NORTEK INC - 10-Q Quarterly Report

Under the terms of one of the Company’s supplemental executive retirement plans (“SERP”), the Company was required to make one-time cash payments to participants in such plan in satisfaction of obligations under that plan when the Recapitalization was completed. Accordingly, the Company made a distribution of approximately $75,100,000 to the participants in the plan from funds included in the Company’s Consolidated Balance Sheet at December 31, 2002 and classified in long-term assets in restricted investments and marketable securities held by pension trusts and transferred to one of the participants a life insurance policy with approximately $10,300,000 of cash surrender value to satisfy a portion of the SERP’s obligation to such participant. The termination and settlement of the obligation of this SERP resulted in a curtailment loss on January 9, 2003 (see Note F).

The total amount of transaction fees and related costs incurred by the Company and Kelso associated with the Recapitalization was approximately $47,300,000, including the $27,900,000 noted above, of which approximately $10,500,000 of advisory fees and expenses was paid to Kelso & Company L.P. A portion of these fees and expenses was recorded by the Company in selling, general and administrative expense, since they were obligations of the Company prior to the Recapitalization. Approximately $12,800,000 was recorded as expense on January 9, 2003 since these fees and expenses became obligations of the Company upon consummation of the Recapitalization (see Note F).

The following reflects the unaudited pro forma effect of the Recapitalization on continuing operations for the period from January 1, 2003 to January 9, 2003:

	Pro Forma
	For the Period
	Jan. 1, 2003 -
	Jan. 9, 2003

Net sales	$	25,000
Operating earnings	$	300
Net loss	$	(3,400	)

The unaudited pro forma condensed consolidated summary of operations for the period from January 1, 2003 to January 9, 2003 presented above has been prepared by adjusting historical amounts for the period to give effect to the Recapitalization as if it had occurred on January 1, 2003. The pro forma adjustments to the historical results of operations for the period from January 1, 2003 to January 9, 2003 include the pro forma impact of the Pushdown Accounting for such period and the elimination of approximately $83,000,000 of expenses and charges of the Recapitalization recorded during such period as the unaudited pro forma condensed consolidated summary of operations assumes that the Recapitalization occurred on January 1, 2003 (see Note A).

(C) In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements on FIN 46 apply to the Company immediately for all variable interest entities created after December 31, 2003 and begin on January 1, 2005 for all variable interest entities created prior to January 1, 2004. The adoption of FIN 46 on January 1, 2004 did not have any impact on the Company’s consolidated financial statements and is not expected to have a material impact in the future.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”), which clarifies the financial accounting and reporting proscribed by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) for derivative instruments, including certain derivative instruments embedded in other contracts. Certain provisions of SFAS No. 149 related to implementation issues of SFAS No. 133 are already effective and other provisions related to forward purchases or sales are effective for both existing contracts and new contracts entered into after June 30, 2003. The Company has previously adopted SFAS No. 133, including the implementation issues addressed in SFAS No. 149, and the adoption of the new provisions of SFAS No. 149 on July 1, 2003 did not have an impact on the Company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS No. 150”), which addresses the accounting and reporting for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and for all existing financial instruments beginning in the first interim period after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities, which are subject to the provisions for the first fiscal period beginning after December 15, 2003. The Company adopted SFAS No. 150 on July 1, 2003. Adoption of this accounting standard did not have an impact on the Company’s consolidated financial statements.

In December 2003, the FASB reissued SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“SFAS No. 132”) to require additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The revised SFAS No. 132 provides only for additional disclosures and does not change the accounting for pension and postretirement plans. The Company has previously adopted SFAS No. 132 and has provided the required new interim disclosures of the revised SFAS No. 132 in Note M.

(D) From January 1, 2004 through February 3, 2004, the Company purchased approximately $14,800,000 of its 9 1/4% Senior Notes due 2007 (“9 1/4% Notes”) and approximately $10,700,000 of its 9 1/8% Senior Notes due 2007 (“9 1/8% Notes”) in open market transactions. On March 15, 2004, the Company redeemed all of the Company’s outstanding 9 1/4% Notes (approximately $160,200,000 in principal amount) and on March 14, 2004 redeemed all of its outstanding 9 1/8% Notes (approximately $299,300,000 in principal amount). The 9 1/4% Notes and 9 1/8% Notes were redeemed at a redemption price of 101.542% and 103.042%, respectively, of the principal amount thereof plus accrued and unpaid interest. The 9 1/4% Notes and 9 1/8% Notes ceased to accrue interest as of the respective redemption dates indicated above. The Company used the net after tax proceeds from the sale of Ply Gem of approx imately $450,000,000, together with existing cash on hand, to fund the redemption of the 9 1/4% Notes and 9 1/8% Notes. On March 14, 2004, the Company redeemed $60,000,000 of the Company’s outstanding 8 7/8% Senior Notes due 2008 (“8 7/8% Notes”). On March 31, 2004, the Company redeemed the remaining $150,000,000 of its outstanding 8 7/8% Notes (see below). The 8 7/8% Notes were called at a redemption price of 104.438% of the principal amount thereof plus accrued and unpaid interest.

On March 1, 2004, the Company completed the sale of $200,000,000 of Senior Floating Rate Notes due 2010 (the “Floating Rate Notes”). The Floating Rate Notes bear interest at a rate per annum equal to LIBOR, as defined, plus 3% (4.87% as of July 3, 2004). Interest on the Floating Rate Notes will be determined and payable semi-annually on June 30 and December 31 of each year commencing June 30, 2004. The Company incurred fees and expenses, including the initial purchaser’s discount, of approximately $4,000,000 in connection with the sale, which will be amortized over the life of the Floating Rate Notes. The Floating Rate Notes are unsecured obligations of the Company, which mature on December 31, 2010, and may be redeemed in whole or in part prior to December 31, 2010 at the redemption prices as defined in the indenture governing the Floating Rate Notes (the “Indenture”). The Indenture contains covenants that limit the Company’s ability to engage in certain transactions, including incurring additional indebtedness and paying dividends or distributions. The terms of the Floating Rate Notes require the Company to register notes having substantially identical terms (the “Exchange Notes”) with the SEC as part of an offer to exchange freely tradable Exchange Notes for the Floating Rate Notes (the “Exchange”) (see Note N). Approximately $60,000,000 principal amount of the 8 7/8% Notes ceased to accrue interest as of March 14, 2004 and approximately $150,000,000 principal amount of such Notes ceased to accrue interest as of March 31, 2004. The Company used the net proceeds of approximately $196,000,000 from the sale of the Floating Rate Notes, together with existing cash on hand, to fund the redemption of the 8 7/8% Notes.

The open market purchases and the redemption of the 9 1/4% Notes, 9 1/8% Notes and 8 7/8% Notes noted above resulted in a pre-tax loss of approximately $11,958,000 in the first quarter of 2004, based upon the difference between the respective redemption prices indicated above and the estimated carrying values at the redemption dates.

Interest expense in the first six months ended July 3, 2004 includes duplicative interest arising during the waiting period from the call for redemption to the date of redemption of the 8 7/8% Senior Notes as during that period, the Floating Rate Notes, whose proceeds were used to refinance the 8 7/8% Notes, were also outstanding.

The period from January 10, 2003 to July 5, 2003 includes approximately $4,100,000 of interest expense from the amortization of the Bridge Facility commitment entered into as part of the Recapitalization (see Note B).

(E) On March 9, 2004, the Company acquired OmniMount Systems, Inc. (“OmniMount”) for approximately $16,500,000 in cash and contingent consideration payable 90 days after fiscal 2006 if certain fiscal 2006 financial results, as defined by the stock purchase agreement, are met. OmniMount is a manufacturer and designer of speaker mountings and other products to maximize the home theater experience.

On December 15, 2003, the Company acquired Operator Specialty Company, Inc. (“OSCO”), located in Casnovia, MI for approximately $2,500,000. OSCO is a manufacturer and designer of gate operators and access controls.

On July 11, 2003, the Company acquired SpeakerCraft, Inc. (“SPC”) for approximately $58,100,000 in cash. SPC is a leading designer and supplier of architectural loudspeakers and audio products used in residential custom applications.

On January 17, 2003, the Company acquired Elan Home Systems L.L.C. (“Elan”) for an aggregate purchase price of approximately $18,900,000 including a $1,500,000 note payable to the sellers. Elan manufactures and sells consumer electronic equipment that controls whole-house entertainment, communication and automation systems for new residential construction and retrofit markets.

Acquisitions accounted for approximately $21,900,000 and $37,300,000 of the increase to net sales for the second quarter and six months ended July 3, 2004, respectively, and accounted for approximately $4,000,000 and $5,900,000 of the increase to operating earnings for the second quarter and six months ended July 3, 2004, respectively, as compared to 2003. OmniMount, OSCO, SPC and Elan are included in the Residential Building Products Segment in the Company’s segment reporting. Pro forma results related to these acquisitions have not been presented, as the effect is not significant to the Company’s consolidated operating results.

Acquisitions are accounted for as purchases and, accordingly, have been included in the Company's consolidated results of operations since the acquisition date. Purchase price allocations are subject to refinement until all pertinent information regarding the acquisitions is obtained.

(F) The operating results of the Air Conditioning and Heating Products Segment for the second quarter and first six months ended July 3, 2004 include approximately $600,000 and $1,900,000, respectively, of costs associated with the closure of certain manufacturing facilities (see Note L). During the three months ended July 5, 2003 and the period from January 10, 2003 to July 5, 2003, approximately $1,400,000 of costs associated with the closure of certain manufacturing facilities was recorded within the Air Conditioning and Heating Products Segment. There were no costs recorded in the period from January 1, 2003 to January 9, 2003 related to the closure of certain manufacturing facilities within the Air Conditioning and Heating Products Segment.

Operating results for the second quarter ended July 3, 2004 include a non-cash foreign exchange gain of approximately $100,000 and operating results for the first six months ended July 3, 2004 include a non-cash foreign exchange loss of approximately $500,000 on intercompany debt not permanently invested between the Company’s subsidiaries. For the second quarter ended July 5, 2003 and the period from January 10, 2003 to July 5, 2003, operating results include a non-cash foreign exchange gain of approximately $600,000 and $700,000, respectively, on intercompany debt not permanently invested.

During the second quarter and first six months ended July 3, 2004, the Company recorded a pre-tax charge to continuing operations of approximately $3,100,000 and $3,300,000, respectively, for compensation expense related to stock options issued to employees, officers and directors in accordance with SFAS No. 123. During the second quarter ended July 5, 2003 and the period from January 10, 2003 to July 5, 2003, the Company recorded a pre-tax charge to continuing operations of approximately $200,000 and $900,000, respectively, for compensation expense related to stock options issued to employees, officers and Directors in accordance with SFAS No. 123 (see Note A). A portion of this expense has been allocated to the Company’s reporting segments for all periods presented (see Note I).

During the second quarter ended July 5, 2003 and the periods from January 10, 2003 to July 5, 2003 and from January 1, 2003 to January 9, 2003, the Company incurred approximately $300,000, $1,700,000 and $100,000, respectively, of direct expenses and fees associated with the Company’s strategic sourcing software and systems development, which were recorded in Unallocated in the Company’s segment reporting.

For the nine days ended January 9, 2003, the Company incurred certain charges in connection with the Recapitalization. These charges were as follows:

Curtailment loss upon termination of a SERP	$	70,142,000
Recapitalization fees, expenses and other		12,848,000
Other		10,000

	$	83,000,000

(G) At July 30, 2004, there was approximately $110,100,000 available for the payment of cash dividends, stock purchases or other restricted payments as defined under the terms of the Company's most restrictive debt covenant related to such payments. The Company’s Indentures which currently contain restricted payment covenants are expected to be replaced with other financing arrangements in the third quarter of 2004 as described in Note N.

(H) On February 12, 2004, the Company sold the capital stock of its wholly-owned subsidiary Ply Gem for net cash proceeds of approximately $506,700,000, after excluding approximately $21,400,000 of proceeds provided to fund liabilities of Ply Gem indemnified by the Company, and recorded a net after-tax gain on the sale of approximately $72,300,000 in the first quarter of 2004. Ply Gem, through its operating subsidiaries, is a manufacturer and distributor of a range of products for use in the residential new construction, do-it-yourself and professional renovation markets, including vinyl siding, windows, patio doors, fencing, railing, decking and accessories. The results of operations of the operating subsidiaries of Ply Gem comprised the Company’s entire Windows, Doors and Siding Products (“WDS”) reporting segment and the corporate expenses of Ply Gem were previously included in Unallocated other, net in the Company’s segment reporting (see Note I).

The Company allocates interest to dispositions that qualify as a discontinued operation for debt instruments which are entered into specifically and solely with the entity disposed of and from debt which is settled with proceeds received from the disposition. For the six months ended July 3, 2004, interest allocated to discontinued operations, included in interest expense, net in the table below, was approximately $2,800,000 (net of taxes of approximately $1,600,000). For the second quarter ended July 5, 2003 and the periods from January 10, 2003 to July 5, 2003 and from January 1, 2003 to January 9, 2003, interest allocated to discontinued operations, included in interest expense, net in the table below, was approximately $6,000,000 (net of taxes of approximately $3,600,000), $11,400,000 (net of taxes of approximately $6,700,000) and $800,000 (net of taxes of approximately $400,000), respectiv ely.

