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 September 27, 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 November 7, 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)





September
    27,
              
              
              December
31,2008
              
              
              2007AssetsCurrent
    Assets:Unrestricted cash and cash
      equivalents
              
              $
              80.2
              
              
              $
              53.4Restricted
    cash
              
              
              0.7
              
              
              
              1.0Accounts
      receivable, less allowancesof $13.3 and
      $12.2
              
              
              338.0
              
              
              
              320.0Inventories:Raw
      materials
              
              
              100.5
              
              
              
              91.6Work in
      process
              
              
              32.0
              
              
              
              29.9Finished
      goods
              
              
              191.2
              
              
              
              187.1323.7
              
              
              
              308.6Prepaid
      expenses
              
              
              14.2
              
              
              
              11.7Other current
      assets
              
              
              14.4
              
              
              
              19.8Prepaid income
      taxes
              
              
              22.1
              
              
              
              28.9Total current
      assets
              
              
              793.3
              
              
              
              743.4Property and Equipment, at
      Cost:Land
              
              
              10.6
              
              
              
              10.4Buildings and
      improvements
              
              
              112.4
              
              
              
              110.1Machinery and
      equipment
              
              
              234.0
              
              
              
              217.1357.0
              
              
              
              337.6Less accumulated
      depreciation
              
              
              129.0
              
              
              
              99.7Total property and
      equipment, net
              
              
              228.0
              
              
              
              237.9Other
    Assets:Goodwill
              
              
              919.0
              
              
              
              1,528.9Intangible assets, less
      accumulated amortizationof $102.2 and
      $80.7
              
              
              143.8
              
              
              
              156.6Deferred debt
      expense
              
              
              49.0
              
              
              
              31.4Restricted investments and
      marketable securities
              
              
              2.4
              
              
              
              2.3Other
assets
              
              
              9.8
              
              
              
              10.31,124.0
              
              
              
              1,729.5Total
Assets
              
              $
              2,145.3
              
              
              $
              2,710.8Liabilities and Stockholder’s
      (Deficit) InvestmentCurrent
      Liabilities:Notes payable and other short-term
      obligations
              
              $
              65.0
              
              
              $
              64.0Current maturities of long-term
      debt
              
              
              15.8
              
              
              
              32.4Long-term debt (see Note
      B)
              
              
              9.2
              
              
              
              ---Accounts
      payable
              
              
              214.4
              
              
              
              192.7Accrued expenses and taxes,
      net
              
              
              242.6
              
              
              
              248.6Total current
      liabilities
              
              
              547.0
              
              
              
              537.7Other
      Liabilities:Deferred income
      taxes
              
              
              32.1
              
              
              
              37.0Other
              
              
              150.7
              
              
              
              125.6182.8
              
              
              
              162.6Notes, Mortgage Notes and
      ObligationsPayable,
      Less Current Maturities
              
              
              2,021.1
              
              
              
              1,921.5Commitments and Contingencies (see
      Note G)Stockholder’s (Deficit)
      Investment:Common stock, $0.01 par value,
      authorized 3,000 shares;3,000 issued and
      outstanding at September 27, 2008 andDecember 31,
      2007
              
              
              ---
              
              
              
              ---Additional paid-in
      capital
              
              
              25.9
              
              
              
              21.6(Accumulated deficit) retained
      earnings
              
              
              (664.4
              )
              
              
              29.7Accumulated other comprehensive
      income
              
              
              32.9
              
              
              
              37.7Total stockholder's
      (deficit) investment
              
              
              (605.6
              )
              
              
              89.0Total Liabilities and
      Stockholder's (Deficit) Investment
              
              $
              2,145.3
              
              
              $
              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 third quarter
      endedSept. 27,
    2008
              
              
              Sept. 29,
    2007(Dollar amounts in
      millions)Net
      Sales
              
              $
              582.6
              
              
              $
              602.2Costs and
      Expenses:Cost of products sold
      (see Note D)
              
              
              434.4
              
              
              
              433.0Selling, general and
      administrative expense, net (see Note D)
              
              
              121.2
              
              
              
              125.1Goodwill impairment
      charge (see Note A)
              
              
              600.0
              
              
              
              ---Amortization of
      intangible assets
              
              
              6.7
              
              
              
              6.51,162.3
              
              
              
              564.6Operating (loss)
      earnings
              
              
              (579.7
              )
              
              
              37.6Interest
      expense
              
              
              (53.4
              )
              
              
              (46.4
              )Investment
      income
              
              
              0.2
              
              
              
              0.6Loss before provision for income
      taxes
              
              
              (632.9
              )
              
              
              (8.2
              )Provision for income
      taxes
              
              
              3.7
              
              
              
              0.5Net loss
              
              $
              (636.6
              )
              
              $
              (8.7
              )


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 nine months
      endedSept. 27,
    2008
              
              
              Sept. 29,
    2007(Dollar amounts in
      millions)Net
      Sales
              
              $
              1,769.9
              
              
              $
              1,799.0Costs and
      Expenses:Cost of products sold
      (see Note D)
              
              
              1,299.3
              
              
              
              1,269.7Selling, general and
      administrative expense, net (see Note D)
              
              
              358.2
              
              
              
              363.3Goodwill impairment
      charge (see Note A)
              
              
              600.0
              
              
              
              ---Amortization of
      intangible assets
              
              
              21.8
              
              
              
              18.92,279.3
              
              
              
              1,651.9Operating (loss)
      earnings
              
              
              (509.4
              )
              
              
              147.1Interest
      expense
              
              
              (143.8
              )
              
              
              (137.4
              )Loss from debt
      retirement
              
              
              (9.9
              )
              
              
              ---Investment
      income
              
              
              0.6
              
              
              
              1.5(Loss) earnings before provision
      for income taxes
              
              
              (662.5
              )
              
              
              11.2Provision for income
      taxes
              
              
              31.6
              
              
              
              11.4Net loss
              
              $
              (694.1
              )
              
              $
              (0.2
              )




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 nine months
      endedSept. 27,
    2008
              
              
              Sept. 29,
    2007(Dollar amounts in
      millions)Cash Flows from operating
      activities:Net loss
              
              $
              (694.1
              )
              
              $
              (0.2
              )Adjustments to reconcile net
      (loss) earnings to net cashprovided by
      operating activities:Depreciation and amortization
      expense
              
              
              53.1
              
              
              
              46.9Non-cash interest expense,
      net
              
              
              53.7
              
              
              
              50.4Non-cash goodwill impairment
      charge
              
              
              600.0
              
              
              
              ---Non-cash stock-based compensation
      expense
              
              
              0.1
              
              
              
              0.3(Gain) loss on property and
      equipment
              
              
              (2.5
              )
              
              
              1.0Loss from debt
      retirement
              
              
              9.9
              
              
              
              ---Deferred federal income tax
      provision (benefit)
              
              
              16.8
              
              
              
              (9.4
              )Changes in certain assets and
      liabilities, net ofeffects
      from acquisitions and dispositions:Accounts receivable,
      net
              
              
              (20.2
              )
              
              
              (12.6
              )Inventories
              
              
              (16.3
              )
              
              
              (36.7
              )Prepaids and other current
      assets
              
              
              (1.5
              )
              
              
              1.4Accounts
      payable
              
              
              22.7
              
              
              
              16.3Accrued expenses and
      taxes
              
              
              31.2
              
              
              
              (3.5
              )Long-term assets, liabilities and
      other, net
              
              
              5.1
              
              
              
              4.1Total adjustments to
      net loss
              
              
              752.1
              
              
              
              58.2Net cash provided by
      operating activities
              
              
              58.0
              
              
              
              58.0Cash Flows from investing
      activities:Capital
      expenditures
              
              
              (20.7
              )
              
              
              (24.1
              )Net cash paid for businesses
      acquired
              
              
              (32.7
              )
              
              
              (93.5
              )Proceeds from the sale of property
      and equipment
              
              
              6.2
              
              
              
              0.6Change in restricted cash and
      marketable securities
              
              
              0.3
              
              
              
              1.5Other, net
              
              
              (2.0
              )
              
              
              (1.4
              )Net cash used in
      investing activities
              
              
              (48.9
              )
              
              
              (116.9
              )Cash Flows from financing
      activities:Increase in
      borrowings
              
              
              165.4
              
              
              
              112.8Payment of
      borrowings
              
              
              (105.5
              )
              
              
              (40.2
              )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
              
              
              (33.1
              )
              
              
              ---Equity investment by THL-Nortek
      Investors, LLC
              
              
              4.2
              
              
              
              ---Payment in connection with senior
      unsecured loan facility rollover
              
              
              ---
              
              
              
              (4.5
              )Net cash provided by
      financing activities
              
              
              17.7
              
              
              
              68.1Net change in unrestricted cash
      and cash equivalents
              
              
              26.8
              
              
              
              9.2Unrestricted cash and cash
      equivalents at the beginning of the period
              
              
              53.4
              
              
              
              57.4Unrestricted cash and cash
      equivalents at the end of the period
              
              $
              80.2
              
              
              $
              66.6Supplemental disclosure of cash
      flow information:Interest
    paid
              
              $
              75.7
              
              
              $
              95.4Income taxes paid,
      net
              
              $
              9.3
              
              
              $
              4.7






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 THIRD QUARTER ENDED SEPTEMBER 29, 2007


(Dollar
amounts in millions)


AccumulatedAdditional
              
              
              
              
              
              OtherPaid-in
              
              
              Retained
              
              
              Comprehensive
              
              
              ComprehensiveCapital
              
              
              Earnings
              
              
              Income
    (Loss)
              
              
              Income
    (Loss)Balance, June 30,
      2007
              
              $
              21.5
              
              
              $
              45.2
              
              
              $
              20.1
              
              
              $
              ---Net loss
              
              
              ---
              
              
              
              (8.7
              )
              
              
              ---
              
              
              
              (8.7
              )Other comprehensive income
      (loss):Currency translation
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              8.1
              
              
              
              8.1Pension liability
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              (0.1
              )
              
              
              (0.1
              )Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (0.7
              )Stock-based
      compensation
              
              
              0.1
              
              
              
              ---
              
              
              
              ---Balance, September 29,
      2007
              
              $
              21.6
              
              
              $
              36.5
              
              
              $
              28.1




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 NINE MONTHS ENDED SEPTEMBER 29, 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 loss
              
              
              ---
              
              
              
              (0.2
              )
              
              
              ---
              
              
              
              (0.2
              )Other comprehensive income
      (loss):Currency translation
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              16.7
              
              
              
              16.7Pension liability
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              (0.2
              )
              
              
              (0.2
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              16.3Adoption of FIN 48 (see Note
      F)
              
              
              ---
              
              
              
              (3.2
              )
              
              
              ---Stock-based
      compensation
              
              
              0.3
              
              
              
              ---
              
              
              
              ---Balance, September 29,
      2007
              
              $
              21.6
              
              
              $
              36.5
              
              
              $
              28.1




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 (DEFICIT)
INVESTMENT


FOR
THE THIRD QUARTER ENDED SEPTEMBER 27, 2008


(Dollar
amounts in millions)


AccumulatedAdditional
              
              
              
              
              
              OtherPaid-in
              
              
              Accumulated
              
              
              Comprehensive
              
              
              ComprehensiveCapital
              
              
              Deficit
              
              
              Income
    (Loss)
              
              
              LossBalance, June 28,
      2008
              
              $
              25.9
              
              
              $
              (27.8
              )
              
              $
              39.0
              
              
              $
              ---Net loss
              
              
              ---
              
              
              
              (636.6
              )
              
              
              ---
              
              
              
              (636.6
              )Other comprehensive
      loss:Currency translation
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              (5.7
              )
              
              
              (5.7
              )Pension liability
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              (0.4
              )
              
              
              (0.4
              )Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (642.7
              )Balance, September 27,
      2008
              
              $
              25.9
              
              
              $
              (664.4
              )
              
              $
              32.9




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 (DEFICIT)
INVESTMENT


FOR
THE FIRST NINE MONTHS ENDED SEPTEMBER 27, 2008


(Dollar
amounts in millions)


Retained
              
              
              AccumulatedAdditional
              
              
              Earnings
              
              
              OtherPaid-in
              
              
              (Accumulated
              
              
              Comprehensive
              
              
              ComprehensiveCapital
              
              
              Deficit)
              
              
              Income
    (Loss)
              
              
              LossBalance, December 31,
      2007
              
              $
              21.6
              
              
              $
              29.7
              
              
              $
              37.7
              
              
              $
              ---Net loss
              
              
              ---
              
              
              
              (694.1
              )
              
              
              ---
              
              
              
              (694.1
              )Other comprehensive
      loss:Currency translation
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              (4.4
              )
              
              
              (4.4
              )Pension liability
      adjustment
              
              
              ---
              
              
              
              ---
              
              
              
              (0.4
              )
              
              
              (0.4
              )Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (698.9
              )Capital contribution from
      parent
              
              
              4.2
              
              
              
              ---
              
              
              
              ---Stock-based
      compensation
              
              
              0.1
              
              
              
              ---
              
              
              
              ---Balance, September 27,
      2008
              
              $
              25.9
              
              
              $
              (664.4
              )
              
              $
              32.9




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
 SEPTEMBER
27, 2008 AND SEPTEMBER 29, 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 inannualfinancial statements prepared in
accordance withU.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 thethirdquarter and firstninemonths endedSeptember 27, 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 currentperiodpresentation.  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”).





Goodwill
and Other Long-Lived Assets





The following table
presents a summary of the activity in goodwill by reporting segment for the
first nine months ended September 27, 2008:




AirResidential
              
              
              Home
              
              
              ConditioningVentilation
              
              
              Technology
              
              
              and HeatingProducts
              
              
              Products
              
              
              Products*
              
              
              Consolidated(Dollar amounts in
      millions)Balance as of December 31,
      2007
              
              $
              798.8
              
              
              $
              415.6
              
              
              $
              314.5
              
              
              $
              1,528.9Estimated impairment
      losses
              
              
              (340.0
              )
              
              
              (60.0
              )
              
              
              (200.0
              )
              
              
              (600.0
              )Purchase accounting
      adjustments
              
              
              (7.9
              )
              
              
              0.2
              
              
              
              ---
              
              
              
              (7.7
              )Impact of changes in foreign
      currencyexchange rates and
      other
              
              
              (0.6
              )
              
              
              (0.2
              )
              
              
              (1.4
              )
              
              
              (2.2
              )Balance as of September 27,
      2008
              
              $
              450.3
              
              
              $
              355.6
              
              
              $
              113.1
              
              
              $
              919.0







*
            The $200
      million impairment loss relates to the Residential HVAC reporting
      unit.  Segment goodwill, after recording the estimated goodwill
      impairment loss, at September 27, 2008 consists of $33.7 million related
      to the Residential HVAC reporting unit and $79.4 million related to the
      Commercial 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), net of any subsequent impairment
losses.  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”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
No. 142”) 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 and intangible assets determined to have indefinite useful lives are
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 believes that the severe impact of the worldwide
crisis in the credit and financial markets in September and October 2008,
declines in new and existing home sales, the instability in the troubled
mortgage market and rising unemployment will have a further negative impact on
consumer disposable income and spending on home remodeling and repair
expenditures through at least 2009. As a result, the Company concluded in the
third quarter of 2008 that indicators of potential goodwill impairment were
present and therefore the Company needed to perform an interim test of goodwill
impairment in accordance with SFAS No. 142.
 
 In accordance with
SFAS No. 142, the Company prepared a “Step 1” Test that compares the estimated
fair value of each reporting unit to its carrying value.  In the event
that the carrying value of a reporting unit exceeded the estimated fair value,
the Company was required to perform a “Step 2” Test and measure the impairment
loss by allocating the estimated fair value of the reporting unit, as determined
in Step 1, to the reporting units’ assets and liabilities, with the residual
amount representing the implied fair value of goodwill.  To the extent
the implied fair value of goodwill is less than the carrying value, an
impairment loss is recognized. The Company utilized a discounted cash flow
approach in order to value the Company’s reporting units for the Step 1 Test,
which required 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 was derived, in part, 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) and include Residential Ventilation Products
(“RVP”), Home Technology Products (“HTP”) and the residential and commercial
segments of Air Conditioning and Heating Products (“Residential HVAC” and
“Commercial HVAC”).  The discounted cash flow calculations also
included a terminal value calculation that was based upon an expected long-term
growth rate for the applicable reporting unit.  The Company believes
that its procedures for estimating discounted future cash flows, including the
terminal valuation, are reasonable and consistent with market conditions at the
time of estimation.  The results of the Step 1 Tests performed in the
third quarter of 2008 indicated that the carrying values of the RVP, HTP and
Residential HVAC reporting units exceeded the estimated fair values determined
by the Company and, as such, a Step 2 Test was required for each of these
reporting units.  The estimated fair value of Commercial HVAC exceeded
its carrying value so no further impairment analysis was required for this
reporting unit.
 
