7Loss from debt
      retirement
              
              
              (9.9
              )
              
              
              ---
              
              
              
              (9.9
              )
              
              
              *Investment
      income
              
              
              0.2
              
              
              
              0.5
              
              
              
              (0.3
              )
              
              
              (60.0
              )(Loss) earnings before provision
      for income taxes
              
              
              (10.2
              )
              
              
              16.5
              
              
              
              (26.7
              )
              
              
              *Provision for income
      taxes
              
              
              33.3
              
              
              
              9.2
              
              
              
              (24.1
              )
              
              
              *Net (loss)
      earnings
              
              $
              (43.5
              )
              
              $
              7.3
              
              
              $
              (50.8
              )
              
              
              *
              %


Change in percentage
      forPercentage of net sales
      for
              
              
              the second quarter of
      2008the second quarter
      ended
              
              
              as compared to
      theJune 28,
    2008
              
              
              June 30,
    2007
              
              
              second quarter of
      2007Net sales
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              ---
              %Cost of products
      sold
              
              
              73.2
              
              
              
              70.2
              
              
              
              (3.0
              )Selling, general and
      administrative expense, net
              
              
              18.3
              
              
              
              18.8
              
              
              
              0.5Amortization of intangible
      assets
              
              
              1.3
              
              
              
              1.0
              
              
              
              (0.3
              )Operating
      earnings
              
              
              7.2
              
              
              
              10.0
              
              
              
              (2.8
              )Interest
      expense
              
              
              (7.3
              )
              
              
              (7.6
              )
              
              
              0.3Loss from debt
      retirement
              
              
              (1.5
              )
              
              
              ---
              
              
              
              (1.5
              )Investment
      income
              
              
              ---
              
              
              
              0.1
              
              
              
              (0.1
              )(Loss) earnings before provision
      for income taxes
              
              
              (1.6
              )
              
              
              2.5
              
              
              
              (4.1
              )Provision for income
      taxes
              
              
              5.1
              
              
              
              1.4
              
              
              
              (3.7
              )Net (loss)
      earnings
              
              
              (6.7
              )
      %
              
              
              1.1
              %
              
              
              (7.8
              )
       %




(1)
            See Note D of
      the Notes to the Unaudited Financial Statements included elsewhere
      herein.





*
            not
      meaningful or not applicable








The following table
presents the financial information for the first six months ended June 28, 2008
and June 30, 2007.  The results of operations for the first six months
ended June 28, 2008 are not necessarily indicative of the results of operations
to be expected for any other interim period or the full year.




Change in earnings
      inthe first six months of
      2008as compared to
      theFor the first six months
      ended
              
              
              first six months of
      2007June 28,
    2008
              
              
              June 30,
    2007
              
              
              $
              
              
              
              %(Dollar amounts in
      millions)Net sales
              
              $
              1,187.3
              
              
              $
              1,196.8
              
              
              $
              (9.5
              )
              
              
              (0.8
              )
      %Cost of products
      sold
              
              
              864.9
              
              
              
              836.7
              
              
              
              (28.2
              )
              
              
              (3.4
              )Selling, general and
      administrative expense, net
              
              
              237.0
              
              
              
              238.2
              
              
              
              1.2
              
              
              
              0.5Amortization of intangible
      assets
              
              
              15.1
              
              
              
              12.4
              
              
              
              (2.7
              )
              
              
              (21.8
              )Operating
      earnings
              
              
              70.3
              
              
              
              109.5
              
              
              
              (39.2
              )
              
              
              (35.8
              )Interest
      expense
              
              
              (90.4
              )
              
              
              (91.0
              )
              
              
              0.6
              
              
              
              0.7Loss from debt
      retirement
              
              
              (9.9
              )
              
              
              ---
              
              
              
              (9.9
              )
              
              
              *Investment
      income
              
              
              0.4
              
              
              
              0.9
              
              
              
              (0.5
              )
              
              
              (55.6
              )(Loss) earnings before provision
      for income taxes
              
              
              (29.6
              )
              
              
              19.4
              
              
              
              (49.0
              )
              
              
              *Provision for income
      taxes
              
              
              27.9
              
              
              
              10.9
              
              
              
              (17.0
              )
              
              
              *Net (loss)
      earnings
              
              $
              (57.5
              )
              
              $
              8.5
              
              
              $
              (66.0
              )
              
              
              *
              %
  Change in percentage
      forPercentage of net sales
      for
              
              
              the first six months of
      2008the first six months
      ended
              
              
              as compared to
      theJune 28,
    2008
              
              
              June 30,
    2007
              
              
              first six months of
      2007Net sales
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              ---
              %Cost of products
      sold
              
              
              72.8
              
              
              
              69.9
              
              
              
              (2.9
              )Selling, general and
      administrative expense, net
              
              
              20.0
              
              
              
              19.9
              
              
              
              (0.1
              )Amortization of intangible
      assets
              
              
              1.3
              
              
              
              1.0
              
              
              
              (0.3
              )Operating
      earnings
              
              
              5.9
              
              
              
              9.2
              
              
              
              (3.3
              )Interest
      expense
              
              
              (7.6
              )
              
              
              (7.6
              )
              
              
              ---Loss from debt
      retirement
              
              
              (0.8
              )
              
              
              ---
              
              
              
              (0.8
              )Investment
      income
              
              
              ---
              
              
              
              0.1
              
              
              
              (0.1
              )(Loss) earnings before provision
      for income taxes
              
              
              (2.5
              )
              
              
              1.7
              
              
              
              (4.2
              )Provision for income
      taxes
              
              
              2.3
              
              
              
              1.0
              
              
              
              (1.3
              )Net (loss)
      earnings
              
              
              (4.8
              )
      %
              
              
              0.7
              %
              
              
              (5.5
              )
       %




(1)
            See Note D of
      the Notes to the Unaudited Financial Statements included elsewhere
      herein.





*
            not
      meaningful or not applicable








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 changes in foreign currency exchange rates, the
operating results of the Company were adversely impacted in the second quarter
and first six months of 2008 by a decline in sales volume in residential
ventilation and home technology products as the housing market continued to
weaken.  The results of operations for the second quarter and first
six months ended June 28, 2008 are not necessarily indicative of the results of
operations to be expected for any other interim period or the full
year.  The demand for certain of the Company’s products is seasonal,
particularly in the Northeast and Midwest regions of the United States where
inclement weather during winter months usually reduces the level of building and
remodeling activity in both home improvement and new construction markets,
thereby reducing the Company’s sales levels during the first and fourth
quarters.  Despite the current volatile operating environment, the
Company has certain new business prospects for 2008 and expects such prospects
will contribute positively to earnings, as discussed further
below.  An overall decline in sales volume and higher material and
transportation costs (which were partially offset by continued strategic
sourcing initiatives as well as sales price increases) also adversely impacted
the second quarter and first six months ended June 28, 2008.  The
Company believes that declines in existing home sales, the instability in the
troubled mortgage market and rising energy prices will have a negative impact on
consumer disposable income and spending on home remodeling and repair
expenditures through 2009, which will have an adverse effect on the Company’s
operating results.
 
 Net
Sales.Consolidated net sales increased approximately $2.8
million or 0.4% for the second quarter ended June 28, 2008 as compared to the
second quarter ended June 30, 2007 and decreased approximately $9.5 million or
0.8% for the first six months ended June 28, 2008 as compared to the first six
months ended June 30, 2007 as discussed further in the following
paragraphs.  The effect of changes in foreign currency exchange rates
and acquisitions contributed approximately $10.3 million and $8.4 million,
respectively, to net sales for the second quarter ended June 28, 2008 and
contributed approximately $22.3 million and $19.6 million, respectively, to net
sales for the first six months ended June 28, 2008.  Excluding the
effect of changes in foreign currency exchange rates and acquisitions,
consolidated net sales decreased approximately $15.9 million and $51.4 million
in the second quarter and first six months ended June 28, 2008,
respectively.
 
 In the RVP segment,
net sales decreased approximately $19.1 million or 9.3% for the second quarter
ended June 28, 2008 as compared to the second quarter ended June 30, 2007 and
decreased approximately $39.6 million or 9.5% for the first six months ended
June 28, 2008 as compared to the first six months ended June 30,
2007.  Net sales in the RVP segment for the second quarter and first
six months ended June 28, 2008 reflects an increase of approximately $8.0
million and $16.8 million, respectively, attributable to the effect of changes
in foreign currency exchange rates and an increase of approximately $0.9 million
and $1.9 million, respectively, attributable to acquisitions.
 
 Excluding the
effect of changes in foreign currency exchange rates and acquisitions, net sales
in the RVP segment decreased approximately $28.0 million for the second quarter
ended June 28, 2008 as compared to the second quarter ended June 30, 2007 and
decreased approximately $58.3 million for the first six months ended June 28,
2008 as compared to the first six months ended June 30, 2007.  The
decrease in net sales in the RVP segment for the second quarter and first six
months ended June 28, 2008 as compared to the same periods of 2007 reflects
lower sales volume of bathroom exhaust fans and kitchen range hoods, partially
offset by higher average unit sales price of bathroom exhaust
fans.  The average unit sales price of kitchen range hoods for the
second quarter and first six months of 2008 was down slightly as compared to the
same periods of 2007.  Higher average unit sales price of 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 2007.  Kitchen range
hoods and bathroom exhaust fans are the largest product category sold in the RVP
segment, accounting for approximately 79.8% and 80.1% of the total RVP segment’s
gross sales for the second quarter and first six months ended June 28, 2008,
respectively.  Sales of range hoods and bathroom exhaust fans
decreased approximately 15.0% and 16.1% in the second quarter and first six
months ended June 28, 2008, respectively, for the RVP segment’s domestic
subsidiaries and excluding the effect of changes in foreign currency exchange
rates, sales of range hoods and bathroom exhaust fans decreased approximately
10.0% and 10.5% in the second quarter and first six months ended June 28, 2008,
respectively, for the RVP segment’s foreign subsidiaries.
 