The sale of Ply Gem and the related operating results have been excluded from earnings (loss) from continuing operations and are classified as discontinued operations for all periods presented.

The table that follows presents a summary of the results of discontinued operations for the three months ended July 3, 2004 and July 5, 2003:

	Post-Recapitalization
	For the Three
	Months Ended
	July 3, 2004			July 5, 2003
	(Amounts in thousands)
	(Unaudited)

Net sales	$	---		$	154,500

Operating earnings (loss) of discontinued operations *	$	(1,200	)	$	21,581

Interest expense, net		---			(9,881	)

Earnings (loss) before income taxes		(1,200	)		11,700
Provision (benefit) for income taxes		(400	)		4,300

Earnings (loss) from discontinued operations	$	(800	)	$	7,400

Depreciation and amortization expense	$	---		$	3,731

* Operating earnings of discontinued operations are net of Ply Gem corporate expenses previously included within Unallocated other, net in the Company’s segment reporting.

Operating earnings of discontinued operations for the three months ended July 5, 2003 include approximately $100,000 of severance and other costs associated with the closure of certain manufacturing facilities.

Operating earnings for the three months ended July 3, 2004 reflect the pre-tax impact of stock-based employee compensation charges of approximately $1,200,000 related to Nortek Holdings’ stock options retained by employees of Ply Gem subsequent to the sale of Ply Gem (see Note A).

The table that follows presents a summary of the results of discontinued operations for the periods presented:

	For the Periods
	Post-Recapitalization						Pre-Recapitalization
	Jan. 1, 2004 -			Jan. 10, 2003 -			Jan. 1, 2003 -
	July 3, 2004			July 5, 2003			Jan. 9, 2003
	(Amounts in thousands)
	(Unaudited)

Net sales	$	40,600		$	253,600		$	8,800

Operating earnings (loss) of discontinued operations *	$	(3,244	)	$	21,771		$	(368	)

Interest expense, net		(4,556	)		(18,671	)		(1,232	)

Earnings (loss) before provision (benefit) for income taxes		(7,800	)		3,100			(1,600	)
Provision (benefit) for income taxes		(2,900	)		1,200			(600	)

Earnings (loss) from discontinued operations		(4,900	)		1,900			(1,000	)

Gain on sale of discontinued operations		122,700			---			---
Income tax provision on sale of discontinued operations		50,400			---			---

		72,300			---			---

Earnings (loss) from discontinued operations	$	67,400		$	1,900		$	(1,000	)

Depreciation and amortization expense	$	1,359		$	8,478		$	315

* Operating earnings (loss) of discontinued operations are net of Ply Gem corporate expenses previously included within Unallocated other, net in the Company’s segment reporting.

Operating earnings (loss) of discontinued operations for the period from January 10, 2003 to July 5, 2003 include approximately $600,000 of severance and other costs associated with the closure of certain manufacturing facilities. Operating earnings (loss) of discontinued operations for the period from January 10, 2003 to July 5, 2003 also include approximately $1,300,000 of costs and expenses for expanded distribution including new customers.

Operating earnings for the six months ended July 3, 2004 reflect the pre-tax impact of stock-based employee compensation charges of approximately $1,900,000 related to Nortek Holdings’ stock options retained by employees of Ply Gem subsequent to the sale of Ply Gem (see Note A).

The table that follows presents a breakdown of the major components of assets and liabilities of discontinued operations as of December 31, 2003:

	December 31, 2003
	(Amounts in thousands)
	(Unaudited)
Assets:
Accounts receivable, less allowances of $8,695,000	$	45,236
Inventories		44,136
Prepaid income taxes		8,392
Property and equipment, net		122,816
Goodwill		219,977
Intangible assets, less accumulated amortization of $3,849,000		44,363
Other assets		9,931

Total assets of discontinued operations	$	494,851


Liabilities:
Accounts payable	$	18,876
Accrued expenses		33,803
Notes, mortgage notes and obligations payable		29,562
Deferred income taxes		25,323
Other liabilities		30,119

Total liabilities of discontinued operations	$	137,683

(I) The Company has two reportable segments: the Residential Building Products Segment and the Air Conditioning and Heating Products Segment. 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 income statement impact of all purchase accounting adjustments, including goodwill and intangible asset amortization, is reflected in the operating earnings of the applicable operating segment.

Net sales, operating earnings and pre-tax earnings from continuing operations for the Company’s segments for the three months ended July 3, 2004 and July 5, 2003 were as follows:

	Three Months Ended
	July 3, 2004			July 5, 2003
	(Amounts in thousands)
	(Unaudited)
Net sales:
Residential building products	$	245,627		$	194,928
Air conditioning and heating products		202,766			195,101

Consolidated net sales	$	448,393		$	390,029


Operating earnings:
Residential building products *	$	41,706		$	31,551
Air conditioning and heating products *		16,218			19,016

Subtotal		57,924			50,567
Unallocated:
Strategic sourcing software and
systems development expense		---			(300	)
Stock based compensation charges		(2,100	)		(200	)
Other, net		(9,262	)		(6,220	)

Consolidated operating earnings		46,562			43,847
Interest expense		(9,293	)		(12,636	)
Investment income		331			289

Earnings before provision for income taxes	$	37,600		$	31,500

Net sales, operating earnings (loss) and pre-tax earnings (loss) from continuing operations for the Company’s segments for the periods presented below were as follows:

	For the Periods
	Post-Recapitalization						Pre-Recapitalization
	Jan. 1, 2004 -			Jan. 10, 2003 -			Jan. 1, 2003 -
	July 3, 2004			July 5, 2003			Jan. 9, 2003
	(Amounts in thousands)
	(Unaudited)
Net sales:
Residential building products	$	482,148		$	379,461		$	16,338
Air conditioning and heating products		373,688			346,645			8,613

Consolidated net sales	$	855,836		$	726,106		$	24,951

Operating earnings (loss):
Residential building products *	$	81,714		$	58,547		$	2,731
Air conditioning and heating products *		25,290			35,492			(1,258	)

Subtotal		107,004			94,039			1,473
Unallocated:
Expenses and charges arising from
the Recapitalization		---			---			(83,000	)
Strategic sourcing software and
systems development expense		---			(1,700	)		(100	)
Stock based compensation charges		(2,300	)		(800	)		---
Other, net		(16,629	)		(13,168	)		(138	)

Consolidated operating earnings (loss)		88,075			78,371			(81,765	)
Interest expense		(25,870	)		(29,427	)		(1,054	)
Loss from debt retirement		(11,958	)		---			---
Investment income		1,253			656			119

Earnings (loss) before provision (benefit)
for income taxes	$	51,500		$	49,600		$	(82,700	)

* The operating results of the Air Conditioning and Heating Products Segment for the first six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003 include approximately $1,900,000 and $1,400,000, respectively, of costs associated with the closure of certain manufacturing facilities (see Note L). There were no costs recorded in the period from January 1, 2003 to January 9, 2003 related to the closure of certain manufacturing facilities within the Air Conditioning and Heating Products Segment. The operating results of the Residential Building Products Segment for the six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003 include approximate ly $600,000 and $100,000, respectively, of compensation expense related to stock options issued to employees of this segment in accordance with SFAS No. 123 and the operating results of he Air Conditioning and Heating Products Segment for the six months ended July 3, 2004 include approximately $400,000 of compensation expense related to stock options issued to employees of this segment in accordance with SFAS No. 123.

Depreciation expense, amortization of intangible assets and purchase price allocated to inventory and capital expenditures from continuing operationsfor the Company’s segments for the three months ended July 3, 2004 and July 5, 2003 were as follows:

	Three Months Ended
	July 3, 2004		July 5, 2003
	(Amounts in thousands)
	(Unaudited)
Depreciation Expense:
Residential building products	$	3,679	$	1,888
Air conditioning and heating products		3,126		1,968
Other		223		83

Consolidated depreciation expense	$	7,028	$	3,939

Amortization of intangible assets and
*purchase price allocated to inventory :**
Residential building products	$	2,728	$	2,277
Air conditioning and heating products		870		687

Consolidated amortization expense and
purchase price allocated to inventory	$	3,598	$	2,964


Capital Expenditures:
Residential building products	$	2,402	$	2,303
Air conditioning and heating products		2,318		1,962
Other		24		11

Consolidated capital expenditures	$	4,744	$	4,276

* During the three months ended July 3, 2004 and July 5, 2003, the Company reflected approximately $200,000 and $900,000, respectively, of excess purchase price allocated to inventory as a non-cash charge to cost of products sold in the Residential Building Products Segment.

Depreciation expense, amortization of intangible assets and purchase price allocated to inventory and capital expenditures from continuing operations for the Company’s segments for the periods presented below were as follows:

	For the Periods
	Post-Recapitalization				Pre-Recapitalization
	Jan. 1, 2004 -		Jan. 10, 2003 -		Jan. 1, 2003 -
	July 3, 2004		July 5, 2003		Jan. 9, 2003
	(Amounts in thousands)
	(Unaudited)
Depreciation Expense:
Residential building products	$	6,503	$	3,731	$	295
Air conditioning and heating products		6,028		3,779		276
Other		305		193		15

Consolidated depreciation expense	$	12,836	$	7,703	$	586

Amortization of intangible assets and
*purchase price allocated to inventory :**
Residential building products	$	5,378	$	6,852	$	53
Air conditioning and heating products		1,694		1,966		14

Consolidated amortization expense and
purchase price allocated to inventory	$	7,072	$	8,818	$	67

Capital Expenditures:
Residential building products	$	4,831	$	4,227	$	91
Air conditioning and heating products		4,475		2,764		116
Other		342		255		---

Consolidated capital expenditures	$	9,648	$	7,246	$	207

* During the six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003, the Company reflected approximately $200,000 and $4,900,000, respectively, of excess purchase price allocated to inventory as a non-cash charge to cost of products sold. In the first six months ended July 3, 2004, all $200,000 was allocated to the Residential Buildings Products Segment and for the period from January 10, 2003 to July 5, 2003, approximately $4,300,000 was allocated to the Residential Building Products Segment and approximately $600,000 was allocated to the Air Conditioning and Heating Products Segment.

(J) The Company provides income taxes on an interim basis based upon the estimated annual effective income tax rate. The following reconciles the federal statutory income tax rate to the estimated effective tax rate of approximately 39.2%, 40.5% and 26.4% for the periods presented:

	For the Periods
	Post-Recapitalization		Pre-Recapitalization
	Jan. 1, 2004 -	Jan. 10, 2003 -	Jan. 1, 2003 -
	July 3, 2004	July 5, 2003	Jan. 9, 2003
Income tax provision (benefit) at the federal statutory rate	35.0%	35.0%	(35.0)%
Net change from federal statutory rate:
State income tax provision, net of federal income tax effect	1.8	1.1	---
Change in tax reserves, net	0.3	0.5	---
Tax effect resulting from foreign activities	1.7	1.7	---
Tax effect of the Recapitalization	---	---	8.3
Non-deductible expenses	0.3	0.5	---
Other, net	0.1	1.7	0.3

Income tax provision (benefit) at estimated effective rate	39.2%	40.5%	(26.4)%

(K) As of July 3, 2004, the Company’s former subsidiary, Ply Gem, has guaranteed approximately $26,700,000 of third party obligations relating to rental payments through June 30, 2016 under a facility leased by SNE (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 $1,000,000 at July 3, 2004 in accordance with Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others “ (“FIN 45”) (see Note H). The buyer of SNE 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 SNE cease making payments then the Company may be required to make payments on its indemnification.

A former subsidiary of the Company is a defendant in a number of lawsuits alleging damage caused by alleged defects in certain pressure treated wood products. A subsidiary of the Company has indemnified Ply Gem for all known liabilities and future claims relating to such matters and retained the rights to all potential reimbursements related to insurance coverage. Many of the lawsuits have been resolved by dismissal or settlement with amounts being paid out of insurance proceeds or other recoveries. The Company and the former subsidiary continue to vigorously defend the remaining suits. Certain defense and indemnity costs are being paid out of insurance proceeds and proceeds from a settlement with suppliers of material used in the production of the treated wood products. The Company has recorded liabilities of approximately $3,800,000 at July 3, 2004 for the indemnification of the estimated cos ts to resolve these outstanding matters. The Company has indemnified the buyer of Ply Gem for these liabilities in connection with the sale of Ply Gem on February 12, 2004 (see Note H).

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 and litigation noted above, of approximately $21,300,000 at July 3, 2004 and $20,900,000 at December 31, 2003. Approximately $18,600,000 of these indemnifications as of July 3, 2004 relate to indemnifications provided to the buyer of Ply Gem in connection with the sale of Ply Gem. Accordingly, the Company has included approximately $4,700,000 of short-term liabilities from discontinued operations and approximately $13,900,000 of long-term liabilities from discontinued operations, respectively, in accrued expenses and other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet at July 3, 2004. Approximately $18,200,0 00 of these indemnifications as of December 31, 2003 related to Ply Gem and were included in liabilities from discontinued operations in the accompanying unaudited condensed consolidated balance sheet prior to the sale of Ply Gem (see Note H).