 The Company
believes that its assumptions used to determine the fair value for the
Commercial HVAC reporting unit were 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
Commercial HVAC could differ from the estimated operating results and related
cash flows.  Based on the Company’s estimates at September 27, 2008,
the impact of reducing the Company’s fair value estimates for Commercial HVAC by
10% would have no impact on the Company’s goodwill assessment for this reporting
unit.
 
 As described above,
the Step 2 Test under SFAS No. 142 requires the Company to perform a theoretical
purchase price allocation for each of the applicable reporting units to
determine the implied fair value of goodwill as of the evaluation
date.  Due to the complexity of the analysis required to complete the
Step 1 and Step 2 Tests and the timing of the Company’s determination of the
goodwill impairment, the Company has not yet finalized its Step 1 and Step 2
Tests.  In accordance with the guidance in SFAS No. 142, the Company
has completed a preliminary assessment of the expected impact of the Step 1 and
Step 2 Tests using reasonable estimates of discounted cash flows and for the
theoretical purchase price allocation and has recorded a preliminary estimate of
the goodwill impairment losses for the third quarter and first nine months ended
September 27, 2008 of approximately $600.0 million.  The calculation
of this preliminary estimate of goodwill impairment losses was approximately
$340.0 million, approximately $60.0 million and approximately $200.0 million for
the RVP, HTP and Residential HVAC reporting units, respectively, for the third
quarter and first nine months ended September 27, 2008.  The
preliminary estimates of goodwill impairment losses will be finalized prior to
the issuance of the Company’s Form 10-K for the year ended December 31, 2008 as
part of its annual evaluation as of the first day of its fiscal fourth
quarter.   The Company believes that the preliminary estimates of
goodwill impairment losses are reasonable and represent the Company’s best
estimate of the goodwill impairment losses to be incurred; however, it is
possible that when the year end tests are completed the Company may be required
to record a material adjustment to these preliminary estimates.
 
 The following
procedures are, among others, the more significant analyses that the Company
needs to complete to finalize its year end Step 1 and Step 2
Tests:





·
            Final
      appraisals to determine the estimated fair value of the RVP, HTP and
      Residential HVAC reporting units, including final calculation of discount
      rates.


·
            Final
      appraisals to determine the estimated fair value of intangible assets and
      property and equipment at the significant subsidiaries within the RVP, HTP
      and Residential HVAC reporting
units.


·
            Final
      actuarial valuations to determine the estimated fair value of pension
      liabilities for the RVP and Residential HVAC reporting
    units.


·
            Final
      analysis for each of the subsidiaries within the RVP, HTP and Residential
      HVAC reporting units to determine the estimated fair value adjustment
      required to inventory.


·
            Final
      deferred tax analysis for the RVP, HTP and Residential HVAC reporting
      units.





In connection with
the preliminary Step 2 Tests, the Company made what it considered to be
reasonable estimates of each of the above items in order to determine its
preliminary best estimate of the goodwill impairment losses under the
theoretical purchase price allocation required for Step 2 Tests by SFAS No.
142.  The completion of the final analyses described above may result
in significant changes to the estimates used and therefore may have a
significant impact on the final goodwill impairment losses recorded for
2008.  In addition, the Company may identify other issues during the
completion of the Step 2 Tests that may have a significant impact on the final
goodwill impairment losses recorded for 2008.





In accordance withSFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No.
144”), the Companyevaluatesthe realizability of long-lived assets,
which primarily consist of property and equipment anddefinite lived 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.  As a result of the
Company’s conclusion that an interim impairment test of goodwill was required
during the third quarter of 2008, the Company performed in the third quarter of
2008 an interim test for the impairment of long-lived assets as required by SFAS
No. 144.





The interim
evaluation of the impairment of long-lived assets, other than goodwill, was
based on expectations of non-discounted future cash flows compared to the
carrying value of the long-lived asset groups in accordance with SFAS No.
144.  If the sum of the expected non-discounted future cash flows was
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
were 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 interim forecasting, and included 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 estimated 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 results of the Company’s interim
impairment testing under SFAS No. 144 indicated that there was no impairment of
long-lived assets, other than goodwill, as of September 27, 2008.





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 ofSeptember 27, 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.




In October 2008, the FASB issued FSP
157-3,“Determining Fair Value of a Financial
Asset in a Market That Is Not Active” (“FSP 157-3”).FSP 157-3expands upon the implementation guidance
in SFAS No. 157 for estimating the present value of future cash flows for some
hard-to-value financial instruments, such as collateralized debt
obligations.  FSP 157-3was effective upon issuance, including
prior periods for which financial statements had not been issued.




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.





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.





AtSeptember 27, 2008, certain employees and consultants held
approximately23,291C-1 units and approximately40,811C-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 approximately23,055and 22,613 were vested atSeptember 27, 2008 and December 31, 2007,
respectively.  The total fair value of the C-1 units is approximately
$1.2 million and approximately $0.1million remains to be amortized atSeptember 27, 2008.  The C-2 units only
vest in the event that certain performance-based criteria, as defined, are
met.  AtSeptember 27, 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 millionin the firstninemonthsended September 27,2008, respectively,and approximately $0.1 million and
$0.3million for thethirdquarter and firstninemonths endedSeptember 29, 2007, respectively, in accordance with
SFAS No. 123R.





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 for the Company on November
15, 2008.  The adoption of SFAS No. 162 will not have a material impact on the Company’s
financial position or results of operations.





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 is
currently evaluating the impact of adopting SFAS No. 160on its consolidated financial
statements.





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 $14.5million of the Company’s unrecognized
tax benefits as ofSeptember 27, 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 $720.9 million.  The 10% Senior Secured Notes are
      guaranteed on a senior secured basis by substantially all of Nortek’s
      subsidiaries located in the United
States.





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.  At September
27, 2008, Nortek had approximately $35.0 million outstanding under its ABL
Facility.  Nortek incurred fees and expenses of approximately $11.8
million, which have been capitalized and 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.  As of September 27, 2008, excess availability under
Nortek’s ABL Facility exceeded $40.0 million and 12.5% of the borrowing
base.





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 of 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 firstninemonths 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 September 27, 2008, the senior unsecured loan facility had
an actual interest rate of approximately 9.8%.  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 $6.0million and $17.4million of accrued interest for thethirdquarter and firstninemonths endedSeptember 27, 2008, respectively, and recorded
approximately $5.8million and $15.8million of accrued interest for thethirdquarter and firstninemonthsendedSeptember 29, 2007, respectively, as additional
indebtedness relating to the senior unsecured loan facility.  AtSeptember 27, 2008 and December 31, 2007, the actual
outstanding principal balance on the senior unsecured loan facility was
approximately $255.4million and $238.0 million,
respectively.  The amount recorded as ofSeptember 27, 2008 and December 31, 2007, net of
unamortized debt discount of approximately $3.7million and $4.1 million, respectively,
is approximately $251.7million 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 aggregate borrowings
outstanding of approximately $9.4 million.  Non-compliance with these
two long-term debt agreements would have resulted in non-compliance with two
other long-term debt agreements totaling approximately $7.3 million at December
31, 2007.  The Company’s Best subsidiary obtained waivers from the
bank, 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 not be in compliance with the maintenance covenant when their
assessment of the required calculation is completed in the first quarter of
2009.  The Company and its Best subsidiary are currently in
negotiations to refinance these two loan agreements; however as of September 27,
2008, a definitive agreement was not signed.  As a result, the Company
has classified approximately $9.2 million of outstanding borrowings under such
“long-term debt” agreements as a current liability on its consolidated balance
sheet at September 27, 2008.  The Company and its Best subsidiary will
continue to negotiate the refinancing of these debt obligations, however no
assurance can be given that it will be successful in obtaining a refinancing,
amendment or waiver on terms acceptable to the Company.  Accordingly,
Nortek could be required to repay the outstanding borrowings of approximately
$13.3 million at September 27, 2008 related to these loans in an event of
non-compliance.


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 September 27, 2008, the Company had
approximately $38.2million 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
September 27, 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 ofSeptember 27, 2008, Nortek’s Fixed Charge Coverage Ratio (as
defined under Nortek’s 10% Senior Secured Notes and 8 1/2% Senior Subordinated
Notes) was approximately 1.6:1.  If Nortek’s Fixed Charge Coverage
Ratio (as defined under Nortek’s 10% Senior Secured Notes and 8 1/2% Senior
Subordinated Notes) was at least 2.00:1 as of September 27, 2008, Nortek would
have up to approximately $216.6 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 $1.1 million and $0.3 million to net sales and
depreciation and amortization expense, respectively, and reduced operating
earnings by approximately $0.4 million for the third quarter ended September 27,
2008 and contributed approximately $20.7 million and $2.2 million to net sales
and depreciation and amortization expense, respectively, and reduced operating
earnings by approximately $3.2 million for the first nine months ended September
27, 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 first nine months 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 of the acquired companies, which is 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
      third quarter ended September 27, 2008 and September 29, 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 third quarter ended
    *Sept. 27, 2008
            
            
            Sept. 29, 2007(Amounts
      in millions)Estimated
      loss contingency on lease guarantee (see Note G)
            
            $
            6.4
            
            
            $
            ---Charges
      related to the closure of the Company's Mammoth, Inc. Chaska, MN facility
      within the HVAC segment (see Note H)
            
            
            ---
            
            
            
            2.3Costs and
      expenses incurred within the RVP segment in connection with the start up
      of a range hood facility in Mexico (1)
            
            
            1.8
            
            
            
            ---Loss on
      settlement of litigation in the RVP segment
            
            
            ---
            
            
            
            1.9Reserve for
      amounts due from customers within the HTP segment
            
            
            1.5
            
            
            
            ---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
            
            
            ---
            
            
            
            0.9Product
      safety upgrade reserves within the RVP and HTP segments (see Note G)
      (1)
            
            
            ---
            
            
            
            0.8Foreign
      exchange losses related to transactions, including intercompany debt not
      indefinitely invested in the Company's subsidiaries
            
            
            0.5
            
            
            
            1.4Net charges
      related to the closure of certain RVP segment facilities (see Note H)
      (1)
            
            
            0.4
            
            
            
            0.2Charges
      related to the closure of the Company's NuTone, Inc. Cincinnati, OH
      facility within the RVP segment (see Note H)
            
            
            ---
            
            
            
            0.4Fees,
      expenses and a reserve recorded within the HTP segment in connection with
      the settlement of a dispute with one of its former
    suppliers
            
            
            0.2
            
            
            
            ---Reduction in
      social liability reserve related to one of the Company’s foreign
      subsidiaries in the RVP segment
            
            
            (1.9
            )
            
            
            ---Gain on
      settlement of litigation in the HVAC segment resulting from a prior bad
      debt write-off
            
            
            (1.2
            )
            
            
            ---





*
            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)
            Recorded in
      cost of products sold.





During the first
nine months ended September 27, 2008 and September 29, 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 nine months ended
      *Sept. 27, 2008
            
            
            Sept. 29, 2007(Amounts
      in millions)Estimated
      loss contingency on lease guarantee (see Note G)
            
            $
            6.4
            
            
            $
            ---Fees,
      expenses and a reserve recorded within the HTP segment in connection with
      the settlement of a dispute with one of its former
    suppliers
            
            
            4.9
            
            
            
            ---Costs and
      expenses incurred within the RVP segment in connection with the start up
      of a range hood facility in Mexico (1)
            
            
            3.2
            
            
            
            ---Foreign
      exchange (gains) losses related to transactions, including intercompany
      debt not indefinitely invested in the Company's
    subsidiaries
            
            
            (0.9
            )
            
            
            3.4Charges
      related to the closure of the Company's Mammoth, Inc. Chaska, MN facility
      within the HVAC segment (see Note H)
            
            
            ---
            
            
            
            2.6Reserve for
      amounts due from customers within the HTP and HVAC
segments
            
            
            1.5
            
            
            
            2.3Legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland within the RVP
      segment
            
            
            ---
            
            
            
            2.2Loss on
      settlement of litigation in the RVP segment
            
            
            ---
            
            
            
            1.9Charges
      related to the closure of the Company's NuTone, Inc. Cincinnati, OH
      facility within the RVP segment (see Note H)
            
            
            ---
            
            
            
            1.8Product
      safety upgrade reserves within the RVP and HTP segments (see Note G)
      (1)
            
            
            ---
            
            
            
            0.6Net charges
      related to the closure of certain RVP segment facilities (see Note H)
      (2)
            
            
            0.6
            
            
            
            0.2Gain from the
      sale of a manufacturing facility within the RVP segment
            
            
            (2.5
            )
            
            
            ---Reduction in
      social liability reserve related to one of the Company’s foreign
      subsidiaries in the RVP segment
            
            
            (1.9
            )
            
            
            ---Gain on
      settlement of litigation in the HVAC segment resulting from a prior bad
      debt write-off
            
            
            (1.2
            )
            
            
            ---





*
            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)
            Recorded in
      cost of products sold.





(2)
            For the first
      nine months ended September 27, 2008, approximately $0.7 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.





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 third quarter ended September 27, 2008 and September 29, 2007,
respectively, and expensed approximately $1.5 million and $1.6 million for the
first nine months ended September 27, 2008 and September 29, 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 (loss) earnings and pre-tax loss for the Company’s reporting
segments for the third quarter ended September 27, 2008 and September 29, 2007
were as follows:




For the third quarter
      endedSept. 27,
    2008
              
              
              Sept. 29,
    2007(Dollar amounts in
      millions)Net sales:Residential ventilation
      products
              
              $
              180.0
              
              
              $
              203.9Home technology
      products
              
              
              132.7
              
              
              
              148.7Air conditioning and heating
      products
              
              
              269.9
              
              
              
              249.6Consolidated net
      sales
              
              $
              582.6
              
              
              $
              602.2Operating (loss)
      earnings:Residential ventilation products
      (1)
              
              $
              (327.1
              )
              
              $
              19.4Home technology products
      (2)
              
              
              (49.3
              )
              
              
              19.2Air conditioning and heating
      products (3)
              
              
              (189.5
              )
              
              
              6.2Subtotal
              
              
              (565.9
              )
              
              
              44.8Unallocated:Stock-based compensation
      charges
              
              
              ---
              
              
              
              (0.1
              )Foreign exchange (losses) gains on
      transactions,including intercompany
      debt
              
              
              (0.3
              )
              
              
              0.1Estimated loss contingency on
      lease guarantee
              
              
              (6.4
              )
              
              
              ---Unallocated,
      net
              
              
              (7.1
              )
              
              
              (7.2
              )Consolidated
      operating (loss) earnings
              
              
              (579.7
              )
              
              
              37.6Interest
      expense
              
              
              (53.4
              )
              
              
              (46.4
              )Investment
      income
              
              
              0.2
              
              
              
              0.6Loss before provision
      for income taxes
              
              $
              (632.9
              )
              
              $
              (8.2
              )




(1)
            The operating
      results of the RVP segment for the third quarter ended September 27, 2008
      include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $340.0
      million,


·
            costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico of approximately $1.8
million,


·
            a reduction
      in the social liability reserve related to one of the Company’s foreign
      subsidiaries of approximately $1.9 million
and


·
            approximately
      $0.4 million in net charges related to the closure of certain RVP segment
      facilities.





The operating
results of the RVP segment for the third quarter ended September 29, 2007
include:


·
            a charge to
      warranty expense of approximately $0.5 million related to a product safety
      upgrade,


·
            an
      approximate $0.4 million charge related to the closure of the Company’s
      NuTone, Inc. Cincinnati, Ohio
facility,


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


·
            legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland of approximately
      $0.9 million,


·
            an
      approximate $1.9 million loss related to the settlement of litigation
      and


·
            net foreign
      exchange losses of approximately $0.6 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 third quarter ended September 27, 2008
      include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $60.0
      million,


·
            a charge of
      approximately $1.5 million related to a reserve for amounts due from
      customers,


·
            approximately
      $0.2 million of fees, expenses and a reserve recorded in connection with
      the settlement of a dispute with one of its former suppliers
      and


·
            net foreign
      exchange losses of approximately $0.2 million related to
      transactions.