 In the HTP segment,
net sales decreased approximately $12.7 million or 8.8% for the second quarter
ended June 28, 2008 as compared to the second quarter ended June 30, 2007 and
decreased approximately $11.8 million or 4.4% for the first six months ended
June 28, 2008 as compared to the first six months ended June 30,
2007.  Net sales in the HTP segment for the second quarter and first
six months ended June 28, 2008 includes an increase of approximately $7.5
million and $17.7 million, respectively, attributable to
acquisitions.  Excluding the effect of acquisitions, net sales in the
HTP segment decreased approximately $20.2 million and $29.5 million for the
second quarter and first six months ended June 28, 2008,
respectively.  This decrease is due to decreased sales of audio and
video distribution equipment and speakers, partially offset by an increase in
sales of certain security and access control products.
 
 In the HVAC
segment, net sales increased approximately $34.6 million or 11.8% for the second
quarter ended June 28, 2008 as compared to the second quarter ended June 30,
2007 and increased approximately $41.9 million or 8.1% for the first six months
ended June 28, 2008 as compared to the first six months ended June 30,
2007.  Net sales in the HVAC segment for the second quarter and first
six months ended June 28, 2008 reflects an increase of approximately $2.3
million and $5.5 million, respectively, attributable to the effect of changes in
foreign currency exchange rates.  The remaining increase in net sales
in the HVAC segment for the second quarter and first six months ended June 28,
2008 as compared to the same periods of 2007 includes higher sales volume of
HVAC products sold to residential site-built and manufactured housing customers,
in part, as a result of a sizeable new customer and increased sales volume of
HVAC products sold to commercial air conditioning customers, in part, as a
result of a sizeable job, of which approximately $40.2 million and $44.0 million
was shipped during the second quarter and first six months of 2008,
respectively.  Backlog for commercial HVAC products was approximately
$169.5 million at June 30, 2007, approximately $172.7 million at December 31,
2007 and approximately $237.5 million at June 28, 2008.  This increase
in backlog serving commercial HVAC customers at June 28, 2008 and December 31,
2007 reflects a new order received in the first quarter of 2008 for
approximately $74.8 million, of which the Company expects the remaining
approximate $30.8 million will be shipped over the remainder of
2008.  Price increases implemented in the second quarter and first six
months of 2008 related to products sold to residential site-built and
manufactured housing customers also contributed to the increase in net sales
over the same periods of 2007.  The Company’s net sales to customers
serving the manufactured housing markets, principally consisting of air
conditioners and furnaces, constituted approximately 5.1% and 5.0% of the
Company’s consolidated net sales for the second quarter ended June 28, 2008 and
June 30, 2007, respectively and constituted approximately 4.8% and 4.6% of the
Company’s consolidated net sales for the first six months ended June 28, 2008
and June 30, 2007, respectively.
 
 Foreign net sales,
which are attributed based on the location of the Company’s subsidiary
responsible for the sale, were approximately 19.7% and 19.9% of consolidated net
sales for the second quarter ended June 28, 2008 and June 30, 2007,
respectively, and were approximately 20.9% of consolidated net sales for each of
the first six months ended June 28, 2008 and June 30, 2007.  Net sales
from the Company’s Canadian subsidiaries were approximately 8.9% and 7.9% of
consolidated net sales for the second quarter ended June 28, 2008 and June 30,
2007, respectively, and were approximately 9.0% and 8.2% of consolidated net
sales for the first six months ended June 28, 2008 and June 30, 2007,
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 8.5% and 9.1% of
consolidated net sales for the second quarter ended June 28, 2008 and June 30,
2007, respectively, and were approximately 9.5% and 10.2% of consolidated net
sales for the first six months ended June 28, 2008 and June 30, 2007,
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
$473.3 million for the second quarter ended June 28, 2008 as compared to
approximately $452.1 million for the second quarter ended June 30, 2007 and was
approximately $864.9 million for the first six months ended June 28, 2008 as
compared to approximately $836.7 million for the first six months ended June 30,
2007.  Cost of products sold, as a percentage of net sales, increased
from approximately 70.2% for the second quarter ended June 30, 2007 to
approximately 73.2% for the second quarter ended June 28, 2008 and increased
from approximately 69.9% for the first six months ended June 30, 2007 to
approximately 72.8% for the first six months ended June 28, 2008 primarily as a
result of the factors described below.
 
 The Company consistently reviews the
costs of its product lines and seeks opportunities to increase prices to help
offset the rising costs of raw materials and transportation.  During
the second quarter and first six months of 2008, the Company implemented certain
price increases, including certain price increases effective beginning in the
third quarter of 2008, in each of its three segments to help offset higher
costs.  In addition, the Company has several increases planned across
all three of its segments for the remainder of the year should its costs for raw
material and transportation continue to rise.  These price increases
may not be totally realized and may not totally offset the impact of higher
costs.
 
 Overall,
consolidated material costs were approximately 48.8% and 47.5% of net sales for
the second quarter ended June 28, 2008 and June 30, 2007, respectively, and were
approximately 47.9% and 46.4% of net sales for the first six months ended June
28, 2008 and June 30, 2007, respectively.  As compared to the second
quarter and first six months ended June 30, 2007, the Company experienced higher
material costs related primarily to purchases of steel, copper and aluminum and
related purchased components, such as compressors and motors.  Cost
increases during the second quarter and first six months ended June 28, 2008 as
compared to the same periods of 2007 were partially offset by continued
strategic sourcing initiatives and improvements in manufacturing
efficiency.
 
 During the second
quarter and first six months ended June 28, 2008 the Company experienced
increased freight costs primarily due to increased fuel surcharges as compared
to the same periods of 2007.  These increases were partially offset by
the Company’s strategic sourcing initiatives and 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 second quarter ended June 28, 2008 was
approximately $141.0 million, or 75.4% as a percentage of the RVP segment’s net
sales, as compared to approximately $143.4 million, or 69.6% as a percentage of
the RVP segment’s net sales for the second quarter ended June 30,
2007.  In the RVP segment, cost of products sold for the first six
months ended June 28, 2008 was approximately $280.5 million, or 74.8% as a
percentage of the RVP segment’s net sales, as compared to approximately $288.9
million, or 69.6% as a percentage of the RVP segment’s net sales for the first
six months ended June 30, 2007.  Cost of products sold in the RVP
segment for the second quarter and first six months ended June 28, 2008 includes
(1) an increase of approximately $6.2 million and $13.3 million, respectively,
related to the effect of changes in foreign currency exchange rates, (2) an
increase of approximately $0.9 million and $1.6 million, respectively,
contributed by acquisitions, (3) costs and expenses incurred in connection with
the start up of a range hood facility in Mexico of approximately $1.4 million
and (4) approximately $0.3 million of severance charges related to the closure
of the Company's Aubrey Manufacturing, Inc. Union, IL facility.  The
increase in the percentage of cost of products sold to net sales for the second
quarter and first six months ended June 28, 2008 over the same periods of 2007
in the RVP segment reflects the impact of the above items, a decline in sales
volume of kitchen range hoods and bathroom exhaust fans without a proportionate
decrease in overhead costs, as well as an increase in material costs as a
percentage of net sales related to purchases of steel and related purchased
components, such as motors.
 
 In the HTP segment,
cost of products sold for the second quarter ended June 28, 2008was approximately $72.7
million, or 55.4% as a percentage of the HTP segment’s net sales, as compared to
approximately $76.0 million, or 52.8% as a percentage of the HTP segment’s net
sales for the second quarter ended June 30, 2007.  In the HTP segment,
cost of products sold for the first six months ended June 28, 2008was approximately $140.4
million, or 55.0% as a percentage of the HTP segment’s net sales, as compared to
approximately $141.8 million, or 53.1% as a percentage of the HTP segment’s net
sales for the first six months ended June 30, 2007.  Cost of products
sold in the HTP segment for the second quarter and first six months ended June
28, 2008 reflects an increase of approximately $4.9 million and $11.3 million,
respectively, contributed by acquisitions.  Cost of products sold in
the HTP segment for the second quarter and first six months ended June 30, 2007
reflects a decrease of approximately $0.2 million in warranty expense related to
a product safety upgrade.  The increase in the percentage of cost of
products sold to net sales for the second quarter and first six months ended
June 28, 2008 as compared to the same periods of 2007 is primarily as a result
of lower sales without a proportionate decrease in overhead costs and increased
transportation costs.
 
 In the HVAC
segment, cost of products sold for the second quarter ended June 28, 2008 was
approximately $259.6 million, or 78.9% as a percentage of the HVAC segment’s net
sales, as compared to approximately $232.7 million, or 79.1% as a percentage of
the HVAC segment’s net sales, for the second quarter ended June 30,
2007.  In the HVAC segment, cost of products sold for the first six
months ended June 28, 2008 was approximately $444.0 million, or 79.7% as a
percentage of the HVAC segment’s net sales, as compared to approximately $406.0
million, or 78.9% as a percentage of the HVAC segment’s net sales, for the first
six months ended June 30, 2007.  Cost of products sold in the HVAC
segment for the second quarter and first six months ended June 28, 2008 includes
an increase of approximately $1.7 million and $4.2 million, respectively,
related to the effect of changes in foreign currency exchange
rates.  The decrease in cost of products sold as a percentage of net
sales for the second quarter ended June 28, 2008 as compared to the same period
of 2007 reflects increased sales volume of product sold to both residential and
commercial customers without a proportionate increase in costs and expenses,
partially offset by higher material costs.  The increase in cost of
products sold as a percentage of net sales for the first six months ended June
28, 2008 as compared to the same period of 2007 reflects an increase in material
costs as a percentage of net sales for products sold to both residential and
commercial customers, partially offset by increased sales volume of product sold
to both residential and commercial customers without a proportionate increase in
costs and expenses.
 