The Company sells a number of products and offers a number of warranties including in some instances, extended warranties. The specific terms and conditions of these warranties vary depending on the product sold and country in which the product is sold. The Company estimates the costs that may be incurred under its warranties and, with the exception of extended warranties, records a liability for such costs at the time of sale. Proceeds received from extended warranties are amortized over the life of the warranty and reviewed to ensure that the liability recorded is equal to or greater than estimated future costs. Factors that affect the Company’s warranty liability include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. The Company periodically assesses the adequacy of its recorded warranty claims and adjusts the amounts as necessary. Changes in the Company’s combined short-term and long-term warranty liabilities during the periods presented are as follows:

	For the Three Months Ended
	July 3, 2004			July 5, 2003
	(Amounts in thousands)
	(Unaudited)

Balance, beginning of period	$	29,378		$	26,743
Warranties provided during period		5,067			4,535
Settlements made during period		(4,240	)		(3,639	)
Changes in liability estimates, including expirations		211			167

Balance, end of period	$	30,416		$	27,806

	For the Periods
	Post-Recapitalization						Pre-Recapitalization
	Jan. 1, 2004 -			Jan. 10, 2003 -			Jan. 1, 2003 -
	July 3, 2004			July 5, 2003			Jan. 9, 2003
	(Amounts in thousands)
	(Unaudited)

Balance, beginning of period	$	29,087		$	25,983		$	26,007
Warranties provided during period		9,262			8,762			234
Settlements made during period		(7,828	)		(7,025	)		(274	)
Changes in liability estimate, including acquisitions		(105	)		86			16

Balance, end of period	$	30,416		$	27,806		$	25,983

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, adjustment or replacement of component parts of units sold, which may include product recalls. Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned. The Company 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.

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

(L) 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 six months ended July 3, 2004, the Company recognized restructuring charges primarily associated with plant closings in the Air Conditioning and Heating Products Segment.

In the second quarter of 2003, the Company initiated restructuring activities related to the closure of two facilities in St. Louis, Missouri, in order to relocate the operations to other facilities. Approximately 293 employees were terminated in 2003 and approximately 98 employees have been terminated to date during the first six months of 2004. Approximately 60 additional employees are expected to be terminated during the remaining six months of 2004. The facilities currently support warehousing and distribution activities of the segment’s residential HVAC products. During the three months and six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003, the Company provided approximately $600,000, $1,900,000 and $1,400,000, respectively, in cost of goods sold related to liabilities incurred as a result of the restructuring. The Company expects to provide an additio nal estimated $800,000 of costs through the end of 2004. The facilities to be closed are owned by the Company and are expected to be sold in 2004.

The following table sets forth restructuring activity in the accompanying unaudited condensed consolidated statement of operations for the periods presented. These costs are included in cost of goods sold and selling, general and administrative expenses in the accompanying unaudited condensed consolidated statement of operations of the Company.

	Employee Separation Expenses			Other			Total Restructuring Costs
	(Amounts in thousands)
	(Unaudited)

Balance at December 31, 2002	$	820		$	645		$	1,465
Other adjustments		(90	)		(110	)		(200	)

Balance at January 9, 2003		730			535			1,265
Payments and asset write downs		(45	)		(205	)		(250	)

Balance at April 5, 2003		685			330			1,015
Provision		1,251			133			1,384
Payments and asset write downs		(143	)		(23	)		(166	)

Balance at July 5, 2003	$	1,793		$	440		$	2,233


Balance at December 31, 2003	$	1,638		$	205		$	1,843
Provision		71			1,219			1,290
Payments and asset write downs		(1,139	)		(1,420	)		(2,559	)

Balance at April 3, 2004		570			4			574
Provision		125			458			583
Payments and asset write downs		(202	)		(462	)		(664	)

Balance at July 3, 2004	$	493		$	---		$	493

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.

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

Pension and profit sharing expense charged to operations aggregated approximately $4,700,000 and $3,700,000 for the three months ended July 3, 2004 and July 5, 2003, respectively. Pension and profit sharing expense charged to operations aggregated approximately $8,100,000, $7,200,000 and $950,000 for the six months ended July 3, 2004 and the periods from January 10, 2003 to July 5, 2003 and from January 1, 2003 to January 9, 2003, respectively. The Company’s policy is to generally fund currently the minimum allowable annual contribution of its various qualified defined benefit plans. As previously disclosed in the Company’s latest annual report on Form 10-K as filed with the SEC, the Company expects to contribute approximately $7,600,000 to its defined benefit pension plans during 2004. As of July 3, 2004, approximately $3,800,000 of contributions have been made.

The Company’s net periodic benefit cost for its defined benefit plans for the three months ended July 3, 2004 and July 5, 2003 consists of the following components:

	For the Three Months Ended
	July 3, 2004			July 5, 2003
	(Amounts in thousands)
	(Unaudited)

Service cost	$	293		$	500
Interest cost		2,316			2,370
Expected return on plan assets		(1,999	)		(1,901	)
Amortization of prior service cost		47			54
Recognized actuarial loss		4			7
Curtailment loss		---			31

Net periodic benefit cost	$	661		$	1,061

The Company’s net periodic benefit (income) cost for its defined benefit plans for the periods presented below consists of the following components:

	For the Periods
	Post-Recapitalization						Pre-Recapitalization
	Jan. 1, 2004 -			Jan. 10, 2003 -			Jan. 1, 2003 -
	July 3, 2004			July 5, 2003			Jan. 9, 2003
	(Amounts in thousands)
	(Unaudited)

Service cost	$	595		$	972		$	80
Interest cost		4,708			4,609			385
Expected return on plan assets		(4,064	)		(3,698	)		(184	)
Amortization of prior service cost		96			104			70
Recognized actuarial loss		8			14			210
Curtailment loss		---			61			65,766

Net periodic benefit cost	$	1,343		$	2,062		$	66,327

The Company’s net periodic benefit cost for its subsidiary’s Post Retirement Health Benefit Plan for the three months ended July 3, 2004 and July 5, 2003 consists of the following components:

	For the Three Months Ended
	July 3, 2004			July 5, 2003
	(Amounts in thousands)
	(Unaudited)

Service cost	$	247		$	251
Interest cost		608			556
Amortization of prior service cost		---			2
Recognized actuarial gain		(5	)		(2	)

Net periodic post retirement health benefit cost		$ 850			$ 807

The Company’s net periodic benefit (income) cost for its subsidiary’s Post Retirement Health Benefit Plan for the periods presented consists of the following components:

	For the periods
	Post-Recapitalization						Pre-Recapitalization
	Jan. 1, 2004 -			Jan. 10, 2003 -			Jan. 1, 2003 -
	July 3, 2004			July 5, 2003			Jan. 9, 2003
	(Amounts in thousands)
	(Unaudited)

Service cost	$	501		$	488		$	13
Interest cost		1,237			1,081			62
Amortization of prior service cost		---			4			2
Recognized actuarial (gain) loss		(11	)		(4	)		35
Curtailment gain		---			---			(355	)

Net periodic post retirement health benefit cost (income)	$	1,727		$	1,569		$	(243	)

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. The Company sponsors a retiree medical program for certain of its locations and the Company expects that this legislation will eventually reduce the Company’s cost for the program. At this point, the Company’s investigation into its response to the legislation is preliminary, as the Company awaits guidance from various governmental and regulatory agencies concerning the requirements that must be met to obtain these cost reductions as well as the manner in which such savings should be measured. Because of various uncertainties related to the Company’s response to this legislation and the appropriate accounting methodology for this event, the Com pany has elected to defer financial recognition of this legislation until the FASB issues final accounting guidance. When issued, that final guidance could require the Company to change previously reported information. This deferral election is permitted under FASB Staff Position No. FAS 106-1 until the first interim or annual period beginning after June 15, 2004.

(N) On July 15, 2004, THL Buildco Holdings, Inc. and THL Buildco, Inc. (“THL Buildco”), newly formed Delaware corporations affiliated with Thomas H. Lee Partners, L.P., together with certain members of Nortek Holdings’ management, entered into a stock purchase agreement with affiliates of Kelso and Company, L.P. and certain other parties, pursuant to which THL Buildco agreed to purchase all of the outstanding capital stock of Nortek Holdings in a transaction valued at approximately $1.74 billion before fees and expenses (the “THL Transaction”).

The THL Transaction is subject to customary closing conditions and is expected to be consummated during the third quarter of 2004. Upon closing of the THL Transaction, certain members of management have agreed to settlement or modification of their compensation and benefit arrangements. Management has also agreed to reinvest a substantial portion of their equity interest in Nortek Holdings into THL Buildco Holdings, Inc. (see below). No significant costs related to the THL Transaction have been incurred through July 3, 2004. Nortek Holdings and the Company expect to account for the THL Transaction as a purchase in accordance with SFAS No. 141 and Push Down Accounting rules and regulations.

In connection with the THL Transaction, THL Buildco expects to partially finance the transaction, including the redemption of substantially all of the Company’s and Nortek Holdings’ existing debt, via the issuance of a combination of a new senior secured term loan and new senior subordinated debt. It is expected that the new senior secured term loan will be secured by substantially all of the assets of the Company and its subsidiaries. The Company also expects to enter into a $100,000,000 revolving credit facility at the closing which will be available for seasonal working capital borrowing needs and other requirements. It is expected that no borrowings under the revolving credit facility will be necessary at the closing. A summary of the estimated cash sources and uses for the THL Transaction is as follows:

Sources:
Cash equity from the Buyer and its affiliates (1)	$	361,300,000
Senior secured term loan		700,000,000
Senior subordinated notes		625,000,000
Estimated cash of the Company		160,400,000

	$	1,846,700,000

Uses:
Purchase price paid to sellers	$	803,200,000
Repayment of existing debt, including interest and redemption premiums		937,700,000
Transaction fees, expenses and other		105,800,000

	$	1,846,700,000

(1) It is expected that management will reinvest up to $109,700,000 of their equity interest in Nortek Holdings into THL Buildco Holdings, Inc.

On July 20, 2004, the Company announced that it has offered to purchase for cash all of its outstanding 9.875% Senior Subordinated Notes due 2011 ($250,000,000 in principal as of July 3, 2004) (the “9.875% Notes”) and all of its outstanding Floating Rate Notes ($200,000,000 in principal as of July 3, 2004) and Nortek Holdings announced that is has offered to purchase for cash all of its 10% Senior Discount Notes due 2011 (approximately $370,500,000 of accreted principal as of July 3, 2004) (the “Senior Discount Notes”), which are both subject to the successful closing of the THL Transaction. Based upon current estimates, Nortek Holdings expects to incur a pre-tax loss from debt retirement of approximately $125,000,000 related to the repurchase of the 9.875% Notes, the Floating Rate Notes and the Senior Discount Notes in the third quarter of 2004, of which approximat ely $66,000,000 relates to Nortek Holdings’ Senior Discount Notes.

NORTEK, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SECOND QUARTER AND FIRST SIX MONTHS ENDED JULY 3, 2004

AND THE SECOND QUARTER AND FIRST SIX MONTHS ENDED JULY 5, 2003

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company is a diversified manufacturer of residential and commercial building products, operating within two principal segments: the Residential Building Products Segment and the Air Conditioning and Heating Products Segment. In the results of operations presented below, Unallocated includes corporate related items, intersegment eliminations and certain income and expense not allocated to reportable segments. Through its principal segments, the Company manufactures and sells, primarily in the United States, Canada and Europe, a wide variety of products for the residential and commercial construction, manufactured housing and the do-it-yourself (“DIY”) and professional remodeling and renovation markets. (As used in this report, the terms “Company” and “Nortek” refer to Nortek, Inc., together with its subsidiaries, unless the context indicates otherwise. Such terms as “Company” and “Nortek” 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 Building Products Segment manufactures and distributes built-in products primarily for the residential new construction and DIY and professional remodeling and renovation markets. The principal products sold by the segment include:

kitchen range hoods
built-in exhaust fans (such as bath fans and fan, heater and light combination units)
indoor air quality products
bath cabinets
door chimes
radio intercoms
central vacuum systems
surround sound systems and,
multi-room audio and video distribution equipment

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

On July 15, 2004, THL Buildco Holdings, Inc. and THL Buildco, Inc. (“THL Buildco”), newly formed Delaware corporations affiliated with Thomas H. Lee Partners, L.P., together with certain members of Nortek Holdings’ management, entered into a stock purchase agreement with affiliates of Kelso and Company, L.P. and certain other parties, pursuant to which THL Buildco agreed to purchase all of the outstanding capital stock of Nortek Holdings in a transaction valued at approximately $1.74 billion before fees and expenses (the “THL Transaction”). The THL Transaction is subject to customary closing conditions and is expected to be consummated during the third quarter of 2004. No significant costs related to the THL Transaction have been incurred through July 3, 2004. Nortek Holdings and the Company expect to account for the THL Transaction as a purchase in accordance with SFAS No. 141 and Push Down Accounting rules and regulations. (See "Liquidity and Capital Resources" and Note N of the Notes to the Unaudited Condensed Consolidated Financial Statement included elsewhere herein.)