The operating
results of the HTP segment for the third quarter ended September 29, 2007
include:


·
            a charge to
      warranty expense of approximately $0.3 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 third quarter ended September 27, 2008
      include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $200.0 million
      and


·
            a gain on the
      settlement of litigation of approximately $1.2 million resulting from a
      prior bad debt write-off.





The operating
results of the HVAC segment for the third quarter ended September 29, 2007
include:


·
            a charge of
      approximately $2.3 million related to the planned closure of the Company’s
      Mammoth, Inc. Chaska, Minnesota manufacturing facility
  and


·
            net foreign
      exchange losses of approximately $1.0 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries.





Unaudited net
sales, operating (loss) earnings and pre-tax (loss) earnings for the Company’s
reporting segments for the first nine months ended September 27, 2008 and
September 29, 2007 were as follows:




For the first nine months
      endedSept. 27,
    2008
              
              
              Sept. 29,
    2007(Dollar amounts in
      millions)Net sales:Residential ventilation
      products
              
              $
              555.2
              
              
              $
              618.7Home technology
      products
              
              
              388.0
              
              
              
              415.8Air conditioning and heating
      products
              
              
              826.7
              
              
              
              764.5Consolidated net
      sales
              
              $
              1,769.9
              
              
              $
              1,799.0Operating (loss)
      earnings:Residential ventilation products
      (1)
              
              $
              (295.2
              )
              
              $
              70.6Home technology products
      (2)
              
              
              (31.2
              )
              
              
              59.0Air conditioning and heating
      products (3)
              
              
              (154.9
              )
              
              
              38.7Subtotal
              
              
              (481.3
              )
              
              
              168.3Unallocated:Stock-based compensation
      charges
              
              
              (0.1
              )
              
              
              (0.3
              )Foreign exchange (losses) gains on
      transactions,including intercompany
    debt
              
              
              (0.2
              )
              
              
              0.3Estimated loss contingency on
      lease guarantee
              
              
              (6.4
              )
              
              
              ---Unallocated,
      net
              
              
              (21.4
              )
              
              
              (21.2
              )Consolidated
      operating (loss) earnings
              
              
              (509.4
              )
              
              
              147.1Interest
      expense
              
              
              (143.8
              )
              
              
              (137.4
              )Loss from debt
      retirement
              
              
              (9.9
              )
              
              
              ---Investment
      income
              
              
              0.6
              
              
              
              1.5(Loss) earnings
      before provision for income taxes
              
              $
              (662.5
              )
              
              $
              11.2


(1)
            The operating
      results of the RVP segment for the first nine months ended September 27,
      2008 include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $340.0
      million,


·
            costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico of approximately $3.2
million,


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


·
            a reduction
      in the social liability reserve related to one of the Company’s foreign
      subsidiaries of approximately $1.9
million,


·
            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
      $0.6 million in net charges related to the closure of certain RVP segment
      facilities.





The operating
results of the RVP segment for the first nine months ended September 29, 2007
include:


·
            a charge to
      warranty expense of approximately $0.5 million related to a product safety
      upgrade,


·
            an
      approximate $1.8 million charge related to the closure of the Company’s
      NuTone, Inc. Cincinnati, Ohio
facility,


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


·
            legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland of approximately
      $2.2 million,


·
            an
      approximate $1.9 million loss related to the settlement of litigation
      and


·
            net foreign
      exchange losses of approximately $1.5 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 nine months ended September 27,
      2008 include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $60.0
      million,


·
            approximately
      $4.9 million of fees, expenses and a reserve recorded in connection with
      the settlement of a dispute with one of its former suppliers
      and


·
            a charge of
      approximately $1.5 million related to a reserve for amounts due from
      customers.





The operating
results of the HTP segment for the first nine months ended September 29, 2007
include:


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


·
            a charge to
      warranty expense of approximately $0.1 million related to a product safety
      upgrade and


·
            net foreign
      exchange gains of approximately $0.2 million related to
      transactions.





(3)
            The operating
      results of the HVAC segment for the first nine months ended September 27,
      2008 include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $200.0
      million,


·
            a gain on the
      settlement of litigation of approximately $1.2 million resulting from a
      prior bad debt write-off and


·
            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 nine months ended September 29, 2007
include:


·
            a charge of
      approximately $2.6 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 $2.4 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 third quarter ended September 27, 2008 and
September 29, 2007 were as follows:




For the third quarter
      endedSept. 27,
    2008
              
              
              Sept. 29,
    2007(Dollar amounts in
      millions)Depreciation
      Expense:Residential ventilation
      products
              
              $
              4.4
              
              
              $
              3.5Home technology
      products
              
              
              1.6
              
              
              
              1.5Air conditioning and heating
      products
              
              
              4.3
              
              
              
              4.1Other
              
              
              0.1
              
              
              
              0.2Consolidated
      depreciation expense
              
              $
              10.4
              
              
              $
              9.3Amortization
      expense:Residential ventilation
      products
              
              $
              2.1
              
              
              $
              1.8Home technology
      products
              
              
              3.1
              
              
              
              2.7Air conditioning and heating
      products
              
              
              1.5
              
              
              
              1.8Other
              
              
              ---
              
              
              
              0.2Consolidated
      amortization expense
              
              $
              6.7
              
              
              $
              6.5Capital
      Expenditures:Residential ventilation
      products
              
              $
              1.8
              
              
              $
              4.1Home technology
      products
              
              
              1.3
              
              
              
              1.6Air conditioning and heating
      products
              
              
              1.7
              
              
              
              4.2Other
              
              
              ---
              
              
              
              0.1Consolidated capital
      expenditures
              
              $
              4.8
              
              
              $
              10.0




Unaudited
depreciation expense, amortization expense and capital expenditures for the
Company’s reporting segments for the first nine months ended September 27, 2008
and September 29, 2007 were as follows:




For the first nine months
      endedSept. 27,
    2008
              
              
              Sept. 29,
    2007(Dollar amounts in
      millions)Depreciation
      Expense:Residential ventilation
      products
              
              $
              12.7
              
              
              $
              10.6Home technology
      products
              
              
              4.8
              
              
              
              4.2Air conditioning and heating
      products
              
              
              13.4
              
              
              
              12.7Other
              
              
              0.4
              
              
              
              0.5Consolidated
      depreciation expense
              
              $
              31.3
              
              
              $
              28.0Amortization
      expense:Residential ventilation
      products
              
              $
              7.4
              
              
              $
              4.4Home technology
      products
              
              
              9.7
              
              
              
              8.6Air conditioning and heating
      products
              
              
              4.4
              
              
              
              5.5Other
              
              
              0.3
              
              
              
              0.4Consolidated
      amortization expense
              
              $
              21.8
              
              
              $
              18.9Capital
      Expenditures:Residential ventilation
      products
              
              $
              9.2
              
              
              $
              9.8Home technology
      products
              
              
              2.8
              
              
              
              4.2Air conditioning and heating
      products
              
              
              8.7
              
              
              
              10.0Other
              
              
              ---
              
              
              
              0.1Consolidated capital
      expenditures
              
              $
              20.7
              
              
              $
              24.1







Unaudited segment
assets for the Company’s reporting segments at September 27, 2008 and December
31, 2007 were as follows:




September
    27,
            
            
            December
31,2008
            
            
            2007(Dollar amounts in
      millions)Segment
    Assets:Residential ventilation
      products
            
            $
            840.9
            
            
            $
            1,202.7Home technology
      products
            
            
            612.0
            
            
            
            704.0Air conditioning and heating
      products
            
            
            526.0
            
            
            
            673.51,978.9
            
            
            
            2,580.2Unallocated:Cash and cash equivalents,
      includingcurrent restricted
      cash
            
            
            80.9
            
            
            
            54.4Prepaid income
      taxes
            
            
            22.1
            
            
            
            28.9Other assets, including long-term
      restricted investments and marketable
      securities
            
            
            63.4
            
            
            
            47.3Consolidated
      assets
            
            $
            2,145.3
            
            
            $
            2,710.8









(F)
            The Company
      provided income taxes on an interim basis based upon the effective tax
      rate through September 27, 2008.  The following reconciles the
      federal statutory income tax rate to the effective tax rate of
      approximately (4.8)% and 101.8% for the first nine months ended September
      27, 2008 and September 29, 2007:





For the first nine months
    endedSept. 27, 2008
            
            Sept. 29, 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
            
            
            (0.3
            )
            
            
            13.7State income
      tax provision, net of federalincome tax
      effect
            
            
            (0.5
            )
            
            
            10.7Tax effect
      resulting from foreign activities
            
            
            ---
            
            
            
            33.7Non-deductible
      expenses (including goodwill impairment losses)
            
            
            (32.0
            )
            
            
            8.2Increase in
      valuation allowance related to deferred tax assets
            
            
            (7.1
            )
            
            
            ---Other,
      net
            
            
            0.1
            
            
            
            0.5Income tax at
      effective rate
            
            
            (4.8
            )%
            
            
            101.8
            %







During the second
quarter of 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 $14.6 million against domestic deferred tax
assets in existence as of December 31, 2007.  In addition, for the
first nine months ended September 27, 2008, the Company recorded a valuation
allowance against certain tax assets related to domestic and foreign operating
losses generated in the period of approximately $32.4 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
September 27, 2008 was approximately $42.0 million.  The amount of
unrecognized tax benefits that impact the effective tax rate, if recognized, is
approximately $25.7 million.  The difference between the total amount
of unrecognized tax benefits and the amount that would impact the effective rate
consists of items that if recognized prior to January 1, 2009 (see Note A for
SFAS No. 141(R) discussion) would result in adjustments to goodwill of
approximately $14.5 million and approximately $1.8 million of reserves that are
being treated as a source of future taxable income that, if reversed, would
result in a corresponding increase in valuation allowances.





As of September 27,
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 September 27, 2008, the total amount
of accrued interest related to uncertain tax positions is approximately $8.9
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 September
      27, 2008, the Company’s former subsidiary, Ply Gem, has guaranteed
      approximately $17.8 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 September 27, 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, or fail to make payments in full, then the Company may be
      required to make payments on its indemnification.  Should such
      payments be required, the Company cannot be certain that the buyer of the
      former subsidiary will meet its financial obligations with respect to its
      indemnification of Nortek.  As a result, the Company has
      recorded a contingent loss in connection with this arrangement of
      approximately $6.4 million in the third quarter of 2008, representing
      Management’s best estimate in accordance with SFAS No. 5, “Accounting for
      Contingencies”, without consideration as to any amount that the Company
      might receive under the buyer’s indemnification to
  Nortek.





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 $17.1 million and $11.1
million at September 27, 2008 and December 31, 2007,
respectively.  Approximately $4.8 million of short-term liabilities
and approximately $12.3 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 September 27, 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 initsconsolidated 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 $59.5million of recorded insurance
liabilities atSeptember
27, 2008 relate to product
liability accruals of approximately $38.5million.





Changes in the Company’s combined
short-term and long-term product liability accruals during thethirdquarter endedSeptember 27, 2008 andSeptember 29, 2007 are as
follows:





For thethirdquarter
    endedSept. 27, 2008
            
            
            Sept. 29, 2007(Amounts in
      millions)Balance, beginning of the
      period
            
            $
            37.9
            
            
            $
            30.7Provision during the
      period
            
            
            3.6
            
            
            
            7.5Payments made during the
      period
            
            
            (2.8
            )
            
            
            (1.6
            )Other
      adjustments
            
            
            (0.2
            )
            
            
            (0.4
            )Balance, end of the
      period
            
            $
            38.5
            
            
            $
            36.2







Changes in the Company’s combined
short-term and long-term product liability accruals during the firstninemonths endedSeptember 27, 2008 andSeptember 29, 2007 are as
follows:





For the firstninemonths
    endedSept. 27, 2008
            
            
            Sept. 29, 2007(Amounts in
      millions)Balance, beginning of the
      period
            
            $
            35.0
            
            
            $
            27.8Provision during the
      period
            
            
            9.8
            
            
            
            13.1Payments made during the
      period
            
            
            (6.3
            )
            
            
            (5.1
            )Other
      adjustments
            
            
            ---
            
            
            
            0.4Balance, end of the
      period
            
            $
            38.5
            
            
            $
            36.2







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 third
quarter ended September 27, 2008 and September 29, 2007 are as
follows:





For thethirdquarter
    endedSept. 27, 2008
            
            
            Sept. 29, 2007(Amounts in
      millions)Balance, beginning of the
      period
            
            $
            50.6
            
            
            $
            43.4Warranties provided during the
      period
            
            
            8.3
            
            
            
            7.9Settlements made during the
      period
            
            
            (7.8
            )
            
            
            (8.0
            )Changes in liability estimate,
      including expirations and acquisitions
            
            
            (0.1
            )
            
            
            0.7Balance, end of the
      period
            
            $
            51.0
            
            
            $
            44.0







Changes in the
Company’s combined short-term and long-term warranty accruals during the first
nine months ended September 27, 2008 and September 29, 2007 are as
follows:





For the firstninemonths
    endedSept. 27, 2008
            
            
            Sept. 29, 2007(Amounts in
      millions)Balance, beginning of the
      period
            
            $
            47.3
            
            
            $
            41.2Warranties provided during the
      period
            
            
            24.3
            
            
            
            21.2Settlements made during the
      period
            
            
            (21.7
            )
            
            
            (20.6
            )Changes in liability estimate,
      including expirations and acquisitions
            
            
            1.1
            
            
            
            2.2Balance, end of the
      period
            
            $
            51.0
            
            
            $
            44.0







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 third
quarter and first nine months ended September 27, 2008, the Company recorded
approximately $0.2 million and $4.9 million, respectively, of fees, expenses and
a reserve recorded within the HTP segment in connection with the 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 third
quarter and first nine months ended September 29, 2007, the Company recorded
liabilities and expensed into selling, general and administrative expense, net
approximately $0.4 million and $1.8 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.In
addition to the severance paid in the second quarter of 2007 related to the
union employees, the Company recorded approximately $2.3 million in the third
quarter of 2007 related to shutdown costs and asset write-offs associated with
the cessation of the manufacturing operations at Chaska.





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 thefirst nine months ended September 27,2008, the Company recorded
a reduction to this reserve of approximately $0.1 millionto selling, general and administrative
expense, net.During the third quarter
ended September 29, 2007, the Company recorded approximately $0.2 million of
severance and other costs associated with this shutdown to selling, general and
administrative expense, net.The Company does not anticipate
recording any further expenses associated with this shutdown during
2008.





During the third
quarter and first nine months ended September 27, 2008, the Company recorded
liabilities and expensed into cost of products sold approximately $0.4 million
and $0.7 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.  The Aubrey facility was shutdown
during the fourth quarter of 2008 and approximately 115 employees were
terminated.  The Company anticipates recording additional expenses
related to severance associated with this shutdown of approximately $0.1 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
            
            
            
            0.8Provision
            
            
            0.4
            
            
            
            ---
            
            
            
            0.4Payments and
      asset write downs
            
            
            (0.1
            )
            
            
            (0.2
            )
            
            
            (0.3
            )Balance
      at September 27, 2008
            
            $
            0.7
            
            
            $
            0.2
            
            
            $
            0.9







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 $1.6million and $2.1million for thethirdquarter endedSeptember 27, 2008 andSeptember 29, 2007, respectively and aggregated
approximately $5.1million and $6.5million for the firstninemonths endedSeptember 27, 2008 andSeptember 29, 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.  AtSeptember 27, 2008, the Company estimated that
approximately $3.1million would be contributed to the
Company’s defined benefit pension plans in 2008, of which approximately
$2.5million was made through the firstninemonths of 2008.