 Selling, General and Administrative
Expense, Net.Consolidated selling, general and administrative
expense, net (“SG&A”) was approximately $118.5 million for the second
quarter ended June 28, 2008 as compared to approximately $121.1 million for the
second quarter ended June 30, 2007 and was approximately $237.0 million for the
first six months ended June 28, 2008 as compared to approximately $238.2 million
for the first six months ended June 30, 2007.  SG&A as a
percentage of net sales decreased from approximately 18.8% for the second
quarter ended June 30, 2007 to approximately 18.3% for the second quarter ended
June 28, 2008 and increased slightly from approximately 19.9% for the first six
months ended June 30, 2007 to approximately 20.0% for the first six months ended
June 28, 2008.  SG&A decreased for the second quarter of 2008 as
compared to the same period of 2007, in part, due to cost reduction measures
initiated in the first and second quarter of 2008.
 SG&A for the
second quarter ended June 28, 2008 and June 30, 2007 includes, among others, the
following items of increase (decrease) in expense (see Note D of the Notes to
the Consolidated Financial Statements included elsewhere
herein):


For the second quarter
endedJune 28, 2008
            
            
            June 30, 2007(Amounts
      in millions)(1
            )
            Fees,
      expenses and a reserve recorded within the HTP segment in connection with
      a contemplated settlement of a dispute with one of its former
      suppliers
            
            $
            4.5
            
            
            $
            ---(2
            )
            SG&A
      related to acquisitions
            
            
            3.0
            
            
            
            ---(3
            )
            Effect of
      changes in foreign currency exchange rates
            
            
            2.0
            
            
            
            ---(4
            )
            Gain from the
      sale of a manufacturing facility within the RVP segment
            
            
            (2.5
            )
            
            
            ---(5
            )
            Decrease in
      display expense in the RVP segment
            
            
            (1.9
            )
            
            
            ---(6
            )
            Net foreign
      exchange (gains) losses related to transactions, including intercompany
      debt not indefinitely invested in the Company’s
    subsidiaries
            
            
            (1.5
            )
            
            
            1.7(7
            )
            Charges
      related to the closure of the Company’s NuTone, Inc.Cincinnati,
      OH facility in the RVP segment
            
            
            ---
            
            
            
            0.8(8
            )
            Charges
      related to reserves for amounts due from customers in the HTP and HVAC
      segments
            
            
            ---
            
            
            
            0.5(9
            )
            Charges
      related to the closure of the Company’s Mammoth, Inc.Chaska, MN
      facility in the HVAC segment
            
            
            ---
            
            
            
            0.3(10
            )
            Legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland in the RVP
      segment
            
            
            ---
            
            
            
            0.3(11
            )
            Reduction in
      reserves related to the closure of the Company's Jensen, Inc. Vernon, CA
      facility within the RVP segment
            
            
            (0.1
            )
            
            
            ---






SG&A for the
first six months ended June 28, 2008 and June 30, 2007 includes, among others,
the following items of increase (decrease) in expense (see Note D of the Notes
to the Consolidated Financial Statements included elsewhere
herein):





For the first six months
    endedJune 28, 2008
            
            
            June 30, 2007(Amounts
      in millions)(1
            )
            SG&A
      related to acquisitions
            
            $
            7.9
            
            
            $
            ---(2
            )
            Decrease in
      display expense within the RVP segment
            
            
            (5.1
            )
            
            
            ---(3
            )
            Fees,
      expenses and a reserve recorded within the HTP segment in connection with
      a contemplated settlement of a dispute with one of its former
      suppliers
            
            
            4.7
            
            
            
            ---(4
            )
            Effect of
      changes in foreign currency exchange rates
            
            
            3.8
            
            
            
            ---(5
            )
            Gain from the
      sale of a manufacturing facility within the RVP segment
            
            
            (2.5
            )
            
            
            ---(6
            )
            Charges
      related to reserves for amounts due from customers within the HTP and HVAC
      segments
            
            
            ---
            
            
            
            2.3(7
            )
            Net foreign
      exchange (gains) losses related to transactions, including intercompany
      debt not indefinitely invested in the Company’s
    subsidiaries
            
            
            (1.4
            )
            
            
            2.0(8
            )
            Charges
      related to the closure of the Company’s NuTone, Inc.Cincinnati,
      OH facility within the RVP segment
            
            
            ---
            
            
            
            1.4(9
            )
            Legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland within the RVP
      segment
            
            
            ---
            
            
            
            1.3(10
            )
            Charges
      related to the closure of the Company’s Mammoth, Inc.
              Chaska, MN
      facility within the HVAC segment
            
            
            ---
            
            
            
            0.3(11
            )
            Reduction in
      reserves related to the closure of the Company's Jensen, Inc. Vernon, CA
      facility within the RVP segment
            
            
            (0.1
            )
            
            
            ---





Amortization of Intangible
Assets.Amortization of
intangible assets increased approximately $2.0 million from approximately $6.4
million for the second quarter ended June 30, 2007 to approximately $8.4 million
for the second quarter ended June 28, 2008 and increased approximately $2.7
million from approximately $12.4 million for the first six months ended June 30,
2007 to approximately $15.1 million for the first six months ended June 28,
2008.  The impact of acquisitions contributed approximately $0.9
million and $1.4 million to the increase in amortization of intangible assets
for the second quarter and first six months ended June 28, 2008,
respectively.  The remaining increase is primarily the result of
finalizing the fair value adjustments to intangible assets relating to
acquisitions in the RVP and HTP segments.
 
 Depreciation
Expense.Depreciation expense
increased approximately $0.1 million from approximately $10.1 million for the
second quarter ended June 30, 2007 to approximately $10.2 million for the second
quarter ended June 28, 2008 and increased approximately $2.2 million from
approximately $18.7 million for the first six months ended June 30, 2007 to
approximately $20.9 million for the first six months ended June 28,
2008.  This increase is primarily attributable to capital
expenditures, and to a lesser extent the impact of acquisitions, which
represented approximately $0.1 million and $0.3 million of the increase in the
second quarter and first six months ended June 28, 2008,
respectively.
 
 Operating
Earnings.Consolidated
operating earnings decreased by approximately $17.8 million from approximately
$64.7 million for the second quarter ended June 30, 2007 to approximately $46.9
million for the second quarter ended June 28, 2008 and decreased by
approximately $39.2 million from approximately $109.5 million for the first six
months ended June 30, 2007 to approximately $70.3 million for the first six
months ended June 28, 2008.  The effect of changes in foreign currency
exchange rates contributed approximately $0.1 million and $0.7 million to
operating earnings for the second quarter and first six months ended June 28,
2008, respectively, while the impact of acquisitions decreased operating
earnings by approximately $1.3 million and $2.6 million for the second quarter
and first six month ended June 28, 2008, respectively.  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 10.0% for the second quarter ended June 30,
2007 to approximately 7.2% for the second quarter ended June 28, 2008 and
decreased from approximately 9.2% for the first six months ended June 30, 2007
to approximately 5.9% for the first six months ended June 28,
2008.
 
 Operating
earnings of the RVP segment for the second quarter ended June 28, 2008 were
approximately $16.0 million as compared to approximately $26.0 million for the
second quarter ended June 30, 2007.  Operating earnings of the RVP
segment for the first six months ended June 28, 2008 were approximately $31.9
million as compared to approximately $51.2 million for the first six months
ended June 30, 2007.  The decrease in operating earnings in the RVP
segment for the second quarter and first six months ended June 28, 2008 as
compared to the same periods in 2007 is primarily as a result of lower sales
volume of kitchen range hoods and bathroom exhaust fans without a proportionate
decline in overhead costs and an increase in material costs related to purchases
of steel and related purchased components, such as motors, as well as increased
freight costs due to increased fuel surcharges.
 
 Operating
earnings in the RVP segment for the second quarter ended June 28, 2008 and June
30, 2007 includes the following increases (decreases) in operating
earnings:


For the second quarter
endedJune 28, 2008
            
            
            June 30, 2007(Amounts
      in millions)(1
            )
            Gain from the
      sale of a manufacturing facility
            
            $
            2.5
            
            
            $
            ---(2
            )
            Increased
      amortization of intangible assets
            
            
            (2.1
            )
            
            
            ---(3
            )
            Decrease in
      displays expense in the RVP segment
            
            
            1.9
            
            
            
            ---(4
            )
            Net foreign
      exchange gains (losses) related to transactions, including intercompany
      debt not indefinitely invested in the Company’s
    subsidiaries
            
            
            1.4
            
            
            
            (0.7
            )(5
            )
            Costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico
            
            
            (1.4
            )
            
            
            ---(6
            )
            Decrease in
      operating earnings related to acquisitions
            
            
            (0.9
            )
            
            
            ---(7
            )
            Charges
      related to the closure of the Company’s NuTone, Inc. Cincinnati, OH
      facility
            
            
            ---
            
            
            
            (0.8
            )(8
            )
            Charges
      related to the closure of the Company's Aubrey Manufacturing, Inc. Union,
      IL facility
            
            
            (0.3
            )
            
            
            ---(9
            )
            Legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland
            
            
            ---
            
            
            
            (0.3
            )(10
            )
            Reduction in
      reserves related to the closure of the Company's Jensen, Inc. Vernon, CA
      facility
            
            
            0.1
            
            
            
            ---





Operating earnings
in the RVP segment for the first six months ended June 28, 2008 and June 30,
2007 includes the following increases (decreases) in operating
earnings:





For the first six months
    endedJune 28, 2008
            
            
            June 30, 2007(Amounts
      in millions)(1
            )
            Decrease in
      displays expense in the RVP segment
            
            $
            5.1
            
            
            $
            ---(2
            )
            Increased
      depreciation expense of property and equipment
            
            
            (1.2
            )
            
            
            ---(3
            )
            Gain from the
      sale of a manufacturing facility
            
            
            2.5
            
            
            
            ---(4
            )
            Increased
      amortization of intangible assets
            
            
            (2.7
            )
            
            
            ---(5
            )
            Costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico
            
            
            (1.4
            )
            
            
            ---(6
            )
            Charges
      related to the closure of the Company’s NuTone, Inc. Cincinnati, OH
      facility
            
            
            ---
            
            
            
            (1.4
            )(7
            )
            Legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland
            
            
            ---
            
            
            
            (1.3
            )(8
            )
            Decrease in
      operating earnings related to acquisitions
            
            
            (1.2
            )
            
            
            ---(9
            )
            Net foreign
      exchange gains (losses) related to transactions, including intercompany
      debt not indefinitely invested in the Company’s
    subsidiaries
            
            
            0.9
            
            
            
            (0.9
            )(10
            )
            Increase in
      operating earnings related to effect of changes in foreign currency
      exchange rates
            
            
            0.5
            
            
            
            ---(11
            )
            Charges
      related to the closure of the Company's Aubrey Manufacturing, Inc. Union,
      IL facility
            
            
            (0.3
            )
            
            
            ---(12
            )
            Reduction in
      reserves related to the closure of the Company's Jensen, Inc. Vernon, CA
      facility
            
            
            0.1
            
            
            
            ---





Operating earnings
of the HTP segment for the second quarter ended June 28, 2008 were approximately
$7.8 million as compared to approximately $23.3 million for the second quarter
ended June 30, 2007 and were approximately $18.1 million for the first six
months ended June 28, 2008 as compared to approximately $39.8 million for the
first six months ended June 30, 2007.  The decrease in operating
earnings in the HTP segment for the second quarter and first six months ended
June 28, 2008 over the same periods in 2007 is primarily a result of decreased
sales volume of audio and video distribution equipment and speakers without a
proportionate decrease in overhead costs and increased transportation costs,
partially offset by higher sales volume of certain security and access control
devices.
 
 Operating earnings
of the HTP segment for the second quarter and first six months ended June 28,
2008 reflects (1) approximately $4.5 million and $4.7 million, respectively, of
fees, expenses and a reserve recorded in connection with a contemplated
settlement of a dispute with one of its former suppliers, (2) a decrease of
approximately $0.4 million and $1.4 million, respectively, contributed by
acquisitions, (3) approximately $0.2 million and $0.5 million, respectively, of
increased depreciation expense of property and equipment and approximately $0.1
million and $0.7 million, respectively, of increased amortization of intangible
assets and (4) net foreign exchange gains of approximately $0.2 million related
to transactions.
 
 Operating earnings
of the HTP segment for the second quarter and first six months ended June 30,
2007 reflects (1) a charge of approximately $0.5 million related to a reserve
for amounts due from customers recorded in the second quarter of 2007, (2) a
decrease in warranty expense of approximately $0.2 million related to a product
safety upgrade and (3) net foreign exchange gains of approximately $0.1 million
related to transactions.
 
 Operating earnings
of the HVAC segment were approximately $29.9 million for the second quarter
ended June 28, 2008 as compared to approximately $22.7 million for the second
quarter ended June 30, 2007 and were approximately $34.6 million for the first
six months ended June 28, 2008 as compared to approximately $32.5 million for
the first six months ended June 30, 2007.  The increase in operating
earnings in the HVAC segment for the second quarter and first six months ended
June 28, 2008 as compared to the same periods in 2007 is primarily the result of
increased sales volume of products sold to both residential and commercial
customers without a proportionate increase in costs and expenses, partially
offset by an increase in material and transportation costs for products sold to
both residential and commercial customers.
 
 Operating earnings
of the HVAC segment for the second quarter and first six months ended June 28,
2008 reflect (1) approximately $0.1 million of decreased depreciation expense
and $0.5 million of increased depreciation expense, respectively, of property
and equipment and approximately $0.3 million and $0.8 million, respectively, of
decreased amortization of intangible assets, (2) an increase in earnings of
approximately $0.1 million and $0.2 million, respectively, from the effect of
changes in foreign currency exchange rates and (3) net foreign exchange losses
of approximately $0.1 million for the second quarter of 2008 and net foreign
exchange gains of approximately $0.2 million for the first six months of 2008
related to transactions, including intercompany debt not indefinitely invested
in the Company’s subsidiaries.
 
 Operating earnings
of the HVAC segment for the second quarter and first six months ended June 30,
2007 reflects (1) a charge of approximately $1.8 million related to reserves for
amounts due from customers recorded in the first six months of 2007, (2) a
charge of approximately $0.3 million related to the planned closure of the
Company’s Mammoth, Inc. Chaska, Minnesota manufacturing facility recorded in the
second quarter of 2007 and (3) net foreign exchange losses of approximately $1.2
million and $1.4 million, respectively, related to transactions, including
intercompany debt not indefinitely invested in the Company’s
subsidiaries.
 
 Operating earnings
of foreign operations, consisting primarily of the results of operations of the
Company’s Canadian subsidiaries, were approximately 6.1% and 11.2% of operating
earnings (before unallocated and corporate expenses) for the second quarter
ended June 28, 2008 and June 30, 2007, respectively, and were approximately 6.1%
and 13.9% of operating earnings (before unallocated and corporate expenses) for
the first six months ended June 28, 2008 and June 30, 2007,
respectively.  Net sales and earnings derived from international
markets are subject to, among others, the risks of currency
fluctuations.
 
 Interest
Expense.  Interest expense decreased approximately $1.3 million
or approximately 2.7% during the second quarter ended June 28, 2008 as compared
to the second quarter ended June 30, 2007 and decreased approximately $0.6
million or approximately 0.7% during the first six months ended June 28, 2008 as
compared to the first six months ended June 30, 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 and
first six months of 2007 related primarily to the decrease in the fair value of
the Option (see Note B to the Notes to the Unaudited Financial Statements
included elsewhere herein).  As a result of this additional non-cash
interest being recorded in 2007, interest expense decreased in the second
quarter and first six months of 2008 accordingly.  This decrease in
the second quarter and first six months ended June 28, 2008 as compared to the
same periods of 2007 was partially offset by approximately $0.7 million and $2.8
million, respectively, of additional interest expense from increased average
principle balances on the Company’s debt obligations and an increase of
approximately $2.1 million and $0.1 million, respectively, related to increased
interest rates.
 
 Loss from Debt
Retirement.  On May 20, 2008, Nortek sold $750.0 million of its
10% Senior Secured Notes due December 1, 2013 (the “10% Senior Secured Notes”)
and also entered into a new five year $350.0 million senior secured asset-based
revolving credit facility (the “ABL Facility”).  The net proceeds from
the 10% Senior Secured Notes and the ABL Facility were used to repay all of the
outstanding indebtedness under Nortek’s existing senior secured credit facility,
which included approximately $675.5 million outstanding under Nortek’s senior
secured term loan and approximately $80.0 million outstanding under the
revolving portion of the senior secured credit facility.  The
redemption of Nortek’s senior secured term loan resulted in a pre-tax loss of
approximately $9.9 million in the second quarter ended June 28, 2008, primarily
as a result of writing off unamortized deferred debt expense.
 
 Investment
Income.Investment income was approximately $0.2 million and
$0.5 million for the second quarter ended June 28, 2008 and June 30, 2007,
respectively, and was approximately $0.4 million and $0.9 million for the first
six months ended June 28, 2008 and June 30, 2007, respectively.
 
 Provision for Income
Taxes.The provision
for income taxes was approximately $33.3 million for the second quarter ended
June 28, 2008 as compared to approximately $9.2 million for the second quarter
ended June 30, 2007 and was approximately $27.9 million for the first six months
ended June 28, 2008 as compared to approximately $10.9 million for the first six
months ended June 30, 2007.  The effective income tax rates of
approximately (94.3)% and 56.2% for the first six months ended June 28, 2008 and
June 30, 2007, respectively, differ from the expected United States federal
statutory rate of 35% principally as a result of increases in valuation
allowances against domestic deferred tax assets, state income tax provisions,
non-deductible expenses, the effect of foreign operations and interest on
uncertain tax positions.  The change in the effective income tax rates
between 2008 and 2007 is principally due to increases in valuation allowances
against domestic deferred tax assets and interest on uncertain tax positions
(see Note F of the Notes to the Unaudited Financial Statements included
elsewhere herein).
 