On February 12, 2004, the Company’s wholly-owned subsidiary, WDS, LLC, sold all of the capital stock of Ply Gem Industries, Inc. (“Ply Gem”). The results of operations of the operating subsidiaries of Ply Gem comprised the Company’s entire Windows, Doors and Siding Products (“WDS”) reporting segment. The corporate expenses of Ply Gem were previously included in Unallocated other, net in the Company’s segment reporting. The results of Ply Gem have been excluded from earnings from continuing operations and are classified separately as discontinued operations for all periods presented. Accordingly, for purposes of this presentation of Management’s Discussion and Analysis of Financial Condition and Results of Operations, all discussion relates to the results from continuing operations. (See Notes A and H of the Notes to the Unaudited Condensed Consol idated Financial Statements included elsewhere herein.)

On November 20, 2002, the Company was reorganized into a holding company structure and each outstanding share of capital stock of the Company was converted into an identical share of capital stock of Nortek Holdings, Inc. (“Nortek Holdings”), a Delaware corporation formed in 2002, with Nortek Holdings becoming the successor public company and the Company becoming a wholly-owned subsidiary of Nortek Holdings (the “Nortek Holdings Reorganization”). On January 9, 2003, Nortek Holdings completed a recapitalization transaction, which resulted in the acquisition of Nortek Holdings by certain affiliates and designees of Kelso & Company L.P. (“Kelso”) and certain members of the Company’s management (the “Recapitalization”). (See Liquidity and Capital Resources and Notes A and B of the Notes to the Unaudited Condensed Consolidated Financial Statements incl uded elsewhere herein.)

On March 9, 2004, the Company through its wholly owned subsidiary, Linear Corporation (“Linear”), acquired OmniMount Systems, Inc. (“OmniMount”). OmniMount is located in Phoenix, AZ and manufacturers and designs speaker mountings and other products to maximize the home theater experience. On December 15, 2003, the Company, through Linear, acquired all of the capital stock of Operator Specialty Company, Inc. (“OSCO”). OSCO is located in Casnovia, MI and manufactures and sells gate operators and door openers. On July 11, 2003, the Company through Linear, acquired SpeakerCraft, Inc. (“SPC”). SPC is located in Riverside, CA and manufactures and sells in-wall and in-ceiling speakers, amplifiers and subwoofers. On January 17, 2003, the Company through its wholly owned subsidiary, Linear, acquired Elan Home Systems L.L.C. (“Elan”). Elan is located in Le xington, KY and manufactures and sells home automation and audio video distribution equipment. These acquisitions have been accounted for under the purchase method of accounting and are included in the Company’s Residential and Building Products Segment. Accordingly, the results of OmniMount, OSCO, SPC and Elan are included in the Company’s consolidated results since the date of their acquisition. (See “Liquidity and Capital Resources” and Notes E and I of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)

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 and Related Expenses
Inventory Valuation
Prepaid Income Tax Assets and Deferred Tax Liabilities
Goodwill
Pensions and Post Retirement Health Benefits
Insurance Liabilities
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 tables that follow present the unaudited net sales from continuing operations, operating earnings from continuing operations and depreciation and amortization expense from continuing operations for the Company’s principal segments for the second quarter ended July 3, 2004 and July 5, 2003, the dollar amount and percentage change of such results as compared to the prior comparable period and the percentage to net sales of operating earnings and depreciation and amortization expense for the second quarter ended July 3, 2004 and July 5, 2003:

							Change in Earnings in the
	Second Quarter Ended						Second Quarter 2004
	July 3,			July 5,			as Compared to 2003
	2004			2003			$			%
	(Dollar amounts in thousands)
Net sales:
Residential Building Products	$	245,627		$	194,928		$	50,699			26.0	%
Air Conditioning and Heating Products		202,766			195,101			7,665			3.9

Consolidated net sales	$	448,393		$	390,029		$	58,364			15.0	%

Operating earnings:
Residential Building Products*	$	41,706		$	31,551		$	10,155			32.2	%
Air Conditioning and Heating Products*		16,218			19,016			(2,798	)		(14.7	)

Subtotal		57,924			50,567			7,357			14.5
Unallocated:
Strategic sourcing software and
systems development expense		---			(300	)		300			100.0
Stock based compensation charges		(2,100	)		(200	)		(1,900	)		(950.0	)
Other, net		(9,262	)		(6,220	)		(3,042	)		(48.9	)

Consolidated operating earnings	$	46,562		$	43,847		$	2,715			6.2	%

Depreciation and amortization expense :**
Residential Building Products	$	6,407		$	4,165		$	2,242			53.8	%
Air Conditioning and Heating Products		3,996			2,655			1,341			50.5
Other		223			83			140			168.7

	$	10,626		$	6,903		$	3,723			53.9	%

Operating earnings margin:
Residential Building Products		17.0	%		16.2	%
Air Conditioning and Heating Products		8.0			9.7
Consolidated		10.4	%		11.2	%

Depreciation and amortization
expense as a % of net sales:
Residential Building Products		2.6	%		2.1	%
Air Conditioning and Heating Products		2.0			1.4
Consolidated		2.4	%		1.8	%

* The operating results of the Air Conditioning and Heating Products Segment for the three months ended July 3, 2004 and July 5, 2003 include approximately $600,000 and $1,400,000, respectively, of costs associated with the closure of certain manufacturing facilities. The operating results of the Air Conditioning and Heating Products Segment for the three months ended July 3, 2004 and July 5, 2003 also include approximately $1,800,000 and approximately $550,000, respectively, of estimated inefficient production costs and expenses associated with the start-up of a new manufacturing facility. The operating results of the Residential Building Products Segment for the three months ended July 3, 2004 and July 5, 2003 include approximately $600,000 and $100,000, respectively, and operating results of the Air Conditioning and Heating Products Segment include for the three months ended July 3, 2004 approximately $400,000 of compensation expense related to stock options issued to employees of such segments in accordance with SFAS No. 123.

** During the three months ended July 3, 2004 and July 5, 2003, the Company reflected approximately $200,000 and $900,000, respectively, of excess purchase price allocated to inventory as a non-cash charge to cost of products sold in the Residential Building Products Segment.

The first six months of 2004 have been compared to the combined first six months of 2003 pre- and post-Recapitalization periods for purposes of management’s discussion and analysis of the results of operations. Any references, below, to the first six months of 2003 shall refer to the combined periods. Material fluctuations in operations resulting from the effect of purchase accounting have been highlighted.

	Pre-Recapitalization			Post-Recapitalization			Combined Six
	January 1, 2003 -			January 10, 2003			Months Ended
	January 9, 2003			July 5, 2003			July 5, 2003
	(Dollar amounts in thousands)
Net sales:	(Unaudited)
Residential Building Products	$	16,338		$	379,461		$	395,799
Air Conditioning and Heating Products		8,613			346,645			355,258

Consolidated net sales	$	24,951		$	726,106		$	751,057

Operating earnings (loss):
Residential Building Products	$	2,731		$	58,547		$	61,278
Air Conditioning and Heating Products		(1,258	)		35,492			34,234

Subtotal		1,473			94,039			95,512
Unallocated:
Expenses and charges arising
from the Recapitalization		(83,000	)		---			(83,000	)
Strategic sourcing software and
systems development expense		(100	)		(1,700	)		(1,800	)
Stock based compensation charges		---			(800	)		(800	)
Other, net		(138	)		(13,168	)		(13,306	)

Consolidated operating earnings (loss)	$	(81,765	)	$	78,371		$	(3,394	)

Depreciation and amortization expense:
Residential Building Products	$	348		$	10,583		$	10,931
Air Conditioning and Heating Products		290			5,745			6,035
Other		15			193			208

	$	653		$	16,521		$	17,174

Operating earnings (loss) margin:
Residential Building Products		16.7	%		15.4	%		15.5	%
Air Conditioning and Heating Products		(14.6	)		10.2			9.6
Consolidated		(327.7)	%		10.8	%		(0.5)	%

Depreciation and amortization
expense as a % of net sales:
Residential Building Products		2.1	%		2.8	%		2.8	%
Air Conditioning and Heating Products		3.4			1.7			1.7
Consolidated		2.6	%		2.3	%		2.3	%

The tables that follow present the unaudited net sales from continuing operations, operating earnings from continuing operations and depreciation and amortization expense from continuing operations for the Company’s principal segments for the first six months ended July 3, 2004 and the combined period ended July 5, 2003, the dollar amount and percentage change of such results as compared to the prior comparable period and the percentage to net sales of operating earnings and depreciation and amortization expense for the first six months ended July 3, 2004 and the combined period ended July 5, 2003:

							Change in Earnings in the
	Six Months Ended						First Six Months 2004
	July 3,			July 5,			as Compared to 2003
	2004			2003 (1)			$			%
	(Dollar amounts in thousands)
Net sales:
Residential Building Products	$	482,148		$	395,799		$	86,349			21.8	%
Air Conditioning and Heating Products		373,688			355,258			18,430			5.2

Consolidated net sales	$	855,836		$	751,057		$	104,779			14.0	%

Operating earnings (loss):
Residential Building Products*	$	81,714		$	61,278		$	20,436			33.3	%
Air Conditioning and Heating Products*		25,290			34,234			(8,944	)		(26.1	)

Subtotal		107,004			95,512			11,492			12.0
Unallocated:
Expenses and charges arising
from the Recapitalization		---			(83,000	)		83,000			100.0
Strategic sourcing software and
systems development expense		---			(1,800	)		1,800			100.0
Stock based compensation charges		(2,300	)		(800	)		(1,500	)		(187.5	)
Other, net		(16,629	)		(13,306	)		(3,323	)		(25.0	)

Consolidated operating earnings (loss)	$	88,075		$	(3,394	)	$	91,469			2,695.0	%

Depreciation and amortization expense :**
Residential Building Products	$	11,881		$	10,931		$	950			8.7	%
Air Conditioning and Heating Products		7,722			6,035			1,687			28.0
Other		305			208			97			46.6

	$	19,908		$	17,174		$	2,734			15.9	%

Operating earnings margin:
Residential Building Products		16.9	%		15.5	%
Air Conditioning and Heating Products		6.8			9.6
Consolidated		10.3	%		(0.5)	%

Depreciation and amortization
expense as a % of net sales:
Residential Building Products		2.5	%		2.8	%
Air Conditioning and Heating Products		2.1			1.7
Consolidated		2.3	%		2.3	%

(1) The six months ended July 5, 2003 represents the combined pre- and post-Recapitalization periods of January 1, 2003 through January 9, 2003 and January 10, 2003 through July 5, 2003, respectively.

* The operating results of the Air Conditioning and Heating Products Segment for the first six months ended July 3, 2004 include approximately $1,900,000 of costs associated with the closure of certain manufacturing facilities and approximately $5,900,000 of estimated inefficient production costs and expenses associated with the start-up of a new manufacturing facility. The operating results of the Air Conditioning and Heating Products Segment for the period from January 10, 2003 to July 5, 2003 include approximately $1,400,000 of costs associated with the closure of certain manufacturing facilities and approximately $550,000 of costs and expenses associated with the startup of a new manufacturing facility. There were no costs recorded in the period from January 1, 2003 to January 9, 2003 related to the closure of certain manufacturing facilities within the Air Conditioning and Heating Products Segment. The operating results of the Residential Building Products Segment for the six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003 include approximately $600,000 and $100,000, respectively, of compensation expense related to stock options issued to employees of this segment in accordance with SFAS No. 123 and the operating results of the Air Conditioning and Heating Products Segment for the six months ended July 3, 2004 include approximately $400,000 of compensation expense related to stock options issued to employees of this segment in accordance with SFAS No. 123.

** During the six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003, the Company reflected approximately $200,000 and $4,900,000, respectively, of excess purchase price allocated to inventory as a non-cash charge to cost of products sold. In the first six months ended July 3, 2004, all $200,000 was allocated to the Residential Buildings Products Segment and for the period from January 10, 2003 to July 5, 2003, approximately $4,300,000 was allocated to the Residential Building Products Segment and approximately $600,000 was allocated to the Air Conditioning and Heating Products Segment.

The tables that follow set forth, for the periods presented, (a) certain unaudited consolidated operating results, (b) the change in the amount and the percentage change of such results as compared to the prior comparable period, (c) the percentage which such results bear to net sales, and (d) the change of such percentages as compared to the prior comparable period. The results of operations for the second quarter ended July 3, 2004 are not necessarily indicative of the results of operations to be expected for any other interim period or the full year.