The Company’s
unaudited net periodic benefit (income) cost for its defined benefit plans for
the third quarter ended September 27, 2008 and September 29, 2007 consists of
the following components:





For the third quarter endedSept. 27, 2008
            
            
            Sept. 29, 2007(Dollar
      amounts in millions)Service
      cost
            
            $
            0.2
            
            
            $
            0.1Interest
      cost
            
            
            3.2
            
            
            
            2.4Expected
      return on plan assets
            
            
            (3.5
            )
            
            
            (2.5
            )Recognized
      actuarial gain
            
            
            (0.1
            )
            
            
            ---Net periodic
      benefit (income) cost
            
            $
            (0.2
            )
            
            $
            ---







The Company’s
unaudited net periodic benefit (income) cost for its defined benefit plans for
the first nine months ended September 27, 2008 and September 29, 2007 consists
of the following components:





For the first nine months
    endedSept. 27, 2008
            
            
            Sept. 29, 2007(Dollar
      amounts in millions)Service
      cost
            
            $
            0.5
            
            
            $
            0.4Interest
      cost
            
            
            9.1
            
            
            
            7.2Expected
      return on plan assets
            
            
            (9.9
            )
            
            
            (7.5
            )Recognized
      actuarial gain
            
            
            (0.1
            )
            
            
            ---Net periodic
      benefit (income) cost
            
            $
            (0.4
            )
            
            $
            0.1







The Company’s
unaudited net periodic benefit cost for its subsidiary’s Post-Retirement Health
Benefit Plan for the third quarter ended September 27, 2008 and September 29,
2007 consists of the following components:




For the third quarter endedSept. 27, 2008
            
            
            Sept. 29, 2007(Dollar
      amounts in millions)Interest
      cost
            
            $
            0.1
            
            
            $
            0.1Amortization
      of prior service cost
            
            
            (0.2
            )
            
            
            ---Net periodic
      post-retirement health (income) cost
            
            $
            (0.1
            )
            
            $
            0.1







The Company’s
unaudited net periodic benefit cost for its subsidiary’s Post-Retirement Health
Benefit Plan for the first nine months ended September 27, 2008 and September
29, 2007 consists of the following components:





For the first nine months
    endedSept. 27, 2008
            
            
            Sept. 29, 2007(Dollar
      amounts in millions)Interest
      cost
            
            $
            0.3
            
            
            $
            0.2Amortization
      of prior service cost
            
            
            (0.2
            )
            
            
            (0.1
            )Net periodic
      post-retirement health cost
            
            $
            0.1
            
            
            $
            0.1









NTK HOLDINGS, INC. AND
SUBSIDIARIES
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 OF
THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THIRD QUARTER AND FIRST NINE MONTHS ENDED SEPTEMBER 27, 2008
 AND
THE THIRD QUARTER AND FIRST NINE MONTHS ENDED SEPTEMBER 29,
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
third quarter ended September 27, 2008 and September 29, 2007:







For the third quarter
      ended
              
              
              Net
  ChangeSept. 27,
    2008
              
              
              Sept. 29,
    2007
              
              
              $
              
              
              %(Dollar amounts in
      millions)Net sales:Residential ventilation
      products
              
              $
              180.0
              
              
              $
              203.9
              
              
              $
              (23.9
              )
              
              
              (11.7
              )
      %Home technology
      products
              
              
              132.7
              
              
              
              148.7
              
              
              
              (16.0
              )
              
              
              (10.8
              )Air conditioning and heating
      products
              
              
              269.9
              
              
              
              249.6
              
              
              
              20.3
              
              
              
              8.1Consolidated net
      sales
              
              $
              582.6
              
              
              $
              602.2
              
              
              $
              (19.6
              )
              
              
              (3.3
              )
      %Operating (loss)
      earnings:Residential ventilation products
      (1)
              
              $
              (327.1
              )
              
              $
              19.4
              
              
              $
              (346.5
              )
              
              
              *
              %Home technology products
      (2)
              
              
              (49.3
              )
              
              
              19.2
              
              
              
              (68.5
              )
              
              
              *Air conditioning and heating
      products (3)
              
              
              (189.5
              )
              
              
              6.2
              
              
              
              (195.7
              )
              
              
              *Subtotal
              
              
              (565.9
              )
              
              
              44.8
              
              
              
              (610.7
              )
              
              
              *Unallocated:Stock-based compensation
      charges
              
              
              ---
              
              
              
              (0.1
              )
              
              
              0.1
              
              
              
              100.0Foreign exchange (losses) gains on
      transactions, including intercompany
      debt
              
              
              (0.3
              )
              
              
              0.1
              
              
              
              (0.4
              )
              
              
              *Estimated loss contingency on
      lease guarantee
              
              
              (6.4
              )
              
              
              ---
              
              
              
              (6.4
              )
              
              
              *Unallocated,
      net
              
              
              (7.1
              )
              
              
              (7.2
              )
              
              
              0.1
              
              
              
              1.4Consolidated
      operating (loss) earnings
              
              $
              (579.7
              )
              
              $
              37.6
              
              
              $
              (617.3
              )
              
              
              *
              %Depreciation and amortization
      expense:Residential ventilation
      products
              
              $
              6.5
              
              
              $
              5.3
              
              
              $
              1.2
              
              
              
              22.6
              %Home technology
      products
              
              
              4.7
              
              
              
              4.2
              
              
              
              0.5
              
              
              
              11.9Air conditioning and heating
      products
              
              
              5.8
              
              
              
              5.9
              
              
              
              (0.1
              )
              
              
              (1.7
              )Unallocated
              
              
              0.1
              
              
              
              0.4
              
              
              
              (0.3
              )
              
              
              (75.0
              )$
              17.1
              
              
              $
              15.8
              
              
              $
              1.3
              
              
              
              8.2
              %Operating (loss) earnings
      margin:Residential ventilation products
      (1)
              
              
              (181.7
              )
      %
              
              
              9.5
              %Home technology products
      (2)
              
              
              (37.2
              )
              
              
              12.9Air conditioning and heating
      products (3)
              
              
              (70.2
              )
              
              
              2.5Consolidated
              
              
              (99.5
              )
              
              
              6.2Depreciation and amortizationexpense as
      a % of net sales:Residential ventilation
      products
              
              
              3.6
              %
              
              
              2.6
              %Home technology
      products
              
              
              3.5
              
              
              
              2.8Air conditioning and heating
      products
              
              
              2.1
              
              
              
              2.4Consolidated
              
              
              2.9
              
              
              
              2.6


*
            not
      meaningful or not applicable




(1)
            The operating
      results of the RVP segment for the third quarter ended September 27, 2008
      include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $340.0
      million,


·
            costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico of approximately $1.8
million,


·
            a reduction
      in the social liability reserve related to one of the Company’s foreign
      subsidiaries of approximately $1.9 million
and


·
            approximately
      $0.4 million in net charges related to the closure of certain RVP segment
      facilities.





The operating
results of the RVP segment for the third quarter ended September 29, 2007
include:


·
            a charge to
      warranty expense of approximately $0.5 million related to a product safety
      upgrade,


·
            an
      approximate $0.4 million charge related to the closure of the Company’s
      NuTone, Inc. Cincinnati, Ohio
facility,


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


·
            legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland of approximately
      $0.9 million,


·
            an
      approximate $1.9 million loss related to the settlement of litigation
      and


·
            net foreign
      exchange losses of approximately $0.6 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 third quarter ended September 27, 2008
      include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $60.0
      million,


·
            a charge of
      approximately $1.5 million related to a reserve for amounts due from
      customers,


·
            approximately
      $0.2 million of fees, expenses and a reserve recorded in connection with
      the settlement of a dispute with one of its former suppliers
      and


·
            net foreign
      exchange losses of approximately $0.2 million related to
      transactions.





The operating
results of the HTP segment for the third quarter ended September 29, 2007
include:


·
            a charge to
      warranty expense of approximately $0.3 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 third quarter ended September 27, 2008
      include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $200.0 million
      and


·
            a gain on the
      settlement of litigation of approximately $1.2 million resulting from a
      prior bad debt write-off.





The operating
results of the HVAC segment for the third quarter ended September 29, 2007
include:


·
            a charge of
      approximately $2.3 million related to the planned closure of the Company’s
      Mammoth, Inc. Chaska, Minnesota manufacturing facility
  and


·
            net foreign
      exchange losses of approximately $1.0 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 nine months ended September 27, 2008 and September 29, 2007:







For the first nine months
      ended
              
              
              Net
  ChangeSept. 27,
    2008
              
              
              Sept. 29,
    2007
              
              
              $
              
              
              %(Dollar amounts in
      millions)Net sales:Residential ventilation
      products
              
              $
              555.2
              
              
              $
              618.7
              
              
              $
              (63.5
              )
              
              
              (10.3
              )
      %Home technology
      products
              
              
              388.0
              
              
              
              415.8
              
              
              
              (27.8
              )
              
              
              (6.7
              )Air conditioning and heating
      products
              
              
              826.7
              
              
              
              764.5
              
              
              
              62.2
              
              
              
              8.1Consolidated net
      sales
              
              $
              1,769.9
              
              
              $
              1,799.0
              
              
              $
              (29.1
              )
              
              
              (1.6
              )
      %Operating (loss)
      earnings:Residential ventilation products
      (1)
              
              $
              (295.2
              )
              
              $
              70.6
              
              
              $
              (365.8
              )
              
              
              *
              %Home technology products
      (2)
              
              
              (31.2
              )
              
              
              59.0
              
              
              
              (90.2
              )
              
              
              *Air conditioning and heating
      products (3)
              
              
              (154.9
              )
              
              
              38.7
              
              
              
              (193.6
              )
              
              
              *Subtotal
              
              
              (481.3
              )
              
              
              168.3
              
              
              
              (649.6
              )
              
              
              *Unallocated:Stock-based compensation
      charges
              
              
              (0.1
              )
              
              
              (0.3
              )
              
              
              0.2
              
              
              
              66.7Foreign exchange (losses) gains on
      transactions,including intercompany
      debt
              
              
              (0.2
              )
              
              
              0.3
              
              
              
              (0.5
              )
              
              
              *Estimated loss contingency on
      lease guarantee
              
              
              (6.4
              )
              
              
              ---
              
              
              
              (6.4
              )
              
              
              *Unallocated,
      net
              
              
              (21.4
              )
              
              
              (21.2
              )
              
              
              (0.2
              )
              
              
              (0.9
              )Consolidated
      operating (loss) earnings
              
              $
              (509.4
              )
              
              $
              147.1
              
              
              $
              (656.5
              )
              
              
              *
              %Depreciation and amortization
      expense:Residential ventilation
      products
              
              $
              20.1
              
              
              $
              15.0
              
              
              $
              5.1
              
              
              
              34.0
              %Home technology
      products
              
              
              14.5
              
              
              
              12.8
              
              
              
              1.7
              
              
              
              13.3Air conditioning and heating
      products
              
              
              17.8
              
              
              
              18.2
              
              
              
              (0.4
              )
              
              
              (2.2
              )Unallocated
              
              
              0.7
              
              
              
              0.9
              
              
              
              (0.2
              )
              
              
              (22.2
              )$
              53.1
              
              
              $
              46.9
              
              
              $
              6.2
              
              
              
              13.2
              %Operating (loss) earnings
      margin:Residential ventilation products
      (1)
              
              
              (53.2
              )
      %
              
              
              11.4
              %Home technology products
      (2)
              
              
              (8.0
              )
              
              
              14.2Air conditioning and heating
      products (3)
              
              
              (18.7
              )
              
              
              5.1Consolidated
              
              
              (28.8
              )
              
              
              8.2Depreciation and
      amortization expense as
      a % of net sales:Residential ventilation
      products
              
              
              3.6
              %
              
              
              2.4
              %Home technology
      products
              
              
              3.7
              
              
              
              3.1Air conditioning and heating
      products
              
              
              2.2
              
              
              
              2.4Consolidated
              
              
              3.0
              
              
              
              2.6


*
            not
      meaningful or not applicable




(1)
            The operating
      results of the RVP segment for the first nine months ended September 27,
      2008 include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $340.0
      million,


·
            costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico of approximately $3.2
million,


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


·
            a reduction
      in the social liability reserve related to one of the Company’s foreign
      subsidiaries of approximately $1.9
million,


·
            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
      $0.6 million in net charges related to the closure of certain RVP segment
      facilities.





The operating
results of the RVP segment for the first nine months ended September 29, 2007
include:


·
            a charge to
      warranty expense of approximately $0.5 million related to a product safety
      upgrade,


·
            an
      approximate $1.8 million charge related to the closure of the Company’s
      NuTone, Inc. Cincinnati, Ohio
facility,


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


·
            legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland of approximately
      $2.2 million,


·
            an
      approximate $1.9 million loss related to the settlement of litigation
      and


·
            net foreign
      exchange losses of approximately $1.5 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 nine months ended September 27,
      2008 include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $60.0
      million,


·
            approximately
      $4.9 million of fees, expenses and a reserve recorded in connection with
      the settlement of a dispute with one of its former suppliers
      and


·
            a charge of
      approximately $1.5 million related to a reserve for amounts due from
      customers.





The operating
results of the HTP segment for the first nine months ended September 29, 2007
include:


·
            a charge
      approximately $0.5 million related to a reserve for amounts due from
      customers,


·
            a charge to
      warranty expense of approximately $0.1 million related to a product safety
      upgrade and


·
            net foreign
      exchange gains of approximately $0.2 million related to
      transactions.





(3)
            The operating
      results of the HVAC segment for the first nine months ended September 27,
      2008 include:


·
            an estimated
      non-cash goodwill impairment charge of approximately $200.0
      million,


·
            a gain on the
      settlement of litigation of approximately $1.2 million resulting from a
      prior bad debt write-off and


·
            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 nine months ended September 29, 2007
include:


·
            a charge of
      approximately $2.6 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 $2.4 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries.





The following table
presents the financial information for the third quarter ended September 27,
2008 and September 29, 2007.  The results of operations for the third
quarter ended September 27, 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 third quarter of
      2008as compared to
      theFor the third quarter
      ended
              
              
              third quarter of
      2007Sept. 27,
    2008
              
              
              Sept. 29,
    2007
              
              
              $
              
              
              %(Dollar amounts in
      millions)Net sales
              
              $
              582.6
              
              
              $
              602.2
              
              
              $
              (19.6
              )
              
              
              (3.3
              )
      %Cost of products
      sold
              
              
              434.4
              
              
              
              433.0
              
              
              
              (1.4
              )
              
              
              (0.3
              )Selling, general and
      administrative expense, net
              
              
              121.2
              
              
              
              125.1
              
              
              
              3.9
              
              
              
              3.1Goodwill impairment
      charge
              
              
              600.0
              
              
              
              ---
              
              
              
              (600.0
              )
              
              
              *Amortization of intangible
      assets
              
              
              6.7
              
              
              
              6.5
              
              
              
              (0.2
              )
              
              
              (3.1
              )Operating (loss)
      earnings
              
              
              (579.7
              )
              
              
              37.6
              
              
              
              (617.3
              )
              
              
              *Interest
      expense
              
              
              (53.4
              )
              
              
              (46.4
              )
              
              
              (7.0
              )
              
              
              (15.1
              )Investment
      income
              
              
              0.2
              
              
              
              0.6
              
              
              
              (0.4
              )
              
              
              (66.7
              )Loss before provision for income
      taxes
              
              
              (632.9
              )
              
              
              (8.2
              )
              
              
              (624.7
              )
              
              
              *Provision for income
      taxes
              
              
              3.7
              
              
              
              0.5
              
              
              
              (3.2
              )
              
              
              *Net loss
              
              $
              (636.6
              )
              
              $
              (8.7
              )
              
              $
              (627.9
              )
              
              
              *
              %
  Change
      in percentage forPercentage of net sales
      for
              the third quarter of
      2008the third quarter
      ended
              as compared to
      theSept. 27,
    2008
              
              Sept. 29,
    2007
              third quarter of
      2007Net sales
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              ---
              %Cost of products
      sold
              
              
              74.6
              
              
              
              71.9
              
              
              
              (2.7
              )Selling, general and
      administrative expense, net
              
              
              20.8
              
              
              
              20.8
              
              
              
              ---Goodwill impairment
      charge
              
              
              103.0
              
              
              
              ---
              
              
              
              (103.0
              )Amortization of intangible
      assets
              
              
              1.1
              
              
              
              1.1
              
              
              
              ---Operating (loss)
      earnings
              
              
              (99.5
              )
              
              
              6.2
              
              
              
              (105.7
              )Interest
      expense
              
              
              (9.2
              )
              
              
              (7.7
              )
              