 During the second
quarter ended June 28, 2008, the Company evaluated the realizability of its
domestic deferred tax assets as a result of recent economic conditions, the
Company’s recent operating results and the Company’s revised forecast, including
the increase in future interest expense as a result of the May 2008
Transactions.  As a result of this analysis, the Company established a
valuation allowance of approximately $17.0 million against domestic deferred tax
assets in existence as of December 31, 2007.  In addition, for the
first six months ended June 28, 2008, the Company recorded a valuation allowance
against certain tax assets related to domestic operating losses generated in the
period of approximately $17.4 million.  In assessing the need for a
valuation allowance, the Company has assessed the available means of recovering
its deferred tax assets, including the ability to carry back net operating
losses, available deferred tax liabilities, tax planning strategies and
projections of future taxable income.  The Company has concluded that
it is more likely than not, based upon all available evidence, that a valuation
allowance is required for substantially all of its net domestic deferred tax
assets.
 Net (Loss)
Earnings.  Consolidated net (loss) earnings decreased by
approximately $50.8 million from net earnings of approximately $7.3 million, or
1.1% as a percentage of net sales, for the second quarter ended June 30, 2007 to
a net loss of approximately $43.5 million for the second quarter ended June 28,
2008 and decreased by approximately $66.0 million from net earnings of
approximately $8.5 million, or 0.7% as a percentage of net sales, for the first
six months ended June 30, 2007 to a net loss of approximately $57.5 million for
the first six months ended June 28, 2008.  The decrease in the second
quarter and first six months ended June 28, 2008 was primarily due to the
factors discussed above, which included a decrease of approximately $17.8
million and $39.2 million, respectively, in consolidated operating earnings, a
loss from debt retirement of approximately $9.9 million recorded in the second
quarter of 2008, an increase of approximately $24.1 million and $17.0 million,
respectively, in the provision for income taxes and a decrease in investment
income of approximately $0.3 million and $0.5 million, respectively, partially
offset by a decrease of approximately $1.3 million and $0.6 million,
respectively, 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 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 ABL
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 the second quarter ended June
28, 2008 and June 30, 2007:




For the second quarter
      endedJune 28,
    2008
              
              
              June 30,
    2007(Dollar amounts in
      millions)Net (loss) earnings (1),
      (2)
              
              $
              (43.5
              )
              
              $
              7.3Provision for income
      taxes
              
              
              33.3
              
              
              
              9.2Interest
      expense  (3)
              
              
              47.4
              
              
              
              48.7Investment
      income
              
              
              (0.2
              )
              
              
              (0.5
              )Depreciation
      expense
              
              
              10.2
              
              
              
              10.1Amortization
      expense
              
              
              8.4
              
              
              
              6.4EBITDA (1),
    (2)
              
              $
              55.6
              
              
              $
              81.2


(1)
            Net loss and
      EBITDA for the second quarter ended June 28, 2008 includes the following
      other income and expense items:


·
            a pre-tax
      loss from debt retirement of approximately $9.9 million, primarily as
      a result of writing off unamortized deferred debt expense related to
      Nortek’s senior secured credit
facility,


·
            approximately
      $4.5 million of fees, expenses and a reserve recorded in connection with a
      contemplated settlement of a dispute with one of its former suppliers
      within the HTP segment,


·
            costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico of approximately $1.4 million within the RVP
      segment,


·
            a gain of
      approximately $2.5 million from the sale of a manufacturing facility
      within the RVP segment,


·
            net foreign
      exchange gains of approximately $1.5 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries, and


·
            approximately
      $0.2 million in net charges related to the closure of certain RVP segment
      facilities.





(2)
            Net earnings
      and EBITDA for the second quarter ended June 30, 2007 includes the
      following other income and expense
items:


·
            net foreign
      exchange losses of approximately $1.7 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries,


·
            a charge of
      approximately $0.8 million related to the closure of the Company’s NuTone,
      Inc. Cincinnati, Ohio facility within the RVP
  segment,


·
            a charge of
      approximately $0.5 million related to a reserve for amounts due from
      customers within the HTP segment,


·
            legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland within the RVP
      segment of approximately $0.3
million,


·
            a charge of
      approximately $0.3 million related to the planned closure of the Company’s
      Mammoth, Inc. Chaska, Minnesota manufacturing facility within the HVAC
      segment, and


·
            a decrease in
      warranty expense of approximately $0.2 million related to a product safety
      upgrade within the HTP segment.





(3)
            Interest
      expense for the second quarter ended June 28, 2008 includes cash interest
      of approximately $29.4 million and non-cash interest of approximately
      $18.0 million.  Interest expense for the second quarter ended
      June 30, 2007 includes cash interest of approximately $29.4 million and
      non-cash interest of approximately $19.3
  million.






The following table presents a
reconciliation from net (loss) earnings, which is the most directly comparable
GAAP operating performance measure, to EBITDA for the first six months ended
June 28, 2008 and June 30, 2007:




For the first six months
      endedJune 28,
    2008
              
              
              June 30,
    2007(Dollar amounts in
      millions)Net (loss) earnings (1),
      (2)
              
              $
              (57.5
              )
              
              $
              8.5Provision for income
      taxes
              
              
              27.9
              
              
              
              10.9Interest
      expense  (3)
              
              
              90.4
              
              
              
              91.0Investment
      income
              
              
              (0.4
              )
              
              
              (0.9
              )Depreciation
      expense
              
              
              20.9
              
              
              
              18.7Amortization
      expense
              
              
              15.1
              
              
              
              12.4EBITDA (1),
    (2)
              
              $
              96.4
              
              
              $
              140.6




(1)
            Net loss and
      EBITDA for the first six months ended June 28, 2008 includes the following
      other income and expense items:


·
            a pre-tax
      loss from debt retirement of approximately $9.9 million, primarily as
      a result of writing off unamortized deferred debt expense related to
      Nortek’s senior secured credit
facility,


·
            approximately
      $4.7 million of fees, expenses and a reserve recorded in connection with a
      contemplated settlement of a dispute with one of its former suppliers
      within the HTP segment,


·
            costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico of approximately $1.4 million within the RVP
      segment,


·
            a gain of
      approximately $2.5 million from the sale of a manufacturing facility
      within the RVP segment,


·
            net foreign
      exchange gains of approximately $1.4 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries, and


·
            approximately
      $0.2 million in net charges related to the closure of certain RVP segment
      facilities.





(2)
            Net earnings
      and EBITDA for the first six months ended June 30, 2007 includes the
      following other income and expense
items:


·
            charges of
      approximately $2.3 million related to reserves for amounts due from
      customers within the HTP and HVAC
segments,


·
            net foreign
      exchange losses of approximately $2.0 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries,


·
            a charge of
      approximately $1.4 million related to the closure of the Company’s NuTone,
      Inc. Cincinnati, Ohio facility within the RVP
  segment,


·
            legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland within the RVP
      segment of approximately $1.3
million,


·
            a charge of
      approximately $0.3 million related to the planned closure of the Company’s
      Mammoth, Inc. Chaska, Minnesota manufacturing facility within the HVAC
      segment, and


·
            a decrease in
      warranty expense of approximately $0.2 million related to a product safety
      upgrade within the HTP segment.





(3)
            Interest
      expense for the first six months ended June 28, 2008 includes cash
      interest of approximately $55.4 million and non-cash interest of
      approximately $35.0 million.  Interest expense for the first six
      months ended June 30, 2007 includes cash interest of approximately $57.2
      million and non-cash interest of approximately $33.8
    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 ABL 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, energy costs, 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 negatively affected the Company’s results of
operations and its cash flow in the first six months of 2008 and these factors
are expected to continue to negatively affect the Company’s results of
operations and its cash flow.
 
 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.
 
 On May 20, 2008,
Nortek sold $750.0 million of its 10% Senior Secured Notes due December 1, 2013
(the “10% Senior Secured Notes”) at a discount of approximately $7.8 million,
which is being amortized over the life of the issue.  Net proceeds
from the sale of the 10% Senior Secured Notes, after deducting underwriting
commissions and expenses, amounted to approximately $721.7
million.  The 10% Senior Secured Notes, which are guaranteed on a
senior secured basis by substantially all of Nortek’s subsidiaries located in
the United States, were issued and sold in a private Rule 144A offering to
institutional investors.  On August 11, 2008, Nortek filed a registration statement
with the SEC to exchange the 10% Senior Secured Notes for registered
notes.
 
 Interest on the 10%
Senior Secured Notes accrues at the rate of 10% per annum and is payable
semi-annually in arrears on June 1 and December 1, commencing on December 1,
2008, until maturity.  Interest on the 10% Senior Secured Notes
accrues from the date of original issuance or, if interest has already been
paid, from the date it was most recently paid.  Interest is computed
on the basis of a 360-day year comprised of twelve 30-day months.
 
 Prior to June 1,
2011, Nortek may redeem up to 35% of the aggregate principal amount of the 10%
Senior Secured Notes with the net cash proceeds from certain equity offerings at
a redemption price of 110.0% plus accrued and unpaid interest, provided that at
least 65% of the original aggregate principal amount of the 10% Senior Secured
Notes remains outstanding after the redemption.  After June 1, 2011
the 10% Senior Secured Notes are redeemable at the option of Nortek, in whole or
in part, at any time and from time to time, on or after June 1, 2011 at 105.0%,
declining to 102.5% on June 1, 2012 and further declining to 100.0% on June 1,
2013.  In addition, the 10% Senior Secured Notes contain a call
provision whereby not more than once during any twelve-month period Nortek may
redeem the 10% Senior Secured Notes at a redemption price equal to 103.0% plus
accrued and unpaid interest, provided that the aggregate amount of these
redemptions does not exceed $75.0 million.
 
 The 10% Senior
Secured Notes are secured by a first-priority lien on substantially all of
Nortek’s and its domestic subsidiaries’ tangible and intangible assets, except
those assets securing Nortek’s new five-year $350.0 million senior secured
asset-based revolving credit facility (the “ABL Facility”) on a first-priority
basis.  The 10% Senior Secured Notes have a second-priority lien on
the ABL Facility’s first-priority collateral and rank equally with all existing
and future senior secured indebtedness of Nortek.   If Nortek
experiences a change in control, each holder of the notes will have the right to
require Nortek to purchase the notes at a price equal to 101% of the principal
amount thereof.  In addition, a change of control may constitute an
event of default under Nortek’s new ABL Facility and would also require Nortek
to offer to purchase its 8 1/2% senior subordinated notes at 101% of the
principal amount thereof, together with accrued and unpaid
interest.
 
 The indenture
governing the 10% Senior Secured Notes contains certain restrictive financial
and operating covenants including covenants that restrict, among other things,
the payment of cash dividends, the incurrence of additional indebtedness, the
making of certain investments, mergers, consolidations and sale of assets (all
as defined in the indenture and other agreements).
 