							Change in Earnings in
	Second Quarter Ended						the Second Quarter 2004
	July 3,			July 5,			as Compared to 2003
	2004			2003			$			%
	(Dollar amounts in millions)

Net sales	$	448.4		$	390.0		$	58.4			15.0	%
Cost of products sold		316.4			280.7			(35.7	)		(12.7	)
Selling, general and administrative expenses, net		81.9			63.4			(18.5	)		(29.2	)
Amortization of intangible assets		3.5			2.0			(1.5	)		(75.0	)

Operating earnings		46.6			43.9			2.7			(6.2	)
Interest expense		(9.3	)		(12.7	)		3.4			26.8
Investment income		0.3			0.3			-			-

Earnings from continuing operations
before provision for income taxes		37.6			31.5			6.1			(19.4	)
Provision for income taxes		14.7			13.0			1.7			(13.1	)

Earnings from continuing operations		22.9			18.5			4.4			(23.8	)
Earnings (loss) from discontinued operations		(0.8	)		7.4			(8.2	)		*

Net earnings	$	22.1		$	25.9		$	(3.8	)		(14.7)	%

	Percentage of Net Sales						Change in Percentage
	Second Quarter Ended						for the Second
	July 3,			July 5,			Quarter 2004
	2004			2003 (1)			as Compared to 2003
Net sales		100.0	%		100.0	%		---	%
Cost of products sold		70.6			72.0			1.4
Selling, general and administrative expenses, net		18.2			16.3			(1.9	)
Amortization of intangible assets		0.8			0.5			(0.3	)

Operating earnings		10.4			11.2			(0.8	)
Interest expense		(2.1	)		(3.3	)		1.2
Investment income		0.1			0.1			-

Earnings from continuing operations
before provision for income taxes		8.4			8.0			0.4
Provision for income taxes		3.3			3.3			-

Earnings from continuing operations		5.1			4.7			0.4
Earnings (loss) from discontinued operations		(0.2	)		1.9			(2.1	)

Net earnings		4.9	%		6.6	%		(1.7)	%

	Pre-Recapitalization			Post-Recapitalization			Combined Six
	Jan. 1, 2003 -			Jan. 10, 2003 -			Months Ended
	Jan. 9, 2003			July 5, 2003			July 5, 2003
	(Dollar amounts in millions)
	(Unaudited)

Net sales	$	24.9		$	726.1		$	751.0
Cost of products sold		18.6			520.4			539.0
Selling, general and administrative expenses, net		5.0			123.5			128.5
Amortization of intangible assets		0.1			3.8			3.9
Expenses and charges arising from the
Recapitalization		83.0			---			83.0

Operating earnings (loss)		(81.8	)		78.4			(3.4	)
Interest expense		(1.0	)		(29.5	)		(30.5	)
Investment income		0.1			0.7			0.8

Earnings (loss) before provision (benefit) for
income taxes		(82.7	)		49.6			(33.1	)
Provision (benefit) for income taxes		(21.8	)		20.1			(1.7	)

Earnings (loss) from continuing operations		(60.9	)		29.5			(31.4	)
Earnings (loss) from discontinued operations		(1.0	)		1.9			0.9

Net earnings (loss)	$	(61.9	)	$	31.4		$	(30.5	)


	Percentage of Net Sales
		Pre-Recapitalization			Post-Recapitalization			Combined Six
		Jan. 1, 2003 -			Jan. 10, 2003 -			Months Ended
		Jan. 9, 2003			July 5, 2003			July 5, 2003

Net sales		100.0	%		100.0	%		100.0	%
Cost of products sold		74.7			71.7			71.8
Selling, general and administrative expenses, net		20.1			17.0			17.1
Amortization of intangible assets		0.4			0.5			0.5
Expenses and charges arising from the
Recapitalization		333.3			-			11.1

Operating earnings (loss)		(328.5	)		10.8			(0.5	)
Interest expense		(4.0	)		(4.1	)		(4.0	)
Investment income		0.4			0.1			0.1

Earnings (loss) before provision (benefit) for
income taxes		(332.1	)		6.8			(4.4	)
Provision (benefit) for income taxes		(87.5	)		2.8			(0.2	)

Earnings (loss) from continuing operations		(244.6	)		4.0			(4.2	)
Earnings (loss) from discontinued operations		(4.0	)		0.3			0.1

Net earnings (loss)		(248.6)	%		4.3	%		(4.1)	%

The tables that follow set forth, for the periods presented, (a) certain unaudited consolidated operating results, (b) the change in the amount and the percentage change of such results as compared to the prior comparable period, (c) the percentage which such results bear to net sales, and (d) the change of such percentages as compared to the prior comparable period. The results of operations for the first six months ended July 3, 2004 are not necessarily indicative of the results of operations to be expected for any other interim period or the full year.

							Change in Earnings in the
	First Six Months Ended						First Six Months 2004
	July 3,			July 5,			as Compared to 2003
	2004			2003 (1)			$			%
	(Dollar amounts in millions)

Net sales	$	855.8		$	751.0		$	104.8			14.0	%
Cost of products sold		605.1			539.0			(66.1	)		(12.3	)
Selling, general and administrative expenses, net		155.8			128.5			(27.3	)		(21.2	)
Amortization of intangible assets		6.8			3.9			(2.9	)		(74.4	)
Expenses and charges arising from the
Recapitalization		---			83.0			83.0			100.0

Operating earnings (loss)		88.1			(3.4	)		91.5			*
Interest expense		(25.9	)		(30.5	)		4.6			15.1
Loss from debt retirement		(11.9	)		---			(11.9	)		*
Investment income		1.2			0.8			0.4			50.0

Earnings (loss) from continuing operations
before provision (benefit) for income taxes		51.5			(33.1	)		84.6			255.6
Provision (benefit) for income taxes		20.2			(1.7	)		21.9			*

Earnings (loss) from continuing operations		31.3			(31.4	)		62.7			199.7
Earnings (loss) from discontinued operations		67.4			0.9			66.5			*

Net earnings (loss)	$	98.7		$	(30.5	)	$	129.2			423.6	%

	Percentage of Net Sales						Change in Percentage
	First Six Months Ended						for the First
	July 3,			July 5,			Six Months 2004
	2004			2003 (1)			as Compared to 2003

Net sales		100.0	%		100.0	%		---	%
Cost of products sold		70.7			71.8			1.1
Selling, general and administrative expenses, net		18.2			17.1			(1.1	)
Amortization of intangible assets		0.8			0.5			(0.3	)
Expense and charges arising from the
Recapitalization		---			11.1			11.1

Operating earnings (loss)		10.3			(0.5	)		10.8
Interest expense		(3.0	)		(4.0	)		1.0
Loss from debt retirement		(1.4	)		---			(1.4	)
Investment income		0.1			0.1			-

Earnings (loss) from continuing operations
before provision (benefit) for income taxes		6.0			(4.4	)		10.4
Provision (benefit) for income taxes		2.3			(0.2	)		2.5

Earnings (loss) from continuing operations		3.7			(4.2	)		7.9
Earnings (loss) from discontinued operations		7.9			0.1			7.8

Net earnings (loss)		11.6	%		(4.1)	%		15.7	%

* not meaningful

The Company’s 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. The Company however, does ensure that whenever the underlying causes of material increases or decreases in consolidated net sales can be adequately analyzed and quantified, that appropriate disclosure of such reasons, including changes in price, volume and the mix of products sold is made.

Consolidated net sales from continuing operations increased approximately $58,400,000 or 15.0% for the second quarter of 2004 as compared to the second quarter of 2003 and increased approximately $104,800,000 or 14.0% for the first six months of 2004 as compared to the first six months of 2003. Net sales increased for the second quarter and first six months of 2004 as compared to the second quarter and first six months of 2003 as a result of the effect of changes in foreign currency exchange rates, the acquisitions of Elan, SPC, OSCO and OmniMount in the Residential Building Products Segment, as well as, price increases and higher net sales volume.

In the Residential Building Products Segment, net sales increased approximately $50,700,000 or 26.0% for the second quarter of 2004 as compared to the second quarter of 2003 and increased approximately $86,300,000 or 21.8% for the first six months of 2004 as compared to the first six months of 2003. The second quarter and first six months of 2004 include increases of approximately $3,200,000 and $11,000,000, respectively, attributable to the effect of changes in foreign currency exchange rates and approximately $21,900,000 and $37,300,000, respectively, attributable to the acquisitions of Elan in January of 2003, SPC in July of 2003, OSCO in December of 2003 and OmniMount in March of 2004. The increase in net sales volume in the Residential Building Products Segment in the second quarter and first six months of 2004 as compared to the second quarter and first six months of 2003 was primarily due to increased volume of bathroom exhaust fans and range hoods as a result of the ongoing stability in the residential housing construction and remodeling markets and from the introduction of new products. To a lesser extent, net sales increased due to sales price increases.

In the Air Conditioning and Heating Products Segment, net sales increased approximately $7,700,000 or 3.9% for the second quarter of 2004 as compared to the second quarter of 2003 and increased approximately $18,500,000 or 5.2% for the first six months of 2004 as compared to the first six months of 2003. The second quarter and first six months of 2004 include increases of approximately $1,900,000 and $5,800,000, respectively, attributable to the effect of changes in foreign currency exchange rates. Net sales in the Air Conditioning and Heating Products Segment for HVAC products sold to residential site-built customers constituted the largest category of product sold to a particular group of customers within this segment in the second quarter and first six months of 2004 and increased approximately 4.2% over the second quarter of 2003 and increased approximately 7.1% over the first six months of 2003. The increase in net sales in this Segment in the second quarter and first six months of 2004 as compared to the second quarter and first six months of 2003 was due principally to continued growth from this segment's brand-name strategy of HVAC products sold to customers serving the residential site built market. To a lesser extent, net sales increased due to sales price increases. These increases were partially offset by the general slowdown in commercial construction activity, which reduced sales of the Company’s commercial HVAC products by less than 1% before considering the effect of foreign exchange as continued softness is being experienced by this industry. The Company does not believe that it will see any meaningful recovery in the manufactured housing and commercial HVAC markets in 2004.

Overall, increases in sales levels in the second quarter and first six months of 2004 reflect the ongoing stability of the housing construction and remodeling markets and our expanded branding effort in our line of air conditioning and heating products, partially offset by a slight decrease in net sales of certain products affected by the general slowdown in commercial construction activity and the continued softness in the manufactured housing market. For the second quarter of 2004 and 2003, the Company’s net sales to customers serving the manufactured housing markets, principally consisting of air conditioners and furnaces, constituted approximately 6.9% and 7.3%, respectively, of the Company’s consolidated net sales and for the first six months of 2004 and 2003, the Company’s net sales to customers serving the manufactured housing markets, principally consisting of air conditio ners and furnaces, constituted approximately 6.5% and 7.1%, respectively, of the Company’s consolidated net sales.

Cost of products sold was approximately $316,400,000 and $605,100,000 for the second quarter and first six months of 2004, respectively, as compared to approximately $280,700,000 and $539,000,000 for the second quarter and first six months of 2003, respectively. Cost of products sold, as a percentage of net sales, decreased from approximately 72.0% in the second quarter of 2003 to approximately 70.6% in the second quarter of 2004 and decreased from approximately 71.8% in the first six months of 2003 to approximately 70.7% in the first six months of 2004. Cost of products sold for the second quarter and first six months of 2004 includes (1) approximately $12,400,000 and $20,900,000, respectively, of cost of products sold from the acquisitions of Elan, SPC, OSCO and OmniMount, (2) approximately $600,000 and $1,900,000, respectively, of severance and other costs associated with the closure of certa in manufacturing facilities, (3) approximately $1,800,000 and $5,900,000, respectively, of estimated inefficient production costs and expenses associated with the start-up of a new manufacturing facility, (4) approximately $3,300,000 and $4,900,000, respectively, of increased depreciation expense of property, plant and equipment in the second quarter and first six months of 2004 as compared to the second quarter and first six months of 2003 arising from finalizing the fair value adjustments in the fourth quarter of 2003 as a result of the Recapitalization, (5) an increase of approximately $4,000,000 and $13,100,000, respectively, related to the effect of changes in foreign currency exchange rates and (6) a non-cash charge of approximately $200,000 for the second quarter and first six months of 2004 related to the amortization of purchase price allocated to inventory as a result of the OmniMount acquisition. Cost of products sold for the second quarter and first six months of 2003 include a non-cash charge of approximately $900,000 and $4,900,000, respectively, primarily related to the amortization of purchase price allocated to inventory as a result of the Recapitalization, approximately $1,400,000 of severance and other costs associated with the closure of certain manufacturing facilities and approximately $550,000 of costs and expenses associated with the startup of a new manufacturing facility.

In the Residential Building Products Segment, cost of products sold for the second quarter and first six months of 2004 was approximately $156,700,000 and $306,000,000, respectively, as compared to approximately $129,000,000 and $264,800,00 in the second quarter and first six months of 2003, respectively. Cost of products sold in this segment for the second quarter and first six months of 2004 includes (1) approximately $12,400,000 and $20,900,000, respectively, of cost of products sold from the acquisitions of Elan, SPC, OSCO and OmniMount, (2) approximately $2,100,000 and $2,700,000, respectively, of increased depreciation expense of property, plant and equipment in the second quarter and first six months of 2004 as compared to the second quarter and first six months of 2003 arising from finalizing the fair value adjustments in the fourth quarter of 2003 as a result of the Recapitalization, (3 ) an increase of approximately $2,500,000 and $8,300,000, respectively, related to the effect of changes in foreign currency exchange rates and (4) a non-cash charge of approximately $200,000 for the second quarter and first six months of 2004 related to the amortization of purchase price allocated to inventory as a result of the OmniMount acquisition. Cost of products sold in this segment for the second quarter and first six months of 2003 include approximately $900,000 and $4,300,000, respectively, related to the amortization of purchase price allocated to inventory related primarily to the Recapitalization.