              
              (1.5
              )Investment
      income
              
              
              ---
              
              
              
              0.1
              
              
              
              (0.1
              )Loss before provision for income
      taxes
              
              
              (108.7
              )
              
              
              (1.4
              )
              
              
              (107.3
              )Provision for income
      taxes
              
              
              0.6
              
              
              
              0.1
              
              
              
              (0.5
              )Net loss
              
              
              (109.3
              )
      %
              
              
              (1.5
              )
      %
              
              
              (107.8
              )
       %






(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 nine months ended September 27,
2008 and September 29, 2007.  The results of operations for the first
nine months ended September 27, 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 nine months of
      2008as compared to
      theFor the first nine months
      ended
              
              
              first nine months of
      2007Sept. 27,
    2008
              
              
              Sept. 29,
    2007
              
              
              $
              
              
              %(Dollar amounts in
      millions)Net sales
              
              $
              1,769.9
              
              
              $
              1,799.0
              
              
              $
              (29.1
              )
              
              
              (1.6
              )
      %Cost of products
      sold
              
              
              1,299.3
              
              
              
              1,269.7
              
              
              
              (29.6
              )
              
              
              (2.3
              )Selling, general and
      administrative expense, net
              
              
              358.2
              
              
              
              363.3
              
              
              
              5.1
              
              
              
              1.4Goodwill impairment
      charge
              
              
              600.0
              
              
              
              ---
              
              
              
              (600.0
              )
              
              
              *Amortization of intangible
      assets
              
              
              21.8
              
              
              
              18.9
              
              
              
              (2.9
              )
              
              
              (15.3
              )Operating (loss)
      earnings
              
              
              (509.4
              )
              
              
              147.1
              
              
              
              (656.5
              )
              
              
              *Interest
      expense
              
              
              (143.8
              )
              
              
              (137.4
              )
              
              
              (6.4
              )
              
              
              (4.7
              )Loss from debt
      retirement
              
              
              (9.9
              )
              
              
              ---
              
              
              
              (9.9
              )
              
              
              *Investment
      income
              
              
              0.6
              
              
              
              1.5
              
              
              
              (0.9
              )
              
              
              (60.0
              )(Loss) earnings before provision
      for income taxes
              
              
              (662.5
              )
              
              
              11.2
              
              
              
              (673.7
              )
              
              
              *Provision for income
      taxes
              
              
              31.6
              
              
              
              11.4
              
              
              
              (20.2
              )
              
              
              *Net loss
              
              $
              (694.1
              )
              
              $
              (0.2
              )
              
              $
              (693.9
              )
              
              
              *
              %




Change in percentage
      forPercentage of net sales
      for
              
              the first nine months of
      2008the first nine months
      ended
              
              as compared to
      theSept. 27,
    2008
              
              Sept. 29,
    2007
              
              first nine months of
      2007Net sales
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              ---
              %Cost of products
      sold
              
              
              73.4
              
              
              
              70.6
              
              
              
              (2.8
              )Selling, general and
      administrative expense, net
              
              
              20.3
              
              
              
              20.2
              
              
              
              (0.1
              )Goodwill impairment
      charge
              
              
              33.9
              
              
              
              ---
              
              
              
              (33.9
              )Amortization of intangible
      assets
              
              
              1.2
              
              
              
              1.0
              
              
              
              (0.2
              )Operating (loss)
      earnings
              
              
              (28.8
              )
              
              
              8.2
              
              
              
              (37.0
              )Interest
      expense
              
              
              (8.1
              )
              
              
              (7.6
              )
              
              
              (0.5
              )Loss from debt
      retirement
              
              
              (0.5
              )
              
              
              ---
              
              
              
              (0.5
              )Investment
      income
              
              
              ---
              
              
              
              0.1
              
              
              
              (0.1
              )(Loss) earnings before provision
      for income taxes
              
              
              (37.4
              )
              
              
              0.7
              
              
              
              (38.1
              )Provision for income
      taxes
              
              
              1.8
              
              
              
              0.7
              
              
              
              (1.1
              )Net loss
              
              
              (39.2
              )
      %
              
              
              ---
              %
              
              
              (39.2
              )
       %




(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.





The results of
operations for the third quarter and first nine months ended September 27, 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.





Excluding the
effect of acquisitions and changes in foreign currency exchange rates, the
operating results of the Company were adversely impacted in the third quarter
and first nine months of 2008 by a decline in sales volume in residential
ventilation and home technology products as the housing market continued to
weaken and by increased costs across all of our businesses.  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 third quarter and first
nine months ended September 27, 2008.





Key industry
activity affecting our businesses in the United States for the third quarter and
first nine months of 2008 and the full year 2007 were as follows:





% Increase
      (Decrease)2008Source
              of Data
            3rdQuarter
            1st9Months
            2007Private residential construction
      spending
            1
            (30)%
            (29)%
            (20)%Total housing
      starts
            1
            (33)%
            (31)%
            (25)%New home
    sales
            1
            (35)%
            (36)%
            (26)%Existing home
      sales
            3
            (8)%
            (15)%
            (13)%Residential improvement
      spending
            1
            (16)%
            (16)%
            (4)%Central air conditioning and heat
      pump shipments
            2
            (5)%
            (6)%
            (9)%Private non-residential
      construction spending
            1
            13%
            17%
            19%Manufactured housing
      shipments
            4
            (15)%
            (10)%
            (18)%





Source of
    data:





(1)
            U.S.Census
    Bureau


(2)
            Air Conditioning and Refrigeration
      Institute


(3)
            National Association of
      Realtors(4)
            Data for the third quarter and
      first nine months ended September 27, 2008 is preliminary based upon the
      information received from theU.S.Census
      Bureau.





The Company
believes that the severe impact of the worldwide crisis in the credit and
financial markets in September and October 2008, declines in new and existing
home sales, the instability in the troubled mortgage market and rising
unemployment will have a further negative impact on consumer disposable income
and spending on home remodeling and repair expenditures through at least
2009.  Accordingly, these factors will have an adverse effect on the
Company’s operating results including the fourth quarter of
2008.  Although the Company has implemented certain cost reduction
measures during the first nine months of 2008, beginning in the fourth quarter
of 2008, the Company began instituting certain additional cost reduction
measures, by implementing initiatives to significantly reduce discretionary
spending and achieve reductions in workforce, across all of its businesses given
the rapidly changing and challenging economic environment, although there can be
no assurance that these measures will be successful.


Net
Sales.Consolidated net sales decreased approximately $19.6
million or 3.3% for the third quarter ended September 27, 2008 as compared to
the third quarter ended September 29, 2007 and decreased approximately $29.1
million or 1.6% for the first nine months ended September 27, 2008 as compared
to the first nine months ended September 29, 2007 as discussed further in the
following paragraphs.  The effect of changes in foreign currency
exchange rates and acquisitions contributed approximately $3.4 million and $1.1
million, respectively, to net sales for the third quarter ended September 27,
2008 and contributed approximately $25.7 million and $20.7 million,
respectively, to net sales for the first nine months ended September 27,
2008.  Excluding the effect of changes in foreign currency exchange
rates and acquisitions, consolidated net sales decreased approximately $24.1
million and $75.5 million in the third quarter and first nine months ended
September 27, 2008, respectively.





In the RVP segment,
net sales decreased approximately $23.9 million or 11.7% for the third quarter
ended September 27, 2008 as compared to the third quarter ended September 29,
2007 and decreased approximately $63.5 million or 10.3% for the first nine
months ended September 27, 2008 as compared to the first nine months ended
September 29, 2007.  Net sales in the RVP segment for the third
quarter and first nine months ended September 27, 2008 reflects an increase of
approximately $3.5 million and $20.3 million, respectively, attributable to the
effect of changes in foreign currency exchange rates and an increase of
approximately $0.4 million and $2.3 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 $27.8 million for the third quarter
ended September 27, 2008 as compared to the third quarter ended September 29,
2007 and decreased approximately $86.1 million for the first nine months ended
September 27, 2008 as compared to the first nine months ended September 29,
2007.  The decrease in net sales in the RVP segment for the third
quarter and first nine months ended September 27, 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 prices of bathroom
exhaust fans.  The average unit sales price of kitchen range hoods for
the third quarter and first nine months of 2008 was down slightly as compared to
the same periods of 2007.  Higher average unit sales prices 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 78.6% and 79.6% of the total RVP
segment’s gross sales for the third quarter and first nine months ended
September 27, 2008, respectively.  Excluding the effect of
acquisitions, sales of range hoods and bathroom exhaust fans decreased
approximately 14.1% and 15.5% in the third quarter and first nine months ended
September 27, 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 11.2% and 10.8% in
the third quarter and first nine months ended September 27, 2008, respectively,
for the RVP segment’s foreign subsidiaries.





In the HTP segment,
net sales decreased approximately $16.0 million or 10.8% for the third quarter
ended September 27, 2008 as compared to the third quarter ended September 29,
2007 and decreased approximately $27.8 million or 6.7% for the first nine months
ended September 27, 2008 as compared to the first nine months ended September
29, 2007.  Net sales in the HTP segment for the third quarter and
first nine months ended September 27, 2008 includes an increase of approximately
$0.7 million and $18.4 million, respectively, attributable to acquisitions and a
decrease of approximately $0.1 million for the third quarter and first nine
months of 2008 attributable to the effect of changes in foreign currency
exchange rates.  Excluding the effect of acquisitions and changes in
foreign currency exchange rates, net sales in the HTP segment decreased
approximately $16.6 million and $46.1 million for the third quarter and first
nine months ended September 27, 2008, respectively.  This decrease is
principally due to decreased sales of audio and video distribution equipment and
speakers.





In the HVAC
segment, net sales increased approximately $20.3 million or 8.1% for the third
quarter ended September 27, 2008 as compared to the third quarter ended
September 29, 2007 and increased approximately $62.2 million or 8.1% for the
first nine months ended September 27, 2008 as compared to the first nine months
ended September 29, 2007.  Net sales in the HVAC segment for first
nine months ended September 27, 2008 reflects an increase of approximately $5.5
million attributable to the effect of changes in foreign currency exchange
rates.  The remaining increase in net sales in the HVAC segment for
the third quarter and first nine months ended September 27, 2008 as compared to
the same periods of 2007 is primarily the result of price increases implemented
in the third quarter and first nine months of 2008 related to products sold to
residential site-built and manufactured housing customers 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 $19.2 million and $63.2
million was shipped during the third quarter and first nine months of 2008,
respectively.  Backlog for commercial HVAC products was approximately
$177.3 million at September 29, 2007, approximately $172.7 million at December
31, 2007 and approximately $237.8 million at September 27, 2008.  This
increase in backlog serving commercial HVAC customers at September 27, 2008
reflects, approximately $11.6 million remaining from a new order received in the
first quarter of 2008 for approximately $74.8 million and increased order input
levels during the past several months for jobs expected to be delivered over the
next six to nine months.  The Company’s net sales to customers serving
the manufactured housing markets, principally consisting of air conditioners and
furnaces, constituted approximately 4.6% of the Company’s consolidated net sales
for the third quarter ended September 27, 2008 and September 29, 2007,
respectively and constituted approximately 4.6% and 4.4% of the Company’s
consolidated net sales for the first nine months ended September 29, 2008 and
September 29, 2007, respectively.


Foreign net sales,
which are attributed based on the location of the Company’s subsidiary
responsible for the sale, were approximately 21.9% and 21.2% of consolidated net
sales for the third quarter ended September 27, 2008 and September 29, 2007,
respectively, and were approximately 21.2% and 21.0% of consolidated net sales
for the first nine months ended September 27, 2008 and September 29, 2007,
respectively.  Net sales from the Company’s Canadian subsidiaries were
approximately 9.9% and 8.6% of consolidated net sales for the third quarter
ended September 27, 2008 and September 29, 2007, respectively, and were
approximately 9.3% and 8.3% of consolidated net sales for the first nine months
ended September 27, 2008 and September 29, 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 9.8% of consolidated net sales
for the third quarter ended September 27, 2008 and September 29, 2007,
respectively, and were approximately 9.2% and 10.0% of consolidated net sales
for the first nine months ended September 27, 2008 and September 29, 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
$434.4 million for the third quarter ended September 27, 2008 as compared to
approximately $433.0 million for the third quarter ended September 29, 2007 and
was approximately $1,299.3 million for the first nine months ended September 27,
2008 as compared to approximately $1,269.7 million for the first nine months
ended September 29, 2007.  Cost of products sold, as a percentage of
net sales, increased from approximately 71.9% for the third quarter ended
September 29, 2007 to approximately 74.6% for the third quarter ended September
27, 2008 and increased from approximately 70.6% for the first nine months ended
September 29, 2007 to approximately 73.4% for the first nine months ended
September 27, 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 third quarter and first nine 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.  These price increases may not be totally realized and may not
totally offset the impact of higher costs.





Overall,
consolidated material costs were approximately 48.2% and 47.7% of net sales for
the third quarter ended September 27, 2008 and September 29, 2007, respectively,
and were approximately 48.0% and 46.8% of net sales for the first nine months
ended September 27, 2008 and September 29, 2007, respectively.  As
compared to the third quarter and first nine months ended September 29, 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 third quarter and first nine
months ended September 27, 2008 as compared to the same periods of 2007 were
partially offset by continued strategic sourcing initiatives and improvements in
manufacturing efficiency.





During the first
nine months ended September 27, 2008, the Company experienced increased freight
costs primarily due to increased fuel surcharges as compared to the same period
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 third quarter ended September 27, 2008 was
approximately $138.0 million, or 76.7% as a percentage of the RVP segment’s net
sales, as compared to approximately $148.0 million, or 72.6% as a percentage of
the RVP segment’s net sales for the third quarter ended September 29,
2007.  In the RVP segment, cost of products sold for the first nine
months ended September 27, 2008 was approximately $418.5 million, or 75.4% as a
percentage of the RVP segment’s net sales, as compared to approximately $436.9
million, or 70.6% as a percentage of the RVP segment’s net sales for the first
nine months ended September 29, 2007.  Cost of products sold in the
RVP segment for the third quarter and first nine months ended September 27, 2008
includes (1) an increase of approximately $2.8 million and $16.1 million,
respectively, related to the effect of changes in foreign currency exchange
rates, (2) an increase of approximately $1.6 million contributed by acquisitions
in the first nine months of 2008, (3) costs and expenses incurred in connection
with the start up of a range hood facility in Mexico of approximately $1.8
million and $3.2 million, respectively, and (4) approximately $0.4 million and
$0.7 million, respectively, of severance charges related to the closure of
certain RVP segment facilities.  Cost of products sold in the RVP for
the third quarter and first nine months ended September 29, 2007 includes a
charge to warranty expense of approximately $0.5 million related to a product
safety upgrade recorded in the third quarter of 2007.  The increase in
the percentage of cost of products sold to net sales for the third quarter and
first nine months ended September 27, 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 third quarter ended September 27, 2008was approximately $73.7
million, or 55.5% as a percentage of the HTP segment’s net sales, as compared to
approximately $80.8 million, or 54.3% as a percentage of the HTP segment’s net
sales for the third quarter ended September 29, 2007.  In the HTP
segment, cost of products sold for the first nine months ended September 27,
2008was
approximately $214.1 million, or 55.2% as a percentage of the HTP segment’s net
sales, as compared to approximately $222.6 million, or 53.5% as a percentage of
the HTP segment’s net sales for the first nine months ended September 29,
2007.  Cost of products sold in the HTP segment for the third quarter
and first nine months ended September 27, 2008 reflects an increase of
approximately $0.7 million and $12.0 million, respectively, contributed by
acquisitions.  Cost of products sold in the HTP segment for the third
quarter and first nine months ended September 29, 2007 reflects a charge to
warranty expense of approximately $0.3 million and $0.1 million, respectively,
related to a product safety upgrade.  The increase in the percentage
of cost of products sold to net sales for the third quarter and first nine
months ended September 27, 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 third quarter ended September 27, 2008
was approximately $222.7 million, or 82.5% as a percentage of the HVAC segment’s
net sales, as compared to approximately $204.2 million, or 81.8% as a percentage
of the HVAC segment’s net sales, for the third quarter ended September 29,
2007.  In the HVAC segment, cost of products sold for the first nine
months ended September 27, 2008 was approximately $666.7 million, or 80.6% as a
percentage of the HVAC segment’s net sales, as compared to approximately $610.2
million, or 79.8% as a percentage of the HVAC segment’s net sales, for the first
nine months ended September 29, 2007.  Cost of products sold in the
HVAC segment for the third quarter ended September 27, 2008 includes a decrease
of approximately $0.1 million related to the effect of changes in foreign
currency exchange rates while the first nine months ended September 27, 2008
includes an increase of approximately $4.1 million related to the effect of
changes in foreign currency exchange rates.  The increase in cost of
products sold as a percentage of net sales for the third quarter and first nine
months ended September 27, 2008 as compared to the same periods of 2007 reflects
an increase in material costs as a percentage of net sales for products sold to
commercial customers and decreased sales volume of product sold to residential
site-built and manufactured housing customers without a proportionate decrease
in expense, partially offset by increased sales volume of product sold to
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 $121.2 million for the third quarter
ended September 27, 2008 as compared to approximately $125.1 million for the
third quarter ended September 29, 2007 and was approximately $358.2 million for
the first nine months ended September 27, 2008 as compared to approximately
$363.3 million for the first nine months ended September 29,
2007.  SG&A as a percentage of net sales remained unchanged at
approximately 20.8% for the third quarter ended September 27, 2008 and September
29, 2007, respectively, and increased from approximately 20.2% for the first
nine months ended September 29, 2007 to approximately 20.3% for the first nine
months ended September 27, 2008.  SG&A decreased for the third
quarter and first nine months of 2008 as compared to the same period of 2007, in
part, due to cost reduction measures initiated in the first half of
2008.