 In connection with
the offering of the 10% Senior Secured Notes, Nortek also entered into the ABL
Facility, of which $50.0 million was drawn at closing and approximately $35.0
million remains outstanding at June 28, 2008.  Subsequent to June 28,
2008, an additional $15.0 million was repaid on Nortek’s ABL
Facility.  Nortek incurred fees and expenses of approximately $11.2
million, which are being recognized as non-cash interest expense over the term
of the ABL Facility.  The ABL Facility replaced Nortek’s existing
$200.0 million revolving credit facility that was to mature on August 27, 2010
and consists of a $330.0 million U.S. Facility (with a $60.0 million sublimit
for the issuance of U.S. standby letters of credit and a $20.0 million sublimit
for U.S. swingline loans) and a $20.0 million Canadian Facility.
 
 There are
limitations on Nortek’s ability to incur the full $350.0 million of commitments
under the ABL Facility.  Availability is limited to the lesser of the
borrowing base and $350.0 million, and the covenants under the 8 1/2% senior
subordinated notes do not currently allow Nortek to incur up to the full
$350.0 million.  The borrowing base at any time will equal the sum
(subject to certain reserves and other adjustments) of:
 
 ·
              85% of the
      net amount of eligible accounts
receivable;
 ·
              85% of the
      net orderly liquidation value of eligible inventory;
  and
 ·
              available
      cash subject to certain limitations as specified in the ABL
      Facility.
 
 The interest rates
applicable to loans under Nortek’s ABL Facility are, at Nortek’s option, equal
to either an adjusted LIBOR rate for a one, two, three or six month interest
period (or a nine or twelve month period, if available) or an alternate base
rate chosen by Nortek, plus an applicable margin percentage.  The
alternate base rate will be the greater of (1) the prime rate or (2) the Federal
Funds rate plus 0.50% plus the applicable margin, which is determined based upon
the average excess borrowing availability for the previous fiscal
quarter.  Interest shall be payable at the end of the selected
interest period, but no less frequently than quarterly.
 
 If at any time the
aggregate amount of outstanding loans, unreimbursed letter of credit drawings
and undrawn letters of credit under Nortek’s ABL Facility exceeds the lesser of
(i) the commitment amount and (ii) the borrowing base, Nortek will be required
to repay outstanding loans and cash collateralize letters of credit in an
aggregate amount equal to such excess, with no reduction of the commitment
amount.  If the amount available under Nortek’s ABL Facility is less
than 15% of the lesser of the commitment amount or the borrowing base or an
event of default has occurred, Nortek will be required to deposit cash from its
material deposit accounts (including all concentration accounts) daily in a
collection account maintained with the administrative agent under Nortek’s ABL
Facility, which will be used to repay outstanding loans and cash collateralize
letters of credit.  Additionally, Nortek’s ABL Facility requires that
if excess availability (as defined) is less than the greater of $40.0 million
and 12.5% of the borrowing base, Nortek will comply with a minimum fixed charge
ratio test.
 
 The net proceeds
from the 10% Senior Secured Notes and the ABL Facility were used to repay all of
the outstanding indebtedness on May 20, 2008 under Nortek’s existing senior
secured credit facility, which included approximately $675.5 million outstanding
under Nortek’s senior secured term loan and approximately $80.0 million
outstanding under the revolving portion of the senior secured credit facility
(collectively, the “May 2008 Transactions”) plus accrued interest and related
fees and expenses.  The redemption of Nortek’s senior secured term
loan resulted in a pre-tax loss of approximately $9.9 million in the second
quarter ended June 28, 2008, primarily as a result of writing off unamortized
deferred debt expense.
 
 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 reflected 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 reflected 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 to offset pressure on the
Company’s sales.  In May 2008, Moody’s affirmed its rating of B3 for
Nortek and NTK Holdings.  The rating agency also assigned a B1 rating
to Nortek’s new 10% Senior Secured Notes.
 
 In April 2008,
Standard & Poor’s lowered its ratings for Nortek and its Parent Company, NTK
Holdings, from “B” to “B-” and issued a negative outlook.  Standard
& Poor’s rating downgrade reflected the Company’s weaker overall financial
profile resulting from the challenging operating conditions in the Company’s new
residential construction and remodeling markets.  The negative outlook
reflected Standard & Poor’s concerns about the US economy, difficult credit
markets and cost inflation, and the anticipation that the Company’s credit
metrics will remain challenged for at least the next several
quarters.  In May 2008, Standard & Poor’s affirmed its corporate
credit rating of B- for Nortek and NTK Holdings, however, it removed the ratings
from negative watch.  Standard & Poor’s also assigned a B rating
to Nortek’s new 10% Senior Secured Notes.
 On May 10, 2006,
the Company borrowed an aggregate principal amount of $205.0 million under a
senior unsecured loan facility.  The senior unsecured loan facility
initially had a term of one year; however, on May 10, 2007, the Company exercised
an option to extend the maturity date of its senior unsecured loan facility to
March 1, 2014 and paid a loan extension fee of approximately $4.5
million.  As a result, the Company recorded approximately $4.5 million
as debt discount which is being amortized as non-cash interest expense using the
interest method through March 1, 2014 and recorded approximately $3.9 million of
additional non-cash interest expense in the second quarter and first six months
of 2007 related primarily to the decreasein the fair value of the
option.The Company’s 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 June 28, 2008, the senior unsecured loan facility had an
actual interest rate of approximately 9.24%.  The Company is accruing
at an effective interest rate of approximately 10.8%, 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 with respect 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 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 $5.7 million and $11.4 million of accrued
interest for the second quarter and first six months ended June 28, 2008,
respectively, and recorded approximately $5.3 million and $10.0 million of
accrued interest for the second quarter and first six monthsended June 30, 2007, respectively, as
additional indebtedness relating to the senior unsecured loan
facility.  At June 28, 2008 and December 31, 2007, the actual
outstanding principal balance on the senior unsecured loan facility was
approximately $249.4 million and $238.0 million, respectively.  The
amount recorded as of June 28, 2008 and December 31, 2007, net of unamortized
debt discount of approximately $3.8 million and $4.1 million, respectively, is
approximately $245.6 million and $233.9 million, respectively.  The
senior unsecured loan facility is not guaranteed by any of the NTK Holdings’
subsidiaries and is not secured by any assets of NTK Holdings or any of its
subsidiaries.
 
 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 June 28, 2008 and December 31,
2007, respectively.


The Company had
consolidated debt at June 28, 2008 of approximately $2,105.2 million consisting
of the following:





(Amounts
      in millions)NTK Holdings' 10 3/4% Senior
      Discount Notes due 2014, net of unamortized discount of approximately
      $106.3 million
            
            $
            356.7NTK Holdings' senior unsecured
      loan facility, including approximately $44.4 million of debt accretion
      related to the PIK option *
            
            
            245.6Nortek’s 10% Senior Secured Notes
      due 2013, net of
      unamortized discount of approximately $7.7 million
            
            
            742.3Nortek's 8 1/2% Senior
      Subordinated Notes due 2014 (“8 1/2% Notes”)
            
            
            625.0Nortek's long-term notes, mortgage
      notes and other indebtedness
            
            
            41.6Nortek's 9 7/8% Senior
      Subordinated Notes due 2011, including unamortized
      premium
            
            
            10.0Subtotal
            
            
            2,021.2Nortek's
      short-term borrowings and current maturities of long-term debt (including
      borrowings of approximately $35.0 million under Nortek’s ABL
      Facility)
            
            
            84.0$
            2,105.2





*
            Also net of approximately $3.8
      million of unamortized debt discount at June 28,
    2008.






During the first
six months ended June 28, 2008, the Company had a net increase in its
consolidated debt of approximately $87.3 million resulting from:





(Amounts
      in millions)Net increases
      in debt related to May 2008 Transactions (1)
            
            $
            36.7Non-cash
      interest activity (2)
            
            
            30.0Other debt
      activity (3)
            
            
            20.6$
            87.3





(1)
            Debt activity
      related to May 2008 Transactions is comprised of the
      following:






(Amounts
      in millions)Issuance of
      10% Senior Secured Notes, net of original debt discount of approximately
      $7.8 million
            
            $
            742.2Borrowings
      under Nortek’s ABL Facility
            
            
            50.0Repayment of
      outstanding borrowings under Nortek’s senior secured credit
      facility
            
            
            (755.5
            )$
            36.7





(2)
            Debt activity
      related to non-cash interest activity is comprised of the
      following:





(Amounts
      in millions)Debt
      accretion relating to the 10 3/4% Senior Discount Notes
            
            $
            18.2Debt
      accretion relating to the PIK option on the senior unsecured loan
      facility
            
            
            11.4Debt
      discount, net relating to the Company’s senior unsecured loan facility and
      Nortek’s 10%
              Senior Secured Notes
            
            
            0.4$
            30.0





(3)
            Other debt
      activity is comprised of the
following:





(Amounts
      in millions)Net
      borrowings under the revolving portion of Nortek’s senior secured credit
      facility
              prior to the May 2008 Transactions
            
            $
            45.0Additional
      borrowings related primarily to the Company’s foreign
      subsidiaries
            
            
            8.0Payments made
      related to Nortek’s ABL Facility
            
            
            (15.0
            )Other
      principal payments
            
            
            (21.7
            )Changes in
      foreign currency exchange rates and other
            
            
            4.3$
            20.6





The Company’s debt
to equity ratio was approximately 56.7:1 at June 28, 2008 as compared to
approximately 22.7:1 at December 31, 2007.  The increase in the ratio
was a result of an increase in indebtedness as noted above, as well as, a
decrease in stockholder’s investment, primarily due to a net loss of
approximately $57.5 million for the first six months ended June 28,
2008.
 