In the Air Conditioning and Heating Products Segment cost of products sold in the second quarter and first six months of 2004 was approximately $159,800,000 and $299,100,000, respectively, as compared to approximately $151,700,000 and $274,200,000, respectively, in the second quarter and first six months of 2003. Cost of products sold in this segment in the second quarter and first six months of 2004 includes (1) an increase of approximately $1,500,000 and $4,800,000, respectively, related to the effect of changes in foreign currency exchange rates, (2) approximately $600,000 and $1,900,000, respectively, of costs associated with the closure of certain manufacturing facilities, (3) approximately $1,800,000 and $5,900,000, respectively, of estimated inefficient production costs and expenses associated with the start-up of a new manufacturing facility and (4) approximately $1,200,000 and $2,200,00 0, respectively, of increased depreciation expense of property, plant and equipment in the second quarter and first six months of 2004 as compared to the second quarter and first six months of 2003 arising from finalizing the fair value adjustments in the fourth quarter of 2003 as a result of the Recapitalization. Cost of products sold in this segment for the second quarter and first six months of 2003 include approximately $1,400,000 of severance and other costs associated with the closure of certain manufacturing facilities, approximately $550,000 of costs and expenses associated with the startup of a new manufacturing facility and also includes in the first six months of 2003 a non-cash charge of approximately $600,000 related to the amortization of purchase price allocated to inventory related to the Recapitalization. There were no additional charges to cost of products sold in this segment related to the amortization of purchase price allocated to inventory related to the Recapitalization in 2004 and th e second quarter of 2003.

Material costs were approximately 44.7% and 45.4% of net sales for the second quarter of 2004 and 2003, respectively and were approximately 44.0% and 44.5% of net sales for the first six months of 2004 and 2003, respectively. Both of the Company’s segments experienced material cost increases related primarily to purchases of steel, copper and aluminum in the second quarter and first six months of 2004 as compared to the second quarter and first six months of 2003. These cost increases were offset by the effect of increased sales prices of certain of the Company’s products and material cost improvements due to the Company’s strategic sourcing initiatives.

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.

Selling, general and administrative expense (“SG&A”) was approximately $81,900,000 and $155,800,000 for the second quarter and first six months of 2004, respectively, as compared to approximately $63,400,000 and $128,500,000 for the second quarter and first six months of 2003, respectively. SG&A as a percentage of net sales increased from approximately 16.3% in the second quarter of 2003 to approximately 18.2% in the second quarter of 2004 and from approximately 17.1% in the first six months of 2003 to approximately 18.2% in the first six months of 2004. SG&A in the second quarter and first six months of 2004 includes (1) approximately $5,600,000 and $10,600,000, respectively, of SG&A from the acquisitions of Elan, SPC, OSCO and OmniMount in the Residential Building Products Segment, (2) approximately $3,100,000 (of which approximately $2,100,000 is included in unalloca ted) and $3,300,000 (of which approximately $2,300,000 is included in unallocated), respectively, of stock based compensation expense and (3) increases of approximately $700,000 and $2,600,000, respectively, related to the effect of changes in foreign currency exchange rates. Approximately $400,000 and $1,600,000 of the increase in SG&A related to the effect of changes in foreign currency exchange is included in the Residential Building Products Segment in the second quarter and first six months of 2004, respectively, and approximately $300,000 and $1,000,000 of the increase in SG&A related to the effect of foreign currency exchange rates is included in the Air Conditioning and Heating Products Segment for the second quarter and first six months of 2004, respectively. SG&A in the second quarter of 2004 includes a non-cash foreign exchange gain of approximately $100,000, included in the Residential Building Products Segment and in the first six months of 2004 includes a non-cash foreign exchange l oss of approximately $500,000 on intercompany debt not permanently invested between the Company’s subsidiaries, of which approximately $300,000 is included in the Residential Building Products Segment and $200,000 is included in unallocated. SG&A in the second quarter and first six months of 2003 includes approximately $300,000 and $1,800,000, respectively, of direct expenses and fees associated with the Company’s strategic sourcing software and systems development and approximately $200,000 and $900,000 (of which approximately $800,000 is included in unallocated), respectively, of stock based compensation from adopting SFAS No. 123. The direct expenses and fees associated with the Company’s strategic sourcing software and systems development, as well as the stock based compensation charges for the second quarter of 2003, are set-forth separately in the segment data. The second quarter and first six months of 2003 includes a non-cash foreign exchange loss of approximately $600,000 and $700 ,000, respectively, on intercompany debt not permanently invested between the Company’s subsidiaries, all of which is included in unallocated. The increase in the percentage in the second quarter and first six months of 2004 is principally due to acquisitions in the Residential Building Products Segment, which have a substantially higher level of SG&A than the overall segment.

Amortization of intangible assets, as a percentage of net sales from continuing operations, increased from approximately 0.5% in the second quarter and first six months of 2003 to approximately 0.8% in the second quarter and first six months of 2004. This increase in the second quarter and first six months of 2004 is principally as a result of approximately $1,600,000 and $3,200,000, respectively, of increased amortization of intangible assets in the second quarter and first six months of 2004 as compared to the second quarter and first six months of 2003 arising from finalizing the fair value adjustments in the fourth quarter of 2003 related to the Recapitalization. Approximately $1,300,000 and $2,600,000 of this increase relates to the Residential Building Products Segment in the second quarter and first six months of 2004, respectively, and approximately $300,000 and $600,000 of this increase relates to the Air Conditioning and Heating Products Segment in the second quarter and first six months of 2004, respectively. (See Note A of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)

Expenses and charges arising from the Recapitalization were approximately $83,000,000 in the first six months of 2003. See Liquidity and Capital Resources and Notes A, B and F of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein, for further discussion of these expenses and charges.

Consolidated operating earnings increased by approximately $2,700,000 from approximately $43,900,000, or 11.2% as a percent of net sales, in the second quarter of 2003 to approximately $46,600,000, or 10.4% as a percent of net sales, in the second quarter of 2004 and increased by approximately $91,500,000 from a loss of approximately $3,400,000, or 0.5% as a percent of net sales, in the first six months of 2003 to earnings of approximately $88,100,000, or 10.3% as a percent of net sales, in the first six months of 2004 as a result of the factors discussed above.

Consolidated operating earnings have been reduced by depreciation and amortization expense (other than amortization of deferred debt expense and debt premium and discount) of approximately $10,600,000 and $6,900,000 for the second quarter of 2004 and 2003, respectively and by approximately $19,900,000 and $17,200,000 for the first six months of 2004 and 2003, respectively. Acquisitions accounted for approximately $200,000 and $300,000 of the increase in such depreciation and amortization expense in the second quarter and first six months of 2004, respectively. Consolidated operating earnings in the second quarter and first six months of 2004 include approximately $3,300,000 and $4,900,000, respectively, of increased depreciation expense of property, plant and equipment and approximately $1,600,000 and $3,200,000, respectively, of increased amortization of intangible assets in the second quarter and first six months of 2004 as compared to the second quarter and first six months of 2003 arising from finalizing the fair value adjustments of each in the fourth quarter of 2003 related to the Recapitalization. Consolidated operating earnings for the second quarter and first six months of 2004 include approximately $200,000 of amortization expense from purchase price allocated to inventory as a result of the OmniMount acquisition and consolidated operating earnings for the second quarter and first six months of 2003 include approximately $900,000 and $4,900,000, respectively, of amortization expense from purchase price allocated to inventory. Consolidated operating earnings for the second quarter of 2004 include a non-cash foreign exchange gain of approximately $100,000 and operating earnings for the first six months of 2004 include a non-cash foreign exchange loss of approximately $500,000 on intercompany debt not permanently invested between the Company’s subsidiaries. For the second quarter and first six months of 2003 operating earnings include a non-cash foreign exchange gain of approximately $600,000 and $700,000, respectively, on intercompany debt not permanently invested.

Operating earnings of the Residential Building Products Segment in the second quarter and first six months of 2004 were approximately $41,700,000 and $81,700,000, respectively, as compared to approximately $31,600,000 and $61,300,000 in the second quarter and first six months of 2003, respectively. Operating earnings of this segment in the second quarter and first six months of 2004 include (1) an increase of approximately $300,000 and $1,100,000, respectively, from the effect of foreign currency exchange rates, (2) approximately $4,000,000 and $5,900,000, respectively, of operating earnings contributed by the acquisitions of Elan, SPC, OSCO and OmniMount, (3) approximately $2,100,000 and $2,700,000, respectively, of increased depreciation expense of property, plant and equipment and approximately $1,300,000 and $2,600,000, respectively, of increased amortization of intangible assets in the seco nd quarter and first six months of 2004 as compared to the second quarter and first six months of 2003 from finalizing the fair value adjustments of each in the fourth quarter of 2003 as a result of the Recapitalization, (4) approximately $600,000 in the second quarter and first six months of 2004 of stock-based compensation charges, (5) a non-cash charge of approximately $200,000 for the second quarter and first six months of 2004 related to the amortization of purchase price allocated to inventory as a result of the OmniMount acquisition and (6) a non-cash foreign exchange gain of approximately $100,000 and a non-cash foreign exchange loss of approximately $300,000, for the second quarter and first six months of 2004, respectively, on intercompany debt not permanently invested between the Company’s subsidiaries. Operating earnings of this segment in the second quarter and first six months of 2003 include approximately $900,000 and $4,300,000, respectively, of amortization expense from purchase price a llocated to inventory related to the Recapitalization and approximately $100,00 of stock-based compensation charges in the second quarter and first six months of 2003. The increase in operating earnings in the Residential Building Products Segment in the second quarter and first six months of 2004 was primarily as a result of increased sales volume, principally bathroom exhaust fans and kitchen range hoods, due to the continued stability of new home construction and remodeling markets.

Operating earnings of the Air Conditioning and Heating Products Segment were approximately $16,200,000 and $25,300,000 in the second quarter and first six months of 2004, respectively, as compared to approximately $19,000,000 and $34,200,000 in the second quarter and first six months of 2003, respectively. Operating earnings of this segment in the second quarter and first six months of 2004 include (1) approximately $600,000 and $1,900,000, respectively, of costs associated with the closure of certain manufacturing facilities, (2) approximately $1,800,000 and $5,900,000, respectively, of estimated inefficient production costs and expenses associated with the start-up of a new manufacturing facility, (3) a decrease of approximately $100,000 from the effect of foreign currency exchange rates in the first six months of 2004, (4) approximately $1,200,000 and $2,200,000, respectively, of increased de preciation expense of property, plant and equipment and approximately $300,000 and $600,000, respectively, of increased amortization of intangible assets in the second quarter and first six months of 2004 as compared to the second quarter and first six months of 2003 from finalizing the fair value adjustments of each in the fourth quarter of 2003 related to the Recapitalization and (5) approximately $400,000 in the second quarter and first six months of 2004 of stock-based compensation charges. Operating earnings of this segment in the second quarter and first six months of 2003 include approximately $1,400,000 of costs associated with the closure of certain manufacturing facilities, approximately $550,000 of costs and expenses associated with the startup of a new manufacturing facility and in the first six months of 2004 include approximately $600,000 of amortization expense from purchase price allocated to inventory related to the Recapitalization. The decrease in operating earnings in the Air Conditioning and Heating Products Segment in the second quarter and first six months of 2004 was principally due to the general slowdown in the manufactured housing markets of certain product lines, as well as, costs in the residential sector related to the relocation of production to new manufacturing facilities and lower levels of efficiency and productivity related to the ramp up of production, partially offset by increased shipments of products to customers serving the residential site built market.

The operating expense in Unallocated was approximately $11,300,000 and $18,900,000 for the second quarter and first six months of 2004, respectively, as compared to approximately $6,700,000 and $98,900,000 in the second quarter and first six months of 2003, respectively. Operating expense in Unallocated for the second quarter and first six months of 2004 includes approximately $2,100,000 and $2,300,000, respectively, of stock based compensation charges and a non-cash foreign exchange loss of approximately $200,000 in the first six months of 2004 on intercompany debt not permanently invested between the Company’s subsidiaries. Operating expense in Unallocated for the second quarter and first six months of 2003 includes approximately $200,000 and $800,000, respectively, of stock-based compensation charges and approximately $300,000 and $1,800,000, respectively, of direct expenses and fees ass ociated with the Company’s strategic sourcing software and systems development. The second quarter and first six months of 2003 includes a non-cash foreign exchange loss of approximately $600,000 and $700,000, respectively, on intercompany debt not permanently invested between the Company’s subsidiaries. Operating expense in Unallocated for the first six months of 2003 also includes approximately $83,000,000 of fees and expenses associated with the Recapitalization.

Operating earnings of foreign operations, consisting primarily of the results of operations of the Company's Canadian and European subsidiaries were approximately 9.6% and 4.8% of operating earnings (before unallocated and corporate expense) in the second quarter of 2004 and 2003, respectively, and were approximately 10.2% and 4.6% in the first six months of 2004 and 2003, respectively. Sales and earnings derived from international markets are subject to, among others, the risks of currency fluctuations.