SG&A for the
third quarter ended September 27, 2008 and September 29, 2007 includes, among
others, the following expense (income) items (see Note D of the Notes to the
Consolidated Financial Statements included elsewhere herein):





For the third quarter endedSept. 27, 2008
            
            
            Sept. 29, 2007(Amounts
      in millions)(1
            )
            Estimated
      loss contingency on lease guarantee
            
            $
            6.4
            
            
            $
            ---(2
            )
            Charges
      related to the closure of the Company’s Mammoth, Inc.Chaska, MN
      facility in the HVAC segment
            
            
            ---
            
            
            
            2.3(3
            )
            Loss on
      settlement of litigation in the RVP segment
            
            
            ---
            
            
            
            1.9(4
            )
            Reserve for
      amounts due from customers within the HTP segment
            
            
            1.5
            
            
            
            ---(5
            )
            Net foreign
      exchange losses related to transactions, including intercompany debt not
      indefinitely invested in the Company’s subsidiaries
            
            
            0.5
            
            
            
            1.4(6
            )
            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
            
            
            ---
            
            
            
            0.9(7
            )
            SG&A
      related to acquisitions
            
            
            0.5
            
            
            
            ---(8
            )
            Charges
      related to the closure of the Company’s NuTone, Inc.Cincinnati,
      OH facility in the RVP segment
            
            
            ---
            
            
            
            0.4(9
            )
            Effect of
      changes in foreign currency exchange rates
            
            
            0.3
            
            
            
            ---(10
            )
            Fees,
      expenses and a reserve recorded within the HTP segment in connection with
      the settlement
              of a dispute with one of its former suppliers
            
            
            0.2
            
            
            
            ---(11
            )
            Net charges
      related to the closure of certain RVP segment facilities
            
            
            ---
            
            
            
            0.2(12
            )
            Reduction in
      social liability reserve related to one of the Company’s foreign
      subsidiaries in the RVP segment
            
            
            (1.9
            )
            
            
            ---(13
            )
            Gain on the
      settlement of litigation in the HVAC segment resulting from a prior bad
      debt write-off
            
            
            (1.2
            )
            
            
            ---(14
            )
            Decrease in
      display expense in the RVP segment
            
            
            (0.2
            )
            
            
            ---






SG&A for the
first nine months ended September 27, 2008 and September 29, 2007 includes,
among others, the following expense (income) items (see Note D of the Notes to
the Consolidated Financial Statements included elsewhere
herein):


For the first nine months
    endedSept. 27, 2008
            
            
            Sept. 29, 2007(Amounts
      in millions)(1
            )
            SG&A
      related to acquisitions
            
            $
            8.4
            
            
            $
            ---(2
            )
            Estimated
      loss contingency on lease guarantee
            
            
            6.4
            
            
            
            ---(3
            )
            Fees,
      expenses and a reserve recorded within the HTP segment in connection with
      the settlement of a dispute with one of its former
    suppliers
            
            
            4.9
            
            
            
            ---(4
            )
            Effect of
      changes in foreign currency exchange rates
            
            
            4.1
            
            
            
            ---(5
            )
            Net foreign
      exchange (gains) losses related to transactions, including intercompany
      debt not indefinitely invested in the Company’s
    subsidiaries
            
            
            (0.9
            )
            
            
            3.4(6
            )
            Charges
      related to the closure of the Company’s Mammoth, Inc.Chaska, MN
      facility within the HVAC segment
            
            
            ---
            
            
            
            2.6(7
            )
            Charges
      related to reserves for amounts due from customers within the HTP and HVAC
      segments
            
            
            1.5
            
            
            
            2.3(8
            )
            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
            
            
            ---
            
            
            
            2.2(9
            )
            Loss on
      settlement of litigation in the RVP segment
            
            
            ---
            
            
            
            1.9(10
            )
            Charges
      related to the closure of the Company’s NuTone, Inc.Cincinnati,
      OH facility within the RVP segment
            
            
            ---
            
            
            
            1.8(11
            )
            Decrease in
      display expense within the RVP segment
            
            
            (5.3
            )
            
            
            ---(12
            )
            Gain from the
      sale of a manufacturing facility within the RVP segment
            
            
            (2.5
            )
            
            
            ---(13
            )
            Reduction in
      social liability reserve related to one of the Company’s foreign
      subsidiaries in the RVP segment
            
            
            (1.9
            )
            
            
            ---(14
            )
            Gain on the
      settlement of litigation in the HVAC segment resulting from a prior bad
      debt write-off
            
            
            (1.2
            )
            
            
            ---(15
            )
            Net charges
      related to the closure of certain RVP segment facilities
            
            
            (0.1
            )
            
            
            0.2






Goodwill Impairment
Charge.During the third quarter of 2008, the Company recorded
an approximate $600.0 million estimated non-cash impairment charge to reduce the
carrying amount of its goodwill to the estimated fair value based upon the
results of the Company’s interim impairment test that was necessitated by the
further deterioration of the housing market and other economic factors during
the third quarter of 2008 including, among others, the instability in the
troubled mortgage market, rising unemployment and declining consumer
confidence.  The Company is in the process of finalizing its goodwill
impairment analysis and expects to complete this process prior to the issuance
of the Company’s Form 10-K for the year ended December 31, 2008 as part of its
annual evaluation as of the first day of its fiscal fourth
quarter.  The Company believes that the preliminary estimates of
goodwill impairment losses are reasonable and represent the Company’s best
estimate of the goodwill impairment losses to be incurred; however, it is
possible that when the year end tests are completed the Company may be required
to record a material adjustment to these preliminary estimates.  See
Note A of the Notes to the Consolidated Financial Statements included elsewhere
herein.


Amortization of Intangible
Assets.Amortization of intangible assets increased
approximately $0.2 million from approximately $6.5 million for the third quarter
ended September 27, 2007 to approximately $6.7 million for the third quarter
ended September 27, 2008 and increased approximately $2.9 million from
approximately $18.9 million for the first nine months ended September 29, 2007
to approximately $21.8 million for the first nine months ended September 27,
2008.  The increase for the first nine months of 2008 is primarily the
result of finalizing the fair value adjustments to intangible assets relating to
acquisitions in the RVP and HTP segments during the first half of 2008, as well
as, a full year of amortization in 2008 related to acquisitions completed in
2007.  The impact of acquisitions contributed approximately $0.3
million and $1.9 million to the increase in amortization of intangible assets
for the third quarter and first nine months ended September 27, 2008,
respectively.





Depreciation
Expense.Depreciation expense increased approximately $1.1
million from approximately $9.3 million for the third quarter ended September
29, 2007 to approximately $10.4 million for the third quarter ended September
27, 2008 and increased approximately $3.3 million from approximately $28.0
million for the first nine months ended September 29, 2007 to approximately
$31.3 million for the first nine months ended September 27,
2008.  This increase is primarily attributable to capital expenditures
and acquisitions.





Operating (Loss)
Earnings.Consolidated operating (loss) earnings decreased by
approximately $617.3 million from operating earnings of approximately $37.6
million for the third quarter ended September 29, 2007 to an operating loss of
approximately $579.7 million for the third quarter ended September 27, 2008 and
decreased by approximately $656.5 million from operating earnings of
approximately $147.1 million for the first nine months ended September 29, 2007
to an operating loss of approximately $509.4 million for the first nine months
ended September 27, 2008.  As noted previously, during the third
quarter of 2008, the Company recorded an approximate $600.0 million estimated
non-cash impairment charge to reduce the carrying amount of its goodwill to the
estimated fair value based upon the results of the Company’s interim impairment
test that was necessitated by the further deterioration of the housing market
and other economic factors during the third quarter of 2008 including, among
others, the instability in the troubled mortgage market, rising unemployment and
declining consumer confidence.  The effect of changes in foreign
currency exchange rates decreased the operating loss by approximately $0.4
million and $1.2 million for the third quarter and first nine months ended
September 27, 2008, respectively, while the impact of acquisitions increased the
operating loss by approximately $0.4 million and $3.2 million for the third
quarter and first nine month ended September 27, 2008,
respectively.  Excluding the effect of the estimated non-cash goodwill
impairment charge, changes in foreign currency exchange rates and acquisitions
operating earnings decreased approximately $17.3 million for the third quarter
ended September 27, 2008 as compared to the third quarter ended September 29,
2007 and decreased approximately $54.5 million for the first nine months ended
September 27, 2008 as compared to the first nine months ended September 29,
2007.  The remaining decrease in consolidated operating earnings is
primarily due to the factors discussed above and that follow.





For the third
quarter ended September 27, 2008, the RVP segment had an operating loss of
approximately $327.1 million as compared to operating earnings of approximately
$19.4 million for the third quarter ended September 29, 2007.  For the
first nine months ended September 27, 2008, the RVP segment had an operating
loss of approximately $295.2 million as compared to operating earnings
approximately $70.6 million for the first nine months ended September 29,
2007.  During the third quarter of 2008, the Company recorded an
approximate $340.0 million estimated non-cash impairment charge to reduce the
carrying amount of the RVP segment’s goodwill to the estimated fair value based
upon the results of the Company’s interim impairment test that was necessitated
by the further deterioration of the housing market and other economic factors
during the third quarter of 2008 including, among others, the instability in the
troubled mortgage market, rising unemployment and declining consumer
confidence.  The remaining decrease in operating (loss) earnings in
the RVP segment for the third quarter and first nine months ended September 27,
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 (loss)
earnings in the RVP segment for the third quarter ended September 27, 2008 and
September 29, 2007 includes the following other expense (income)
items:





For the third quarter endedSept. 27, 2008
            
            
            Sept. 29, 2007(Amounts
      in millions)(1
            )
            Reduction in
      social liability reserve related to one of the Company’s foreign
      subsidiaries
            
            $
            (1.9
            )
            
            $
            ---(2
            )
            Loss on
      settlement of litigation
            
            
            ---
            
            
            
            1.9(3
            )
            Costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico
            
            
            1.8
            
            
            
            ---(4
            )
            Increased
      depreciation expense of property and equipment
            
            
            0.9
            
            
            
            ---(5
            )
            Legal and
      other professional fees and expenses incurred in connection with matters
      related to certain subsidiaries based in Italy and Poland
            
            
            ---
            
            
            
            0.9(6
            )
            Net foreign
      exchange losses related to transactions, including intercompany debt not
      indefinitely invested in the Company’s subsidiaries
            
            
            ---
            
            
            
            0.6(7
            )
            Product
      safety upgrade reserves
            
            
            ---
            
            
            
            0.5(8
            )
            Net charges
      related to the closure of certain segment facilities
            
            
            0.4
            
            
            
            0.2(9
            )
            Charges
      related to the closure of the Company’s NuTone, Inc. Cincinnati, OH
      facility
            
            
            ---
            
            
            
            0.4(10
            )
            Decrease in
      operating loss related to effect of changes in foreign currency exchange
      rates
            
            
            (0.3
            )
            
            
            ---(11
            )
            Increased
      amortization of intangible assets
            
            
            0.3
            
            
            
            ---(12
            )
            Decrease in
      displays expense in the RVP segment
            
            
            (0.2
            )
            
            
            ---(13
            )
            Decrease in
      operating earnings related to acquisitions
            
            
            0.2
            
            
            
            ---






Operating (loss)
earnings in the RVP segment for the first nine months ended September 27, 2008
and September 29, 2007 includes the following other expense (income)
items:





For the first nine months
    endedSept. 27, 2008
            
            
            Sept. 29, 2007(Amounts
      in millions)(1
            )
            Decrease in
      displays expense in the RVP segment
            
            $
            (5.3
            )
            
            $
            ---(2
            )
            Costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico
            
            
            3.2
            
            
            
            ---(3
            )
            Increased
      amortization of intangible assets
            
            
            3.0
            
            
            
            ---(4
            )
            Gain from the
      sale of a manufacturing facility
            
            
            (2.5
            )
            
            
            ---(5
            )
            Legal and
      other professional fees and expenses incurred in connection with matters
      related to
              certain subsidiaries based in Italy and Poland
            
            
            ---
            
            
            
            2.2(6
            )
            Increased
      depreciation expense of property and equipment
            
            
            2.1
            
            
            
            ---(7
            )
            Reduction in
      social liability reserve related to one of the Company’s foreign
      subsidiaries
            
            
            (1.9
            )
            
            
            ---(8
            )
            Loss on
      settlement of litigation
            
            
            ---
            
            
            
            1.9(9
            )
            Charges
      related to the closure of the Company’s NuTone, Inc. Cincinnati, OH
      facility
            
            
            ---
            
            
            
            1.8(10
            )
            Decrease in
      operating earnings related to acquisitions
            
            
            1.4
            
            
            
            ---(11
            )
            Net foreign
      exchange (gains) losses related to transactions, including intercompany
      debt not indefinitely
              invested in the Company’s subsidiaries
            
            
            (0.9
            )
            
            
            1.5(12
            )
            Decrease in
      operating loss related to effect of changes in foreign currency exchange
      rates
            
            
            (0.9
            )
            
            
            ---(13
            )
            Net charges
      related to the closure of certain segment facilities
            
            
            0.6
            
            
            
            0.2(14
            )
            Product
      safety upgrade reserves
            
            
            ---
            
            
            
            0.5






For the third
quarter ended September 27, 2008, the HTP segment had an operating loss of
approximately $49.3 million as compared to operating earnings of approximately
$19.2 million for the third quarter ended September 29, 2007.  For the
first nine months ended September 27, 2008, the HTP segment had an operating
loss of approximately $31.2 million as compared to operating earnings of
approximately $59.0 million for the first nine months ended September 29,
2007.  During the third quarter of 2008, the Company recorded an
approximate $60.0 million estimated non-cash impairment charge to reduce the
carrying amount of the HTP segment’s goodwill to the estimated fair value based
upon the results of the Company’s interim impairment test that was necessitated
by the further deterioration of the housing market and other economic factors
during the third quarter of 2008 including, among others, the instability in the
troubled mortgage market, rising unemployment and declining consumer
confidence.  The remaining decrease in operating (loss) earnings in
the HTP segment for the third quarter and first nine months ended September 27,
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.





Operating losses of
the HTP segment for the third quarter and first nine months ended September 27,
2008 also reflect (1) approximately $0.2 million and $4.9 million, respectively,
of fees, expenses and a reserve recorded in connection with the settlement of a
dispute with one of its former suppliers, (2) a charge of approximately $1.5
million related to a reserve for amounts due from customers recorded in the
third quarter of 2008, (3) a decrease of approximately $0.2 million and $1.8
million, respectively, contributed by acquisitions, (4) approximately $0.1
million and $0.6 million, respectively, of increased depreciation expense of
property and equipment and approximately $0.4 million and $1.1 million,
respectively, of increased amortization of intangible assets and (5) a net
foreign exchange loss of approximately $0.2 million in the third quarter of 2008
related to transactions.