 The agreements that
govern the terms of the Company’s debt, including the indentures that govern NTK
Holdings’ 10 3/4% Senior Discount Notes, Nortek’s 10% Senior Secured Notes and
Nortek’s 8 1/2% senior subordinated notes and the credit agreements that govern
NTK Holdings’ senior unsecured loan facility and Nortek’s ABL Facility, contain
covenants that restrict the Company’s ability and the ability of its
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.
 
 At June 28, 2008, the Company had
approximately $49.4million available for the payment of
cash dividends, stock purchases or other restricted paymentsunder 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.
 
 The indenturesthat governNortek’s10% Senior Secured Notesand Nortek’s 8 1/2% Senior Subordinated
NoteslimitNortek’sability to make certain payments,
including dividends to service NTK Holdings’ debt obligations, loans or
investments or the redemption or retirement of any equity interests and
indebtedness subordinated to the notes.  These limitations are based
on a calculation of net income, equity issuances, receipt of capital
contributions and return on certain investments since August 27, 2004 (as
defined). As of June 28, 2008, Nortek had the
capacity to make certain payments, including dividends to service NTK Holdings’
debt obligations, of up to approximately $145.9 million.As of June 28, 2008, Nortek’s Fixed Charge Coverage Ratio was
approximately 1.67:1.  If Nortek’s Fixed Charge Coverage Ratio was at
least 2.00:1 as of June 28, 2008, Nortek would have up to approximately $243.5
million available to make certain payments, including dividends to service NTK
Holding’s debt obligations.
 
 The Company and its
subsidiaries, affiliates or significant shareholders may from time to time, in
their sole discretion, purchase, repay, refinance, 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 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.  Contingent consideration of
approximately $32.7 million related to the acquisitions of Par Safe, ABT and
Magenta Research, Ltd., which was accrued for December 31, 2007, was paid during
the second quarter of 2008.  The remaining estimated total maximum
potential amount of contingent consideration that may be paid in the future for
all completed acquisitions is approximately $54.0 million.
 
 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 ABL Facility.
 
 As noted above,
during the second quarter of 2008, Nortek issued $750.0 million of 10% Senior
Secured Notes, entered into a new
five year $350.0 million senior secured asset-based revolving credit facility
and repaid all outstanding borrowings under Nortek’s senior secured credit
facility.  As a result of these transactions,the following is a summary of the
Company’s estimated future cash obligations under long-term debt obligations and
interest payments as of June 28, 2008:


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), (2)
            
            $
            13.3
            
            
            $
            141.6
            
            
            $
            131.7
            
            
            $
            1,876.4
            
            
            $
            2,163.0Interest
      payments (3), (4), (5)
            
            
            142.4
            
            
            
            331.3
            
            
            
            388.0
            
            
            
            189.6
            
            
            
            1,051.3Capital lease
      obligations
            
            
            2.3
            
            
            
            4.6
            
            
            
            4.1
            
            
            
            7.9
            
            
            
            18.9Total
            
            $
            158.0
            
            
            $
            477.5
            
            
            $
            523.8
            
            
            $
            2,073.9
            
            
            $
            3,233.2





(1)
            Excludes
      notes payable and other short-term obligations of approximately $68.4
      million, including outstanding borrowings under the ABL Facility of
      approximately $35.0 million.





(2)
            Excludes
      unamortized debt discount of approximately $7.7 million and $3.8 million
      related to Nortek’s 10% Senior Secured Notes and the Company’s senior
      unsecured loan facility,
respectively.




(3)
            Based upon
      interest rates in effect at June 28,
2008.





(4)
              Subsidiary
      debt used for working capital purposes such as lines of credit are
      estimated to continue through December 31, 2017 in the above
      table.
 
 (5)
              Includes
      interest payments on Nortek’s ABL Facility which are estimated to continue
      through May 20, 2013 in the above
table.








Although the
Company and its subsidiaries have entered into a number of operating lease
obligations, purchase obligations and have guaranteed certain obligations of
various third parties, the above table does not reflect these obligations as
there have been no significant changes in these obligations since December 31,
2007.
 
 The Company’s combined short-term and
long-term product liability accruals increased from approximately $35.0 million
at December 31, 2007 to approximately $37.9 million at June 28,
2008.  Product liability expense increased from approximately $2.3
million for the second quarter ended June 30, 2007 to approximately $3.3 million
for the second quarter ended June 28, 2008 and increased from approximately $5.6
million for the first six months ended June 30, 2007 to approximately $6.2
million for the first six months ended June 28, 2008.  The increase in
product liability expense for the second quarter and first six months ended June
28, 2008 as compared to the same periods of 2007 is primarily the result of an
increase in product liability accruals of approximately $0.6 million recorded in
the in the RVP segment during the first six months of 2008.  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 G of the Notes to the Unaudited
Financial Statements included elsewhere herein).
 
 The Company’s
combined short-term and long-term warranty accruals increased from approximately
$47.3 million at December 31, 2007 to approximately $50.6 million at June 28,
2008.  Warranty expense increased from approximately $7.8 million for
the second quarter ended June 30, 2007 to approximately $8.7 million for the
second quarter ended June 28, 2008 and increased from approximately $13.3
million for the first six months ended June 30, 2007 to approximately $16.0
million for the first six months ended June 28, 2008.  The increase in
warranty expense for the second quarter and first six months ended June 28, 2008
as compared to the same periods of 2007 is primarily as a result of increased
expense levels for residential HVAC products due to higher sales volume in the
second quarter and first six months of 2008 as compared to the same periods of
2007.  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 G of the Notes to the
Unaudited Financial Statements included elsewhere herein).
 
 Unrestricted cash
and cash equivalents increased from approximately $53.4 million at December 31,
2007 to approximately $79.1 million at June 28, 2008.  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 June 28, 2008, 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 $8.6 million for the second quarter ended June
28, 2008 as compared to approximately $7.3 million for the second quarter ended
June 30, 2007 and were approximately $15.9 million for the first six months
ended June 28, 2008 as compared to approximately $14.1 million for the first six
months ended June 30, 2007.  Capital expenditures were approximately
$36.4 million for the year ended December 31, 2007 and are expected to be
between approximately $30.0 million and $35.0 million in 2008.
 
 The Company’s
working capital and current ratio increased from approximately $205.7 million
and 1.4:1, respectively, at December 31, 2007 to approximately $266.1 million
and 1.5:1, respectively, at June 28, 2008.  This increase in working
capital for the first six months ended June 28, 2008 was primarily a result of
increases in inventories and accounts receivable and decreases in current
maturities of long-term debt and accrued expenses and taxes, net, partially
offset by increases in accounts payable, as described further below and
previously.  The increase in cash from December 31, 2007 to June 28,
2008 was also a contributing factor to the increase in working
capital.
 
 Accounts receivable
increased approximately $48.2 million, or approximately 15.1%, between December
31, 2007 and June 28, 2008, while net sales increased approximately $77.9
million, or approximately 13.7%, in the second quarter of 2008 as compared to
the fourth quarter of 2007.  This increase in accounts receivable is
primarily as a result of increased sales volume in the Company’s residential
HVAC products.  The effect of changes in foreign currency exchange
rates contributed approximately $3.3 million to the increase in accounts
receivable at June 28, 2008. 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 June 28, 2008
as compared to December 31, 2007.  Accounts receivable from customers
related to foreign operations decreased approximately $0.2 million, or
approximately 0.2%, between December 31, 2007 and June 28, 2008.  The
Company did not experience any significant overall changes in credit terms,
collection efforts, credit utilization or delinquency in accounts receivable in
the first six months of 2008.
 
 Inventories
increased approximately $21.8 million, or approximately 7.1%, between December
31, 2007 and June 28, 2008 as a result of increased purchases in the HVAC
segment to support future sales levels.  The effect of changes in
foreign currency exchange rates contributed approximately $1.4 million to the
increase in inventories at June 28, 2008.
 
 Accounts payable
increased approximately $57.3 million, or 29.7%, between December 31, 2007 and
June 28, 2008 due primarily to increased inventory levels in the HVAC segment
and the timing of payments.  The effect of changes in foreign currency
exchange rates contributed approximately $3.4 million to the increase in
accounts payable at June 28, 2008.
 
 Accrued expenses and taxes, net
decreased approximately $10.2 million, or approximately 4.1%, between December
31, 2007 and June 28, 2008 primarily as a result of contingent consideration
payments of approximately $32.7 million which were accrued at December 31, 2007
and were paid in the second quarter of 2008, partially offset by approximately
$9.8 million of increased accrued interest on Nortek’s 10% Senior Secured Notes,
approximately $4.7 millionrelated to a reserve recorded within
the HTP segment in connection with a contemplated settlement of a dispute with
one of its former suppliersand approximately $2.9 million of increased insurance reserves primarily
consisting of product liability accruals in the RVP segment as noted
previously.
 