Interest expense decreased approximately $3,400,000 or approximately 26.8% in the second quarter of 2004 as compared to the second quarter of 2003 and decreased approximately $4,600,000 or approximately 15.1% in the first six months of 2004 as compared to the first six months of 2003. The decrease in interest expense in the second quarter and first six months of 2004 is primarily due to approximately $4,100,000 of interest expense in the first quarter of 2003 from the amortization of the Bridge Facility, a reduction of indebtedness from the debt redemptions and open market purchases, lower interest rates from the sale of Floating Rate Notes used to refinance the 8 7/8% Senior Notes, partially offset by duplicative interest arising during the waiting period from the call for redemption to the date of redemption of the 8 7/8% Senior Notes. Interest allocated to discontinued operations was approxim ately $9,600,000 for the second quarter of 2003 and was approximately $4,400,000 and $19,300,000 for the first six months of 2004 and 2003, respectively, and was also a factor in the change in interest expense from continuing operations. (See Liquidity and Capital Resources and Notes B and H of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)

During the first quarter of 2004, the Company called for redemption all of the Company’s outstanding 9 1/4% Senior Notes due 2007 (“9 1/4% Notes”), all of its outstanding 9 1/8% Senior Notes due 2007 (“9 1/8% Notes”) and all of its outstanding 8 7/8% Senior Notes due 2008 (“8 7/8% Notes”). The redemption of the 9 1/4% Notes, 9 1/8% Notes and 8 7/8% Notes resulted in a pre-tax loss of approximately $11,958,000 in the first quarter of 2004, based upon the difference between the respective redemption prices and the estimated carrying values at the redemption dates of the 9 1/4% Notes, 9 1/8% Notes and 8 7/8% Notes, which include the principal amount redeemed and the estimated remaining unamortized premium recorded in connection with the Recapitalization. (See Note D of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein .)

Investment income was approximately $300,000 in the second quarter of 2004 and 2003 and increased approximately $400,000 or 50.0% in the first six months of 2004 as compared to the first six months of 2003 primarily as a result of higher average invested balances.

The provision for income taxes from continuing operations was approximately $14,700,000 and $13,000,000 for the second quarter of 2004 and 2003, respectively, and the provision for income taxes from continuing operations was approximately $20,200,000 for the first six months of 2004 as compared to a benefit for income taxes from continuing operations of approximately $1,700,000 for the first six months of 2003. The income tax rates in both the second quarter and first six months of 2004 and 2003 differed from the United States Federal statutory rate of 35% principally as a result of the effect of non-deductible expenses, foreign income tax on foreign source income, state income tax provisions, and in 2003 due to the Recapitalization. (See Notes A, B and J of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)

The table that follows presents a summary of the results of discontinued operations for the three months ended July 3, 2004 and July 5, 2003. (See Note H of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)

	Post-Recapitalization
	For the Three
	Months Ended
	July 3, 2004			July 5, 2003
	(Amounts in thousands)
	(Unaudited)

Net sales	$	---		$	154,500

Operating earnings (loss) of discontinued operations *	$	(1,200	)	$	21,581

Interest expense, net		---			(9,881	)

Earnings (loss) before income taxes		(1,200	)		11,700
Provision (benefit) for income taxes		(400	)		4,300

Earnings (loss) from discontinued operations	$	(800	)	$	7,400

Depreciation and amortization expense	$	---		$	3,731

* Operating earnings of discontinued operations are net of Ply Gem corporate expenses previously included within Unallocated other, net in the Company’s segment reporting.

The table that follows presents a summary of the operating results of discontinued operations for the periods presented. (See Note H of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)

	For the Periods
	Post-Recapitalization						Pre-Recapitalization
	Jan. 1, 2004 -			Jan. 10, 2003 -			Jan. 1, 2003 -
	July 3, 2004			July 5, 2003			Jan. 9, 2003
	(Amounts in thousands)
	(Unaudited)

Net sales	$	40,600		$	253,600		$	8,800

Operating earnings (loss) of discontinued operations *	$	(3,244	)	$	21,771		$	(368	)

Interest expense, net		(4,556	)		(18,671	)		(1,232	)

Earnings (loss) before provision (benefit) for income taxes		(7,800	)		3,100			(1,600	)
Provision (benefit) for income taxes		(2,900	)		1,200			(600	)

Earnings (loss) from discontinued operations		(4,900	)		1,900			(1,000	)

Gain on sale of discontinued operations		122,700			---			---
Income tax provision on sale of discontinued operations		50,400			---			---

		72,300			---			---

Earnings (loss) from discontinued operations	$	67,400		$	1,900		$	(1,000	)

Depreciation and amortization expense	$	1,359		$	8,478		$	315

* Operating earnings (loss) of discontinued operations are net of Ply Gem corporate expenses previously included within Unallocated other, net in the Company’s segment reporting.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements on FIN 46 apply to the Company immediately for all variable interest entities created after December 31, 2003 and begin on January 1, 2005 for all variable interest entities created prior to January 1, 2004. The adoption of FIN 46 on January 1, 2004 did not have any impact on the Company’s consolidated financial statements and is not expected to have a material impact in the future.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”), which clarifies the financial accounting and reporting proscribed by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”) for derivative instruments, including certain derivative instruments embedded in other contracts. Certain provisions of SFAS No. 149 related to implementation issues of SFAS No. 133 are already effective and other provisions related to forward purchases or sales are effective for both existing contracts and new contracts entered into after June 30, 2003. The Company has previously adopted SFAS No. 133, including the implementation issues addressed in SFAS No. 149, and the adoption of the new provisions of SFAS No. 149 on July 1, 2003 did not hav e an impact on the Company’s consolidated financial Statements.

In December 2003, the FASB reissued SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“SFAS No. 132”) to require additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The revised SFAS No. 132 provides only for additional disclosures and does not change the accounting for pension and postretirement plans. The Company has previously adopted SFAS No. 132 and has provided the required new disclosures of the revised SFAS No. 132 in Note M of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.

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 generally accepted accounting principles in the United States (“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 income (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 hig hly leveraged or has a disadvantageous tax structure. The Company uses a significant amount of capital assets and depreciation and amortization expense is a necessary element of the Company’s costs and ability to generate revenue and therefore its exclusion from EBITDA is a material limitation. The Company has a significant amount of debt and interest expense is a necessary element of the Company’s costs and ability to generate revenue and therefore its exclusion from EBITDA is a material limitation. The Company generally incurs significant U.S federal, state and foreign income taxes each year and the provision (benefit) for income taxes is a necessary element of the Company’s costs and therefore its exclusion from EBITDA is a material limitation. As a result, EBITDA should be evaluated in conjunction with net income (loss) for a more complete analysis of the Company’s profitability, as net income (loss) includes the financial statement impact of these items and is the most directly compa rable 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 the Company’s Credit Facility, note holders and Bond Rating agencies, among others, as a supplemental non-GAAP operating measure to assist them in their evaluation of the Company’s performance. The Company is also active in mergers, acquisitions and divestitures and uses EBITDA as an additional operating performance measure to assess Company, subsidiary and potential acquisition target enterprise value and to assist in the o verall 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 the Recapitalization, which impacts comparability with its competitors who may or may not have recently revalued their fixed and intan gible assets, and the differing tax structures and tax jurisdictions of certain of the Company’s competitors. The Company has included EBITDA as a supplemental operating performance measure, which should be evaluated by investors in conjunction with the traditional GAAP performance measures discussed earlier in this Results of Operations section for a complete evaluation of the Company’s operating performance.

The following table presents a reconciliation from net earnings, which is the most directly comparable GAAP operating performance measure, to EBITDA for the second quarter ended July 3, 2004 and July 5, 2003:

	For the Three
	Months Ended
	July 3, 2004			July 5, 2003
	(Amounts in thousands)

Net earnings *	$	22,100		$	25,900
Provision for income taxes
from continuing operations		14,700			13,000
Provision (benefit) for income taxes
from discontinued operations		(400	)		4,300
Interest expense from continuing operations		9,293			12,636
Interest expense from discontinued operations		---			9,916
Investment income from continuing operations		(331	)		(289	)
Investment income from discontinued operations		---			(35	)
Depreciation expense from continuing operations		7,028			3,939
Depreciation expense from discontinued operations		---			2,646
Amortization expense from continuing operations		3,598			2,964
Amortization expense from discontinued operations		---			1,085

EBITDA	$	55,988		$	76,062

* Includes approximately $800,000 of loss and approximately $7,400,000 of earnings from discontinued operations for the three months ended July 3, 2004 and July 5, 2003, respectively. (See Note H of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)

EBITDA includes approximately $4,300,000 and $300,000 of stock based compensation from adopting SFAS No. 123 recorded in the three months ended July 3, 2004 and July 5, 2003, respectively. (See Notes A and I of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)

The following table presents a reconciliation from net earnings (loss), which is the most directly comparable GAAP operating performance measure, to EBITDA for the periods presented:

	For the Periods
	Post-Recapitalization						Pre-Recapitalization
	Jan. 1, 2004			Jan. 10, 2003 -			Jan. 1, 2003 -
	July 3, 2004			July 5, 2003			Jan. 9, 2003
	(Amounts in thousands)

Net earnings (loss) *	$	98,700		$	31,400		$	(61,900	)
Provision (benefit) for income taxes
from continuing operations		20,200			20,100			(21,800	)
Provision (benefit) for income taxes
from discontinued operations		47,500			1,200			(600	)
Interest expense from continuing operations		25,870			29,427			1,054
Interest expense from discontinued operations		4,585			18,774			1,234
Investment income from continuing operations		(1,253	)		(656	)		(119	)
Investment income from discontinued operations		(29	)		(103	)		(2	)
Depreciation expense from continuing operations		12,836			7,703			586
Depreciation expense from discontinued operations		1,158			5,033			245
Amortization expense from continuing operations		7,072			8,818			67
Amortization expense from discontinued operations		201			3,445			70

EBITDA	$	216,840		$	125,141		$	(81,165	)

* Includes approximately $67,400,000, $1,900,000 and $(1,000,000) of earnings (loss) from discontinued operations for the first six months ended July 3, 2004 and the periods from January 10, 2003 to July 5, 2003 and from January 1, 2003 to January 9, 2003, respectively. (See Note H of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)

EBITDA includes approximately $83,000,000 of expenses and charges arising from the Recapitalization recorded in the period from January 1, 2003 to January 9, 2003 and approximately $5,200,000 and $1,000,000 of stock based compensation from adopting SFAS No. 123 recorded in the first six months ended July 3, 2004 and the period from January 10, 2003 to July 5, 2003, respectively. (See Notes A, F and I of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)

Liquidity and Capital Resources

Sources:
Cash equity from the Buyer and its affiliates (1)	$	361,300,000
Senior secured term loan		700,000,000
Senior subordinated notes		625,000,000
Estimated cash of the Company		160,400,000

	$	1,846,700,000

Uses:
Purchase price paid to sellers	$	803,200,000
Repayment of existing debt, including interest and redemption premiums		937,700,000
Transaction fees, expenses and other		105,800,000

	$	1,846,700,000

(1) It is expected that management will reinvest up to $109,700,000 of their equity interest in Nortek Holdings into THL Buildco Holdings, Inc.

On July 20, 2004, the Company announced that it has offered to purchase for cash all of its outstanding 9.875% Senior Subordinated Notes due 2011 ($250 million in principal as of July 3, 2004) (the “9.875% Notes”) and all of its outstanding Floating Rate Notes ($200 million in principal as of July 3, 2004) and Nortek Holdings announced that is has offered to purchase for cash all of its 10% Senior Discount Notes due 2011 (approximately $370.5 million of accreted principal as of July 3, 2004) (the “Senior Discount Notes”), which are both subject to the successful closing of the THL Transaction. Based upon current estimates, Nortek Holdings expects to incur a pre-tax loss from debt retirement of approximately $125,000,000 related to the repurchase of the 9.875% Notes, the Floating Rate Notes and the Senior Discount Notes in the third quarter of 2004, of which a pproximately $66,000,000 relates to Nortek Holdings’ Senior Discount Notes.

From January 1, 2004 through February 3, 2004, the Company purchased approximately $14,800,000 of its 9 1/4% Senior Notes due 2007 (“9 1/4% Notes”) and approximately $10,700,000 of its 9 1/8% Senior Notes due 2007 (“9 1/8% Notes”) in open market transactions. On March 15, 2004, the Company redeemed all of the Company’s outstanding 9 1/4% Notes (approximately $160,200,000 in principal amount) and on March 14, 2004 redeemed all of its outstanding 9 1/8% Notes (approximately $299,300,000 in principal amount). The 9 1/4% Notes and 9 1/8% Notes were redeemed at a redemption price of 101.542% and 103.042%, respectively, of the principal amount thereof plus accrued and unpaid interest. The 9 1/4% Notes and 9 1/8% Notes ceased to accrue interest as of the respective redemption dates indicated above. The Company used the net after tax proceeds from the sale of Ply Ge m of approximately $450,000,000, together with existing cash on hand, to fund the redemption of the 9 1/4% Notes and 9 1/8% Notes. On March 14, 2004, the Company redeemed $60,000,000 of the Company’s outstanding 8 7/8% Senior Notes due 2008 (“8 7/8% Notes”). On March 31, 2004, the Company redeemed the remaining $150,000,000 of its outstanding 8 7/8% Notes (see below). The 8 7/8% Notes were called at a redemption price of 104.438% of the principal amount thereof plus accrued and unpaid interest.