Operating earnings
of the HTP segment for the third quarter and first nine months ended September
29, 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 charge to warranty expense of approximately $0.3 million and $0.1 million,
respectively, related to a product safety upgrade and (3) net foreign exchange
gains of approximately $0.1 million and $0.2 million, respectively, related to
transactions.





For the third
quarter ended September 27, 2008, the HVAC segment had an operating loss of
approximately $189.5 million as compared to operating earnings of approximately
$6.2 million for the third quarter ended September 29, 2007.  For the
first nine months ended September 27, 2008, the HVAC segment had an operating
loss of approximately $154.9 million as compared to operating earnings of
approximately $38.7 million for the first nine months ended September 29,
2007.  During the third quarter of 2008, the Company recorded an
approximate $200.0 million estimated non-cash impairment charge to reduce the
carrying amount of the HVAC segment’s goodwill to the estimated fair value based
upon the results of the Company’s interim impairment test that was necessitated
by the further deterioration of the housing market and other economic factors
during the third quarter of 2008 including, among others, the instability in the
troubled mortgage market, rising unemployment and declining consumer
confidence.  Excluding the effect of this estimated non-cash goodwill
impairment charge, operating earnings in the HVAC segment increased
approximately $4.3 million for the third quarter ended September 27, 2008 as
compared to the third quarter ended September 29, 2007 and increased
approximately $6.4 million for the first nine months ended September 27, 2008 as
compared to the first nine months ended September 29, 2007.  The
increase in operating earnings in the HVAC segment for the third quarter and
first nine months ended September 27, 2008 as compared to the same periods in
2007 is primarily the result of increased sales volume of products sold to
commercial customers without a proportionate increase in costs and expenses,
partially offset by decreased sales volume of product sold to residential
site-built and manufactured housing customers without a proportionate decrease
in expense and an increase in material and transportation costs for products
sold to commercial customers.


Operating losses of
the HVAC segment for the third quarter and first nine months ended September 27,
2008 also reflect (1) a gain of approximately $1.2 million related to the
settlement of litigation resulting from a prior bad debt write-off recorded in
the third quarter of 2008, (2) approximately $0.2 million and $0.7 million,
respectively, of increased depreciation expense of property and equipment and
approximately $0.3 million and $1.1 million, respectively, of decreased
amortization of intangible assets, (3) an increase in earnings of approximately
$0.1 million and $0.3 million, respectively, from the effect of changes in
foreign currency exchange rates and (4) a net foreign exchange gain of
approximately $0.2 million for the first nine 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 third quarter and first nine months ended September
29, 2007 reflects (1) a charge of approximately $1.8 million related to reserves
for amounts due from customers recorded in the first nine months of 2007, (2) a
charge of approximately $2.3 million and $2.6 million, respectively, related to
the closure of the Company’s Mammoth, Inc. Chaska, Minnesota manufacturing
facility and (3) net foreign exchange losses of approximately $1.0 million and
$2.4 million, respectively, related to transactions, including intercompany debt
not indefinitely invested in the Company’s subsidiaries.





Excluding the
effect of the estimated non-cash goodwill impairment charge of approximately
$600.0 million recorded in the third quarter of 2008, operating earnings of
foreign operations, consisting primarily of the results of operations of the
Company’s Canadian subsidiaries, would have been approximately 15.6% and 8.8% of
operating earnings (before unallocated and corporate expenses) for the third
quarter and first nine months ended September 27, 2008,
respectively.  Operating earnings of foreign operations were
approximately 10.9% and 13.1% of operating earnings (before unallocated and
corporate expenses) for the third quarter and first nine months ended September
29, 2007, respectively.  Net sales and earnings derived from
international markets are subject to, among others, the risks of currency
fluctuations.





Interest
Expense.  Interest expense increased approximately $7.0
million, or approximately 15.1%, during the third quarter ended September 27,
2008 as compared to the third quarter ended September 29, 2007 and increased
approximately $6.4 million, or approximately 4.7% during the first nine months
ended September 27, 2008 as compared to the first nine months ended September
29, 2007.  Interest expense increased for the third quarter and first
nine months of 2008 as compared to the same periods of 2007 primarily due to
higher interest rates as a result of Nortek’s 10% Senior Secured Notes due
December 1, 2013 (the “10% Senior Secured Notes”) and Nortek’s new five year
$350.0 million senior secured asset-based revolving credit facility (the “ABL
Facility”) of approximately $4.8 million and $4.9 million, respectively, and
higher average principal balances of approximately $1.4 million and $4.2
million, respectively.  In addition, the Company’s interest expense
increased approximately $1.4 million in the third quarter and first nine months
of 2008 related to increased deferred debt expense related to the additional
deferred financing costs associated with Nortek’s 10% Senior Secured Notes and
Nortek’s ABL Facility.  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 first nine 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).





Loss from Debt
Retirement.  On May 20, 2008, Nortek sold $750.0 million of its
10% Senior Secured Notes and also entered into the ABL Facility (collectively,
the "May 2008 Transactions").  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 first nine months ended September 27, 2008, primarily as a
result of writing off unamortized deferred debt expense.





Investment
Income.Investment income was approximately $0.2 million and
$0.6 million for the third quarter ended September 27, 2008 and September 29,
2007, respectively, and was approximately $0.6 million and $1.5 million for the
first nine months ended September 27, 2008 and September 29, 2007,
respectively.





Provision for Income
Taxes.The provision for income taxes was approximately $3.7
million for the third quarter ended September 27, 2008 as compared to
approximately $0.5 million for the third quarter ended September 29, 2007 and
was approximately $31.6 million for the first nine months ended September 27,
2008 as compared to approximately $11.4 million for the first nine months ended
September 29, 2007.  The effective income tax rates of approximately
(4.8)% and 101.8% for the first nine months ended September 27, 2008 and
September 29, 2007, respectively, differ from the expected United States federal
statutory rate of 35% principally as a result of non-deductible expenses,
including the treatment of the estimated non-cash goodwill impairment charge of
approximately $600.0 million as a permanent non-deductible expense for the third
quarter ended September 27, 2008, as well as, increases in valuation allowances
against domestic deferred tax assets, state income tax provisions, 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 the permanent adjustment associated with the estimated non-cash goodwill
impairment charge of approximately $600.0 million recorded during the third
quarter ended September 27, 2008, 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 of 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 $14.6 million against domestic deferred tax
assets in existence as of December 31, 2007.  In addition, for the
first nine months ended September 27, 2008, the Company recorded a valuation
allowance against certain tax assets related to domestic and foreign operating
losses generated in the period of approximately $32.4 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.  Consolidated net loss increased by approximately $627.9
million from approximately $8.7 million for the third quarter ended September
29, 2007 to approximately $636.6 million for the third quarter ended September
27, 2008 and increased by approximately $693.9 million from approximately $0.2
million for the first nine months ended September 29, 2007 to approximately
$694.1 million for the first nine months ended September 27,
2008.  The increase in net loss in the third quarter and first nine
months ended September 27, 2008 was primarily due to the factors discussed
above, which included a decrease of approximately $617.3 million and $656.5
million, respectively, in consolidated operating (loss) earnings primarily
driven by an estimated non-cash goodwill impairment charge of approximately
$600.0 million recorded in the third quarter of 2008, a loss from debt
retirement of approximately $9.9 million recorded in the first nine months of
2008, an increase of approximately $3.2 million and $20.2 million, respectively,
in the provision for income taxes, an increase of approximately $7.0 million and
$6.4 million, respectively, in interest expense and a decrease in investment
income of approximately $0.4 million and $0.9 million,
respectively.





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, which is the most directly comparable GAAP
operating performance measure, to EBITDA for thethirdquarter endedSeptember27, 2008 andSeptember29, 2007:







For the third quarter
      endedSept. 27,
    2008
              
              
              Sept. 29,
    2007(Dollar amounts in
      millions)Net loss (1),
      (2)
              
              $
              (636.6
              )
              
              $
              (8.7
              )Provision for income
      taxes
              
              
              3.7
              
              
              
              0.5Interest
      expense  (3)
              
              
              53.4
              
              
              
              46.4Investment
      income
              
              
              (0.2
              )
              
              
              (0.6
              )Depreciation
      expense
              
              
              10.4
              
              
              
              9.3Amortization
      expense
              
              
              6.7
              
              
              
              6.5EBITDA (1),
    (2)
              
              $
              (562.6
              )
              
              $
              53.4


(1)
            Net loss and
      EBITDA for the third quarter ended September 27, 2008 includes the
      following other income and expense
items:


·
            an estimated
      non-cash goodwill impairment charge of approximately $600.0
      million,


·
            a charge of
      approximately $6.4 million related to an estimated loss contingency on a
      lease guarantee,


·
            a reduction
      in the social liability reserve related to one of the Company’s foreign
      subsidiaries in the RVP segment of approximately $1.9
    million,


·
            costs and
      expenses incurred in connection with the start up of a range hood facility
      in Mexico of approximately $1.8 million within the RVP
      segment,


·
            a charge of
      approximately $1.5 million related to a reserve for amounts due from
      customers within the HTP segment,


·
            a gain on the
      settlement of litigation in the HVAC segment resulting from a prior bad
      debt write-off of approximately $1.2
million,


·
            net foreign
      exchange losses of approximately $0.5 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries,


·
            approximately
      $0.4 million in net charges related to the closure of certain RVP segment
      facilities, and


·
            approximately
      $0.2 million of fees, expenses and a reserve recorded in connection with
      the settlement of a dispute with one of its former suppliers within the
      HTP segment.





(2)
            Net loss and
      EBITDA for the third quarter ended September 29, 2007 includes the
      following other income and expense
items:


·
            a charge of
      approximately $2.3 million related to the planned closure of the Company’s
      Mammoth, Inc. Chaska, Minnesota manufacturing facility within the HVAC
      segment,


·
            a loss on
      settlement of litigation in the RVP segment of approximately $1.9
      million,


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


·
            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 $0.9
million,


·
            a charge to
      warranty expense of approximately $0.8 million related to a product safety
      upgrade within the RVP and HTP
segments,


·
            a charge of
      approximately $0.4 million related to the closure of the Company’s NuTone,
      Inc. Cincinnati, Ohio facility within the RVP segment,
  and


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





(3)
            Interest
      expense for the third quarter ended September 27, 2008 includes cash
      interest of approximately $34.7 million and non-cash interest of
      approximately $18.7 million.  Interest expense for the third
      quarter ended September 29, 2007 includes cash interest of approximately
      $29.8 million and non-cash interest of approximately $16.6
      million.






The following table presents a
reconciliation from net loss, which is the most directly comparable GAAP
operating performance measure, to EBITDA for the firstninemonths endedSeptember27, 2008 andSeptember29, 2007:







For the first nine months
      endedSept. 27,
    2008
              
              
              Sept. 29,
    2007(Dollar amounts in
      millions)Net loss (1),
      (2)
              
              $
              (694.1
              )
              
              $
              (0.2
              )Provision for income
      taxes
              
              
              31.6
              
              
              
              11.4Interest
      expense  (3)
              
              
              143.8
              
              
              
              137.4Investment
      income
              
              
              (0.6
              )
              
              
              (1.5
              )Depreciation
      expense
              
              
              31.3
              
              
              
              28.0Amortization
      expense
              
              
              21.8
              
              
              
              18.9EBITDA (1),
    (2)
              
              $
              (466.2
              )
              
              $
              194.0


(1)
            Net loss and
      EBITDA for the first nine months ended September 27, 2008 includes the
      following other income and expense
items:


·
            an estimated
      non-cash goodwill impairment charge of approximately $600.0
      million,


·
            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,


·
            a charge of
      approximately $6.4 million related to an estimated loss contingency on a
      lease guarantee,


·
            approximately
      $4.9 million of fees, expenses and a reserve recorded in connection with
      the 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 $3.2 million within the RVP
      segment,


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


·
            a reduction
      in the social liability reserve related to one of the Company’s foreign
      subsidiaries in the RVP segment of approximately $1.9
    million,


·
            a charge of
      approximately $1.5 million related to a reserve for amounts due from
      customers within the HTP segment,


·
            a gain on the
      settlement of litigation in the HVAC segment resulting from a prior bad
      debt write-off of approximately $1.2
million,


·
            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
      $0.6 million in net charges related to the closure of certain RVP segment
      facilities.





(2)
            Net loss and
      EBITDA for the first nine months ended September 29, 2007 includes the
      following other income and expense
items:


·
            net foreign
      exchange losses of approximately $3.4 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries,


·
            a charge of
      approximately $2.6 million related to the planned closure of the Company’s
      Mammoth, Inc. Chaska, Minnesota manufacturing facility within the HVAC
      segment,


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


·
            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 $2.2
million,


·
            a loss on
      settlement of litigation in the RVP segment of approximately $1.9
      million,


·
            a charge of
      approximately $1.8 million related to the closure of the Company’s NuTone,
      Inc. Cincinnati, Ohio facility within the RVP
  segment,


·
            a charge to
      warranty expense of approximately $0.6 million related to a product safety
      upgrade within the RVP and HTP segments,
and


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





(3)
            Interest
      expense for the first nine months ended September 27, 2008 includes cash
      interest of approximately $90.1 million and non-cash interest of
      approximately $53.7 million.  Interest expense for the first
      nine months ended September 29, 2007 includes cash interest of
      approximately $87.0 million and non-cash interest of approximately $50.4
      million.






Liquidity
and Capital Resources





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





The Company’s
ability to pay interest on or to refinance its indebtedness depends on Nortek’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, instability in the housing market, rising unemployment and
declining consumer confidence negatively affected the Company’s results of
operations and its cash flow in the first nine months of 2008.
 
 The Company
believes that the severe impact of the worldwide crisis in the credit and
financial markets in September and October 2008, declines in new and existing
home sales, the instability in the troubled mortgage market and rising
unemployment will have a further negative impact on consumer disposable income
and spending on home remodeling and repair expenditures through at least
2009.  Accordingly, these factors will have an adverse effect on the
Company’s operating results including the fourth quarter of
2008.  Although the Company has implemented certain cost reduction
measures during the first nine months of 2008, beginning in the fourth quarter
of 2008, the Company began instituting certain additional cost reduction
measures, by implementing initiatives to significantly reduce discretionary
spending and achieve reductions in workforce, across all of its businesses given
the rapidly changing and challenging economic environment, although there can be
no assurance that these measures will be successful.


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.





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.





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
September 27, 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 ofSeptember27, 2008, Nortek’s Fixed Charge Coverage Ratio (as
defined under Nortek’s 10% Senior Secured Notes and 8 1/2% Senior Subordinated
Notes) was approximately 1.6:1.  If Nortek’s Fixed Charge
Coverage Ratio(as defined
under Nortek’s 10% Senior Secured Notes and 8 1/2% Senior Subordinated Notes)was at least 2.00:1 as of
September 27, 2008, Nortek would have up to approximately $216.6 million
available to make certain payments, including dividends to service NTK Holding’s
debt obligations.





At September 27, 2008, the Company had
approximately $38.2million 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.





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 $720.9
million.  The 10% Senior Secured Notes are guaranteed on a senior
secured basis by substantially all of Nortek’s subsidiaries located in the
United States.





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.  In October
2008, Nortek borrowed an additional $60.0 million under its ABL
Facility.  Nortek incurred fees and expenses of approximately $11.8
million, which have been capitalized and 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.  As of September 27, 2008, excess availability under
Nortek’s ABL Facility exceeded $40.0 million and 12.5% of the borrowing
base.