 Changes in certain
working capital accounts, as noted above, between December 31, 2007 and June 28,
2008, differ from the changes reflected in the Company’s unaudited condensed
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 decreased by approximately $1.5 million from
approximately $46.1 million for the first six months ended June 30, 2007 to
approximately $44.6 million for the first six months quarter ended June 28,
2008.  This decrease is primarily due to a decrease in net (loss)
earnings of approximately $66.0 million partially offset by an increase in the
deferred federal income tax provision of approximately $26.3 million and a
decrease in working capital needs of approximately $25.0 million.  Net
cash flows used in investing activities decreased by approximately $45.4 million
from approximately $89.7 million for the first six months ended June 30, 2007 to
approximately $44.3 million for the first six months ended June 28,
2008.  This decrease was primarily due to a decrease in payments for
acquisitions of approximately $43.6 million and an increase of approximately
$6.1 million in proceeds from the sale of property and equipment, partially
offset by an increase in the level of capital expenditures of approximately $1.8
million.  Net cash flows provided by financing activities decreased by
approximately $36.1 million from approximately $61.5 million for the first six
months ended June 30, 2007 to approximately $25.4 million for the first six
months ended June 28, 2008.  This decrease was primarily due to fees
paid in connection with the May 2008 Transactions of approximately $31.7 million
and a decline in net borrowings of approximately $13.0 million, partially offset
by an equity investment by THL-Nortek Investors, LLC of approximately $4.2
million during the second quarter of 2008.  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 increased approximately $25.7 million and $17.9 million
from December 31, 2007 to June 28, 2008 and from December 31, 2006 to June 30,
2007, respectively, principally as a result of the following:




Condensed
      ConsolidatedCash Flows
    (1)For the first six months
      endedJune 28,
    2008
              
              
              June 30,
    2007(Dollar amounts in
      millions)Operating
      Activities:Cash flow from
      operations, net
              
              $
              41.8
              
              
              $
              68.3Change in accounts
      receivable, net
              
              
              (44.8
              )
              
              
              (47.2
              )Change in
      inventories
              
              
              (20.4
              )
              
              
              (33.7
              )Change in prepaids
      and other current assets
              
              
              (4.0
              )
              
              
              2.3Change in accounts
      payable
              
              
              53.9
              
              
              
              49.5Change in accrued
      expenses and taxes
              
              
              12.3
              
              
              
              7.6Investing
      Activities:Capital
      expenditures
              
              
              (15.9
              )
              
              
              (14.1
              )Net cash paid for
      businesses acquired
              
              
              (32.7
              )
              
              
              (76.3
              )Proceeds from the
      sale of property and equipment
              
              
              6.2
              
              
              
              0.1Change in restricted
      cash and marketable securities
              
              
              ---
              
              
              
              1.2Financing
      Activities:Change in borrowings,
      net
              
              
              66.3
              
              
              
              66.0Net proceeds from
      sale of the 10% Senior Secured Notes due 2013
              
              
              742.2
              
              
              
              ---Redemption of
      Nortek's senior secured credit facility
              
              
              (755.5
              )
              
              
              ---Fees paid in
      connection with new debt facilities
              
              
              (31.7
              )
              
              
              ---Equity investment by
      THL-Nortek Investors, LLC
              
              
              4.2
              
              
              
              ---Payment in connection
      with senior unsecured loan facility rollover
              
              
              ---
              
              
              
              (4.5
              )Other, net
              
              
              3.8
              
              
              
              (1.3
              )$
              25.7
              
              
              $
              17.9




(1)
            Summarized
      from the Company’s unaudited condensed consolidated statement of cash
      flows for the first six months ended June 28, 2008 and June 30, 2007 (see
      the Unaudited 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.




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 ABL 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 first
six months ended June 28, 2008 and June 30, 2007:




For the first six months
      endedJune 28,
    2008
              
              
              June 30,
    2007(Dollar amounts in
      millions)Net cash provided by
      operating activities
              
              $
              44.6
              
              
              $
              46.1Cash used by working capital and other long-termasset and
      liability changes
              
              
              (2.8
              )
              
              
              22.2Deferred federal
      income tax (provision) benefit
              
              
              (20.8
              )
              
              
              5.5Gain (loss) on
      property and equipment
              
              
              2.5
              
              
              
              (0.2
              )Loss from debt
      retirement
              
              
              (9.9
              )
              
              
              ---Non-cash interest
      expense, net
              
              
              (35.0
              )
              
              
              (33.8
              )Non-cash stock-based
      compensation expense
              
              
              (0.1
              )
              
              
              (0.2
              )Provision for income
      taxes
              
              
              27.9
              
              
              
              10.9Interest expense
      (3)
              
              
              90.4
              
              
              
              91.0Investment
      income
              
              
              (0.4
              )
              
              
              (0.9
              )EBITDA (1),
    (2)
              
              $
              96.4
              
              
              $
              140.6


(1)
            EBITDA for
      the first six months ended June 28, 2008 includes the following other
      income and expense items:


·
            a pre-tax
      loss from debt retirement of approximately $9.9 million, primarily as a
      result of writing off unamortized deferred debt expense related to
      Nortek’s senior secured credit
facility,


·
            approximately
      $4.7 million of fees, expenses and a reserve recorded in connection with a
      contemplated settlement of a dispute with one of its former suppliers
      within the HTP segment,


·
            costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico of approximately $1.4 million within the RVP
      segment,


·
            a gain of
      approximately $2.5 million from the sale of a manufacturing facility
      within the RVP segment,


·
            net foreign
      exchange gains of approximately $1.4 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries, and


·
            approximately
      $0.2 million in net charges related to the closure of certain RVP segment
      facilities.





(2)
            EBITDA for
      the first six months ended June 30, 2007 includes the following other
      income and expense items:


·
            charges of
      approximately $2.3 million related to reserves for amounts due from
      customers within the HTP and HVAC
segments,


·
            net foreign
      exchange losses of approximately $2.0 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries,


·
            a charge of
      approximately $1.4 million related to the closure of the Company’s NuTone,
      Inc. Cincinnati, Ohio facility within the RVP
  segment,


·
            legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland within the RVP
      segment of approximately $1.3
million,


·
            a charge of
      approximately $0.3 million related to the planned closure of the Company’s
      Mammoth, Inc. Chaska, Minnesota manufacturing facility within the HVAC
      segment, and


·
            a decrease in
      warranty expense of approximately $0.2 million related to a product safety
      upgrade within the HTP segment.





(3)
            Interest
      expense for the first six months ended June 28, 2008 includes cash
      interest of approximately $55.4 million and non-cash interest of
      approximately $35.0 million.  Interest expense for the first six
      months ended June 30, 2007 includes cash interest of approximately $57.2
      million and non-cash interest of approximately $33.8
    million.






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, energy costs, consumer
confidence and unemployment, among others.  The Company’s performance
in the second quarter and first six months of 2008 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 the second quarter and first six months of 2008 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 through 2009.





The Company has
recently experienced an increase in the level of product liability expense in
2008 and 2007, particularly in the RVP segment.  The Company is unable
to ascertain at this time whether this 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 is
subject to the effects of changing prices and for the past several years, the
impact of inflation has had a significant adverse effect on its results of
operations for the periods presented.  In some circumstances, market
conditions or customer expectations may prevent the Company from increasing the
prices of its products to offset the inflationary pressures that may increase
costs in the future.  The Company continued to experience higher
material costs primarily related to purchases of steel, copper and aluminum in
the second quarter of 2008.  Additionally, during the second quarter
of 2008, the Company experienced increased freight costs primarily due to
increased fuel surcharges as compared to the second quarter of
2007.  These cost increases were partially offset by continued
strategic sourcing initiatives and improvements in manufacturing efficiency, as
well as sales price increases.





As of June 28,
2008, approximately 6.9% of the Company’s workforce was subject to various
collective bargaining agreements.





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.  See Note H of the Notes to the Unaudited Financial
Statements for further information surrounding work stoppages at the Company’s
facilities.





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 June 28, 2008, 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 June 28, 2008,
approximately 85.6% of the carrying value 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 June 28, 2008, an overall unfavorable change in interest
rates of 100 basis points would result in an additional charge to interest
expense for the remaining six months of 2008 of approximately $1.5
million.





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 the second quarter and first six months of 2008, the net
impact of changes in foreign currency exchange rates was not material to the
Company’s financial condition or results of operations.  The impact of
changes in foreign currency exchange rates related to translation resulted in an
increase in stockholder’s investment of approximately $0.9 million and $1.3
million for the second quarter and first six months ended June 28, 2008,
respectively.  Additionally, the impact of changes in foreign currency
exchange rates related to transactions resulted in an increase in foreign
exchange gains recorded in selling, general and administrative expense, net of
approximately $3.2 million and $3.4 million for the second quarter and first six
months ended June 28, 2008, respectively, as compared to the same periods of
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 June 28, 2008 consist primarily of
short-term borrowings by certain of the Company’s foreign
subsidiaries.  The Company generally does not enter into derivative
financial instruments to manage foreign currency exposure.  At June
28, 2008, 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 June 28, 2008, the Company did not
have any material outstanding commodity forward contracts.





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 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.





Item
3.  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
4.  Controls and
Procedures





As of the end of
the period covered by this report, the Company carried out an evaluation, under
the supervision and with the participation of the Company’s management,
including the Company’s Chairman and Chief Executive Officer along with the
Company’s Vice President and Chief Financial Officer and the Company’s Corporate
Disclosure and Controls Committee, of the effectiveness of the Company’s
disclosure controls and procedures as defined in Rule 13a–15e and 15d-15e under
the Securities Exchange Act of 1934, as amended.  Based upon that
evaluation, the Company’s Chairman and Chief Executive Officer along with the
Company’s Vice President and Chief Financial Officer concluded that as of the
end of such period, the Company’s disclosure controls and procedures are
effective to ensure that information relating to the Company (including its
consolidated subsidiaries) required to be disclosed in the Company’s periodic
SEC filings is recorded, processed, summarized and reported within the time
periods specified by the SEC’s rules and forms.  There have been no
significant changes in the Company’s internal control over financial reporting
that occurred during the period covered by this report that have materially
affected, or that are reasonably likely to materially affect the Company’s
internal control over financial reporting.











PART
II.  OTHER INFORMATION







Item
2.  Unregistered Sales of
Equity Securities and Use of Proceeds





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.





Item
6.                      Exhibits





The items marked
with an asterisk are filed herewith.





*
            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.








SIGNATURE








Pursuant to the
requirements 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.







NTK HOLDINGS, INC.


(Registrant)








/s/ Almon C.
      Hall


Almon C.
Hall,


Vice President and
Chief


Financial
Officer








August 12,
2008