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 of 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 firstninemonths 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 September 27, 2008, the senior unsecured loan facility had
an actual interest rate of approximately 9.8%.  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 $6.0million and $17.4million of accrued interest for thethirdquarter and firstninemonths endedSeptember 27, 2008, respectively, and recorded
approximately $5.8million and $15.8million of accrued interest for thethirdquarter and firstninemonthsendedSeptember 29, 2007, respectively, as additional
indebtedness relating to the senior unsecured loan facility.  AtSeptember 27, 2008 and December 31, 2007, the actual
outstanding principal balance on the senior unsecured loan facility was
approximately $255.4million and $238.0 million,
respectively.  The amount recorded as ofSeptember 27, 2008 and December 31, 2007, net of
unamortized debt discount of approximately $3.7million and $4.1 million, respectively,
is approximately $251.7million 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 aggregate borrowings
outstanding of approximately $9.4 million.  Non-compliance with these
two long-term debt agreements would have resulted in non-compliance with two
other long-term debt agreements totaling approximately $7.3 million at December
31, 2007.  The Company’s Best subsidiary obtained waivers from the
bank, 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 not be in compliance with the maintenance covenant when their
assessment of the required calculation is completed in the first quarter of
2009.  The Company and its Best subsidiary are currently in
negotiations to refinance these two loan agreements; however as of September 27,
2008, a definitive agreement was not signed.  As a result, the Company
has classified approximately $9.2 million of outstanding borrowings under such
“long-term debt” agreements as a current liability on its consolidated balance
sheet at September 27, 2008.  The Company and its Best subsidiary will
continue to negotiate the refinancing of these debt obligations, however no
assurance can be given that it will be successful in obtaining a refinancing,
amendment or waiver on terms acceptable to the Company.  Accordingly,
Nortek could be required to repay the outstanding borrowings of approximately
$13.3 million at September 27, 2008 related to these loans in an event of
non-compliance.


The Company had
consolidated debt at September 27, 2008 of approximately $2,111.1 million
consisting of the following:





(Amounts
      in millions)NTK Holdings’ 10 3/4% Senior
      Discount Notes due 2014, net of unamortized discount of approximately
      $36.8 million
            
            $
            366.2NTK Holdings’ senior unsecured
      loan facility due 2014, including approximately $50.4 million of debt
      accretion related to the PIK option *
            
            
            251.7Nortek’s 10% Senior Secured Notes
      due 2013, net of
      unamortized discount of approximately $7.4million
            
            
            742.6Nortek’s 8 1/2% Senior
      Subordinated Notes due 2014 (“8 1/2% Notes”)
            
            
            625.0Nortek’s long-term notes, mortgage notes and
      other indebtedness
            
            
            25.6Nortek’s 9 7/8% Senior
      Subordinated Notes due 2011, including unamortized
      premium
            
            
            10.0Subtotal
            
            
            2,021.1Nortek’s
      short-term borrowings (including borrowings of approximately $35.0 million
      under Nortek’s ABL Facility), current maturities of long-term debt and
      long-term debt classified as current
            
            
            90.0$
            2,111.1




*
            Also net of approximately
      $3.7million of unamortized debt
      discount atSeptember27,
  2008.






During the first
nine months ended September 27, 2008, the Company had a net increase in its
consolidated debt of approximately $93.2 million resulting from:





(Amounts
      in millions)Net increases
      in debt related to May 2008 Transactions (1)
            
            $
            36.7Non-cash
      interest activity (2)
            
            
            45.8Other debt
      activity (3)
            
            
            10.7$
            93.2





(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
            
            $
            27.6Debt
      accretion relating to the PIK option on the senior unsecured loan
      facility
            
            
            17.4Debt
      discount, net relating to the Company’s senior unsecured loan facility and
      Nortek’s 10% Senior Secured Notes
            
            
            0.8$
            45.8





(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
            
            $
            45.0Borrowings
      made under Nortek’s ABL Facility
            
            
            30.0Additional
      borrowings related primarily to the Company’s foreign
      subsidiaries
            
            
            10.4Payments made
      related to Nortek’s ABL Facility
            
            
            (45.0
            )Other
      principal payments
            
            
            (30.5
            )Changes in
      foreign currency exchange rates and other
            
            
            0.8$
            10.7







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 ofSeptember27, 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)
            
            $
            22.7
            
            
            $
            129.5
            
            
            $
            128.5
            
            
            $
            1,876.3
            
            
            $
            2,157.0Interest
      payments (3), (4), (5)
            
            
            142.5
            
            
            
            355.7
            
            
            
            383.8
            
            
            
            140.6
            
            
            
            1,022.6Capital lease
      obligations
            
            
            2.3
            
            
            
            4.6
            
            
            
            4.0
            
            
            
            7.5
            
            
            
            18.4Total
            
            $
            167.5
            
            
            $
            489.8
            
            
            $
            516.3
            
            
            $
            2,024.4
            
            
            $
            3,198.0





(1)
            Excludes
      notes payable and other short-term obligations of approximately $65.0
      million, including outstanding borrowings under the ABL Facility of
      approximately $35.0 million.





(2)
            Excludes
      unamortized debt discount of approximately $7.4 million and $3.7 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 September 27,
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 except as discussed in the following paragraph.





At September 27,
2008, the Company’s former subsidiary, Ply Gem, has guaranteed approximately
$17.8 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 September 27, 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, or fail to make payments in full, then the Company may be required to
make payments on its indemnification.  Should such payments be
required, the Company cannot be certain that the buyer of the former subsidiary
will meet its financial obligations with respect to its indemnification of
Nortek.  As a result, the Company has recorded a contingent loss in
connection with this arrangement of approximately $6.4 million in the third
quarter of 2008, representing Management’s best estimate in accordance with SFAS
No. 5, “Accounting for Contingencies”, without consideration as to any amount
that the Company might receive under the buyer’s indemnification to
Nortek.





The Company’s combined short-term and
long-term product liability accruals increased from approximately $35.0 million
at December 31, 2007 to approximately $38.5million atSeptember27, 2008.  Product liability
expensedecreased from approximately $7.5million for thethirdquarter endedSeptember29, 2007 to approximately $3.6million for thethirdquarter endedSeptember27, 2008 anddecreased from approximately $13.1million for the firstninemonths endedSeptember29, 2007 to approximately $9.8million for the first nine months ended September 27,
2008.  The decrease in product liability expense for the third quarter
and first nine months ended September 27, 2008 as compared to the same periods
of 2007 is primarily the result of an improved trend in claims within the RVP
segment during the first nine 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 $51.0 million at September
27, 2008.  Warranty expense increased from approximately $7.9 million
for the third quarter ended September 29, 2007 to approximately $8.3 million for
the third quarter ended September 27, 2008 and increased from approximately
$21.2 million for the first nine months ended September 29, 2007 to
approximately $24.3 million for the first nine months ended September 27,
2008.  The increase in warranty expense for the third quarter and
first nine months ended September 27, 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 third quarter and first nine 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 $80.2 million at September 27, 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 September 27, 2008, approximately $3.1 million (of
which approximately $2.4 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 $4.8 million for the third quarter ended
September 27, 2008 as compared to approximately $10.0 million for the third
quarter ended September 29, 2007 and were approximately $20.7 million for the
first nine months ended September 27, 2008 as compared to approximately $24.1
million for the first nine months ended September 29, 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 $246.3 million
and 1.5:1, respectively, at September 27, 2008.  This increase in
working capital for the first nine months ended September 27, 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
September 27, 2008 was also a contributing factor to the increase in working
capital.





Accounts receivable
increased approximately $18.0 million, or approximately 5.6%, between December
31, 2007 and September 27, 2008, while net sales increased approximately $13.4
million, or approximately 2.4%, in the third quarter of 2008 as compared to the
fourth quarter of 2007.  This increase in accounts receivable is
primarily as a result of increased sales of the Company’s commercial and
residential HVAC products.  The effect of changes in foreign currency
exchange rates contributed approximately $2.2 million to the increase in
accounts receivable at September 27, 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 September 27,
2008 as compared to December 31, 2007.  Accounts receivable from
customers related to foreign operations increased approximately $2.3 million, or
approximately 2.1%, between December 31, 2007 and September 27,
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 nine months of 2008.


Inventories
increased approximately $15.1 million, or approximately 4.9%, between December
31, 2007 and September 27, 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 $1.2 million to the
increase in inventories at September 27, 2008.





Accounts payable
increased approximately $21.7 million, or 11.3%, between December 31, 2007 and
September 27, 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 $0.9 million to the increase
in accounts payable at September 27, 2008.





Accrued expenses and taxes, net
decreased approximately $6.0 million, or approximately 2.4%, between December31, 2007 and September 27,
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 $16.6 million of
increased accrued interestprimarily as a result of Nortek’s 10% Senior Secured Notes due 2013, approximately $4.9 millionrelated to a reserve
recorded within the HTP segment in connection with the settlement of a dispute
with one of its former suppliersand approximately $4.8 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
September 27, 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 remained unchanged at approximately $58.0
million for the first nine months ended September 27, 2008 and September 29,
2007, respectively.  This was primarily the net result of an increase
in net loss of approximately $693.9 million, offset by an estimated non-cash
goodwill impairment charge of approximately $600.0 million recorded in the third
quarter of 2008, an increase in the deferred federal income tax provision of
approximately $26.2 million, a decrease in working capital needs of
approximately $52.0 million and a non-cash loss from debt retirement of
approximately $9.9 million.  Net cash flows used in investing
activities decreased by approximately $68.0 million from approximately $116.9
million for the first nine months ended September 29, 2007 to approximately
$48.9 million for the first nine months ended September 27,
2008.  This decrease was primarily due to a decrease in payments for
acquisitions of approximately $60.8 million, an increase of approximately $5.6
million in proceeds from the sale of property and equipment and a decrease in
the level of capital expenditures of approximately $3.4 million.  Net
cash flows provided by financing activities decreased by approximately $50.4
million from approximately $68.1 million for the first nine months ended
September 29, 2007 to approximately $17.7 million for the first nine months
ended September 27, 2008.  This decrease was primarily due to fees
paid in connection with the May 2008 Transactions of approximately $33.1 million
and a decline in net borrowings of approximately $26.0 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 $26.8 million and $9.2 million from
December 31, 2007 to September 27, 2008 and from December 31, 2006 to September
29, 2007, respectively, principally as a result of the following:




Condensed
      ConsolidatedCash Flows
    (1)For the first nine months
      endedSept. 27,
    2008
              
              
              Sept. 29,
    2007(Dollar amounts in
      millions)Operating
      Activities:Cash flow from
      operations, net
              
              $
              37.0
              
              
              $
              89.0Change in accounts
      receivable, net
              
              
              (20.2
              )
              
              
              (12.6
              )Change in
      inventories
              
              
              (16.3
              )
              
              
              (36.7
              )Change in prepaids
      and other current assets
              
              
              (1.5
              )
              
              
              1.4Change in accounts
      payable
              
              
              22.7
              
              
              
              16.3Change in accrued
      expenses and taxes
              
              
              31.2
              
              
              
              (3.5
              )Investing
      Activities:Capital
      expenditures
              
              
              (20.7
              )
              
              
              (24.1
              )Net cash paid for
      businesses acquired
              
              
              (32.7
              )
              
              
              (93.5
              )Proceeds from the
      sale of property and equipment
              
              
              6.2
              
              
              
              0.6Change in restricted
      cash and marketable securities
              
              
              0.3
              
              
              
              1.5Financing
      Activities:Change in borrowings,
      net
              
              
              59.9
              
              
              
              72.6Net 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
              
              
              (33.1
              )
              
              
              ---Equity investment by
      THL-Nortek Investors, LLC
              
              
              4.2
              
              
              
              ---Payment in connection
      with senior unsecured loan facility rollover
              
              
              ---
              
              
              
              (4.5
              )Other, net
              
              
              3.1
              
              
              
              2.7$
              26.8
              
              
              $
              9.2







(1)
            Summarized
      from the Company’s unaudited condensed consolidated statement of cash
      flows for the first nine months ended September 27, 2008 and September 29,
      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
nine months ended September 27, 2008 and September 29, 2007:









For the first nine months
      endedSept. 27,
    2008
              
              
              Sept. 29,
    2007(Dollar amounts in
      millions)Net cash provided by
      operating activities
              
              $
              58.0
              
              
              $
              58.0Cash (provided by)
      used by working capital andother long-term asset and liability changes
              
              
              (21.0
              )
              
              
              31.0Non-cash goodwill
      impairment charge
              
              
              (600.0
              )
              
              
              ---Deferred federal
      income tax (provision) benefit
              
              
              (16.8
              )
              
              
              9.4Gain (loss) on
      property and equipment
              
              
              2.5
              
              
              
              (1.0
              )Loss from debt
      retirement
              
              
              (9.9
              )
              
              
              ---Non-cash interest
      expense, net
              
              
              (53.7
              )
              
              
              (50.4
              )Non-cash stock-based
      compensation expense
              
              
              (0.1
              )
              
              
              (0.3
              )Provision for income
      taxes
              
              
              31.6
              
              
              
              11.4Interest expense
      (3)
              
              
              143.8
              
              
              
              137.4Investment
      income
              
              
              (0.6
              )
              
              
              (1.5
              )EBITDA (1),
    (2)
              
              $
              (466.2
              )
              
              $
              194.0


(1)
            EBITDA for
      the first nine months ended September 27, 2008 includes the following
      other income and expense items:


·
            an estimated
      non-cash goodwill impairment charge of approximately $600.0
      million,


·
            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,


·
            a charge of
      approximately $6.4 million related to an estimated loss contingency on a
      lease guarantee,


·
            approximately
      $4.9 million of fees, expenses and a reserve recorded in connection with
      the 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 $3.2 million within the RVP
      segment,


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


·
            a reduction
      in the social liability reserve related to one of the Company’s foreign
      subsidiaries in the RVP segment of approximately $1.9
    million,


·
            a charge of
      approximately $1.5 million related to a reserve for amounts due from
      customers within the HTP segment,


·
            a gain on the
      settlement of litigation in the HVAC segment resulting from a prior bad
      debt write-off of approximately $1.2
million,


·
            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
      $0.6 million in net charges related to the closure of certain RVP segment
      facilities.





(2)
            EBITDA for
      the first nine months ended September 29, 2007 includes the following
      other income and expense items:


·
            net foreign
      exchange losses of approximately $3.4 million related to transactions,
      including intercompany debt not indefinitely invested in the Company’s
      subsidiaries,


·
            a charge of
      approximately $2.6 million related to the planned closure of the Company’s
      Mammoth, Inc. Chaska, Minnesota manufacturing facility within the HVAC
      segment,


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


·
            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 $2.2
million,


·
            a loss on
      settlement of litigation in the RVP segment of approximately $1.9
      million,


·
            a charge of
      approximately $1.8 million related to the closure of the Company’s NuTone,
      Inc. Cincinnati, Ohio facility within the RVP
  segment,


·
            a charge to
      warranty expense of approximately $0.6 million related to a product safety
      upgrade within the RVP and HTP segments,
and


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





(3)
            Interest
      expense for the first nine months ended September 27, 2008 includes cash
      interest of approximately $90.1 million and non-cash interest of
      approximately $53.7 million.  Interest expense for the first
      nine months ended September 29, 2007 includes cash interest of
      approximately $87.0 million and non-cash interest of approximately $50.4
      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 third quarter and first nine 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 third quarter and first nine months of 2008 the
Company’s earnings continued to be challenged by higher commodity costs which
have only been partially offset by certain price increases and the Company’s
strategic cost reduction initiatives.  The Company believes that the
severe impact of the worldwide crisis in the credit and financial markets in
September and October 2008 will have further negative impacts on employment
levels and consumer spending, including home remodeling and repair expenditures,
which will adversely impact the Company’s operating results through at least
2009.




The Company
experienced an increase in the level of product liability expense in 2007 over
2006, particularly in the RVP segment.  In the first nine months of
2008, product liability expense declined.  The Company is unable to
ascertain at this time whether this level of expense in 2008 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 first nine months of 2008.  Additionally, during the first nine
months of 2008, the Company experienced increased freight costs primarily due to
increased fuel surcharges as compared to the same period 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 September 27,
2008, approximately 7.2% 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.





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 September 27, 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 September 27, 2008,
approximately 85.4% 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 September 27, 2008, an overall unfavorable change in interest
rates of 100 basis points would result in an additional charge to interest
expense for the remaining three months of 2008 of approximately $0.8
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 third quarter and first nine 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 a
decrease in stockholder’s investment of approximately $5.7 million and $4.4
million for the third quarter and first nine months ended September 27, 2008,
respectively.  Additionally, the impact of changes in foreign currency
exchange rates related to transactions resulted in a decrease in foreign
exchange losses recorded in SG&A of approximately $0.9 million for the third
quarter ended September 27, 2008 as compared to the same period of 2007 and
resulted in an increase in foreign exchange gains recorded in selling, general
and administrative expense, net of approximately $4.3 million for the first nine
months ended September 27, 2008 as compared to the same period 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 September 27, 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
September 27, 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 September 27, 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

















November 12,
2008