On March 1, 2004, the Company completed the sale of $200,000,000 of Senior Floating Rate Notes due 2010 (the “Floating Rate Notes”). The Floating Rate Notes bear interest at a rate per annum equal to LIBOR, as defined, plus 3% (4.87% as of July 30, 2004). Interest on the Floating Rate Notes will be determined and payable semi-annually on June 30 and December 31 of each year commencing June 30, 2004. The Company incurred fees and expenses, including the initial purchaser’s discount, of approximately $4,000,000 in connection with the sale, which will be amortized over the life of the Floating Rate Notes. The Floating Rate Notes are unsecured obligations of the Company, which mature on December 31, 2010, and may be redeemed in whole or in part prior to December 31, 2010 at the redemption prices as defined in the indenture governing the Floating Rate Notes (the “Inde nture”). The Indenture contains covenants that limit the Company’s ability to engage in certain transactions, including incurring additional indebtedness and paying dividends or distributions. The terms of the Floating Rate Notes require the Company to register notes having substantially identical terms (the “Exchange Notes”) with the SEC as part of an offer to exchange freely tradable Exchange Notes for the Floating Rate Notes (the “Exchange”) (see Note D and N of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein). Approximately $60,000,000 principal amount of the 8 7/8% Notes ceased to accrue interest as of March 14, 2004 and approximately $150,000,000 principal amount of such Notes ceased to accrue interest as of March 31, 2004. The Company used the net proceeds of approximately $196,000,000 from the sale of the Floating Rate Notes, together with existing cash on hand, to fund the redemption of the 8 7/8% Notes.

The Company has a $175,000,000 Senior Secured Credit Facility, as amended, (the “Senior Secured Credit Facility”), which is syndicated among several banks. The Senior Secured Credit Facility is secured by substantially all of the Company’s accounts receivable and inventory, as well as certain intellectual property rights, and, as amended, permits borrowings up to the lesser of $175,000,000 or the total of 85% of eligible accounts receivable, as defined, and 50% of eligible inventory, as defined. The outstanding principal balances under the Senior Secured Credit Facility accrue interest at the Company’s option at either LIBOR plus a margin ranging from 2.0% to 2.5% or the banks’ prime rate plus a margin ranging from 0.5% to 1.0% depending upon the excess available borrowing base, as defined, and the timing of the borrowing as the margin rates will be adjusted quarterly. In addition, the Company pays an unused line fee of between 0.375% and 0.5% on the excess available borrowing capacity, as defined. The Senior Secured Credit Facility includes customary limitations and covenants, but does not require the Company to maintain any financial covenant unless the excess available borrowing base, as defined, is less than $30,000,000 in which case the Company would be required to maintain, on a trailing four quarter basis, a minimum level of $155,000,000 of earnings before interest, taxes, depreciation and amortization, as defined. At July 3, 2004 there were no outstanding borrowings under the Senior Secured Credit Facility.

The Company had consolidated debt at July 3, 2004, of approximately $484,812,000 consisting of (i) $13,410,000 of short-term borrowings and current maturities of long-term debt, (ii) $20,853,000 of long-term notes, mortgage notes and other indebtedness, (iii) $250,549,000 of 9 7/8% Senior Subordinated Notes and (iv) $200,000,000 of Floating Rate Notes. During the first six months ended July 3, 2004, the Company had a net decrease in its consolidated debt of approximately $502,247,000 which represented $710,875,000 of principal payments including the Senior Note redemptions previously discussed net of additional borrowings of approximately $208,628,000 including the Floating Rate Notes.

The indentures and other agreements governing the Company and its subsidiaries’ indebtedness (including the indentures for the 9 7/8% Senor Subordinated Notes and the Floating Rate Notes, as well as, the credit agreement for the Senior Secured Credit Facility) contain certain restrictive financial and operating covenants including covenants that restrict the ability of the Company and its subsidiaries to complete acquisitions, pay dividends, incur indebtedness, make investments, sell assets and take certain other corporate actions.

At July 30, 2004 approximately $110,100,000 was available for the payment of cash dividends, stock purchases or other restricted payments as defined under the terms of the Company's most restrictive indenture based on the redemption and refinancing of certain of the Company’s Notes. (See Note G of the Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere herein.)

At July 3, 2004, the Company had consolidated unrestricted cash, cash equivalents and marketable securities of approximately $128,306,000 as compared to approximately $182,349,000 at December 31, 2003. It is expected that substantially all of available cash at the closing date will be utilized as part of the THL transaction. The Company’s debt to equity ratio was approximately 0.8:1 at July 3, 2004 as compared to approximately 1.8:1 at December 31, 2003. The change in the ratio was primarily due to a net decrease in indebtedness and an increase in stockholder’s investment, primarily as a result of net earnings for the first six months of 2004.

The Company’s ability to pay interest on or to refinance its indebtedness depends on the Company’s future performance, working capital levels and capital structure, which are subject to general economic, financial, competitive, legislative, regulatory and other factors which may be beyond its control. 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 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.

As of July 3, 2004, approximately $3,500,000 of letters of credit have been issued as additional security for approximately $13,400,000 of capital leases outstanding (included in notes, mortgage notes and obligations payable in the accompanying condensed consolidated balance sheet at July 3, 2004) relating to one of the Company’s manufacturing facilities, approximately $11,000,000 of letters of credit have been issued as additional security for certain of the Company's insurance programs and approximately $1,200,000 of letters of credit have been issued as additional security for certain of the subsidiaries purchases and other requirements.

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. No significant changes in these obligations have occurred since December 31, 2003.

Unrestricted cash and cash equivalents and marketable securities decreased from approximately $182,349,000 at December 31, 2003 to approximately $128,306,000 at July 3, 2004. The Company has classified as restricted in the accompanying unaudited condensed consolidated balance sheet certain investments that are not fully available for use in its operations. At July 3, 2004, approximately $10,480,000 (of which $8,523,000 is included in current assets) of cash, investments and marketable securities is held primarily as collateral to fund construction costs of an addition to a facility within the Company’s Air Conditioning and Heating Products Segment, as well as for insurance and letter of credit requirements.

Capital expenditures were approximately $9,648,000 in the first six months of 2004 as compared to approximately $7,453,000 in the first six months of 2003. Capital expenditures were approximately $17,400,000 for the year ended December 31, 2003 and are expected to be between $30,000,000 and $35,000,000 in 2004.

The Company's working capital and current ratio decreased from approximately $683,700,000 and 2.7:1, respectively, at December 31, 2003 to approximately $305,400,000 and 1.9:1, respectively, at July 3, 2004, principally as a result of the sale of Ply Gem on February 12, 2004 reducing the amount of assets and liabilities of discontinued operations.

Accounts receivable increased approximately $48,889,000 or approximately 22.8%, between December 31, 2003 and July 3, 2004, while net sales increased approximately $82,979,000 or approximately 22.7% in the second quarter of 2004 as compared to the fourth quarter of 2003. These increases are primarily a result of increased sales levels, timing of cash collections and acquisitions which contributed approximately $8,100,000 to net sales in the second quarter of 2004 and approximately $4,200,000 to accounts receivable at July 3, 2004. 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 July 3, 2004 as compared to December 31, 2003. The Company did not experience any significant overall changes in credit terms, collection efforts, credit utilization or delinquency in accounts receivable in the first six months of 2004.

Inventories increased approximately $42,573,000 or approximately 26.7%, between December 31, 2003 and July 3, 2004, primarily as a result of seasonality related to products sold to customers serving the residential site built market within the HVAC segment, increases in inventory levels in the Residential Building Products Segment, in part, due to strong demand and the acquisitions which contributed approximately $6,600,000 to the increase in inventories.

Accounts payable increased approximately $46,914,000 or approximately 41.6%, between December 31, 2003 and July 3, 2004 due primarily to increased inventory levels and timing of payments. The acquisitions contributed approximately $2,200,000 to this increase.

Changes in certain working capital accounts, as noted above, between December 31, 2003 and July 3, 2004, 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 three preceding paragraphs and from other non-cash items, including among others, the effect of changes in foreign currency exchange rates.

Unrestricted cash and cash equivalents decreased approximately $59,054,000 from December 31, 2003 to July 3, 2004, principally as a result of the following:

	*Condensed Consolidated Cash Flows ()**
Operating Activities:
Cash flow from operations, net	$	4,624,000
Increase in accounts receivable, net		(48,250,000	)
Increase in inventories		(38,165,000	)
Decrease in prepaids and other current assets		4,878,000
Increase in net assets of discontinued operations		(3,134,000	)
Increase in accounts payable		45,830,000
Increase in accrued expenses and taxes		13,016,000
Investing Activities:
Net cash paid for acquisitions		(16,500,000	)
Purchase of investments and marketable securities		(5,000,000	)
Proceeds from the sale of discontinued businesses		520,138,000
Capital expenditures		(9,648,000	)
Increase in restricted cash and investments		(111,000	)
Financing Activities:
Decrease in borrowings, net		(4,011,000	)
Sale of Floating Rate Notes		196,000,000
Redemption of Senior Notes		(716,700,000	)
Other, net		(2,021,000	)

	$	(59,054,000	)

(*) Summarized from the Company’s Condensed Consolidated Statement of Cash Flows for the first half ended July 3, 2004. (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 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 income (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 generally accepted accounting principles in the United States (“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, 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 the Company’s Credit Facility, note holders and Bond Rating agencies, among others, as a supplemental non-GAAP liquidity measure to assist them in their evaluation of the Company’s cash flow pe rformance. The Company uses EBITDA in conjunction with traditional GAAP liquidity measures as part of its overall assessment 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 (used in) operating activities, which is the most directly comparable GAAP liquidity measure, to EBITDA for the periods presented:

	For the Periods
	Post-Recapitalization						Pre-Recapitalization
	Jan. 1, 2004			Jan. 10, 2003 -			Jan. 1, 2003 -
	July 3, 2004			July 5, 2003			Jan. 9, 2003
	(Amounts in thousands)

Net cash used in operating activities *	$	(23,137	)	$	(6,257	)	$	(5,705	)
Cash used by working capital and
other long-term asset and liability changes		27,761			46,568			12,880
Effect of the Recapitalization, net		---			---			(62,397	)
Non-cash stock-based compensation		(5,241	)		(952	)		---
Deferred federal income tax provision
from continuing operations		(9,800	)		12,000			(5,900	)
Deferred federal income tax credit
from discontinued operations		18,500			---			---
Gain on sale of discontinued operations		122,700			---			---
Non-cash interest expense, net		(217	)		(3,438	)		(125	)
Loss from debt retirement		(11,958	)		---			---
Provision (benefit) for income taxes
from continuing operations		20,200			20,100			(21,800	)
Provision (benefit) for income taxes
from discontinued operations		47,500			1,200			(600	)
Interest expense from continuing operations		25,870			29,427			1,054
Interest expense from discontinued operations		4,585			18,774			1,234
Investment income from continuing operations		(1,253	)		(656	)		(119	)
Investment income from discontinued operations		(29	)		(103	)		(2	)
Depreciation expense from discontinued operations		1,158			5,033			245
Amortization expense from discontinued operations		201			3,445			70

EBITDA	$	216,840		$	125,141		$	(81,165	)

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, inflation, consumer confidence and unemployment.

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 Department of Energy announced on April 2, 2004 that effective January 26, 2006, the minimum seasonal energy efficiency rating for residential central air conditioners (“SEER”) will be raised to 13 SEER. The current minimum is 10 SEER. Approximately 97% of the Company’s residential central air conditioner sales are currently below the 13 SEER efficiency rating. The Company’s Air Conditioning and Heating Products Segment currently produces residential central air conditioners with a 13 SEER efficiency rating and continues to focus on product improvements including energy efficiency as part of its engineering and manufacturing planning.

As of July 3, 2004, approximately 13.2% of the Company’s workforce was subject to various collective bargaining agreements. Collective bargaining agreements covering approximately 2.5% of the Company’s workforce will expire through the end of 2004 and those covering an additional 7.5% will expire through the end of 2005. As agreements expire, until negotiations are completed, it is not known whether the Company will be able to negotiate collective bargaining agreements on the same or more favorable terms as the current agreements or at all 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.

There have been no significant changes in market risk from the December 31, 2003 disclosures included in the Company’s annual report on Form 10-K.

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.

The Company has historically managed its borrowing exposure to changes in interest rates by optimizing the use of fixed rate debt with extended maturities. During the first quarter of 2004, the Company sold $200,000,000 of Floating Rate Notes with a variable interest rate (4.87% at July 3, 2004) and redeemed $695,000,000 of Senior Notes which had fixed interest rates. Of the Company’s total outstanding debt, approximately 41.7% have variable interest rates at July 3, 2004.

B. Foreign Currency Risk

Sales and earnings derived from international markets and net assets within international markets are subject to, among others, the risks of currency fluctuations primarily related to changes in the Euro, the Canadian Dollar and the British Pound. In the first half of 2004, the net impact of foreign currency changes was not material to the Company’s financial condition or results of operations, but may not be indicative of future results. The impact of foreign currency changes related to translation resulted in a decrease in stockholder’s investment of approximately $511,000 and $3,761,000 for the second quarter and first six months of 2004, respectively. The Company manages its exposure to foreign currency exchange risk principally by trying to minimize the Company’s net investment in foreign assets through the use of strategic short and long-term borrowings at the f oreign subsidiary level. The Company generally does not enter into derivative financial instruments to manage foreign currency exposure. At July 3, 2004, 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 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 July 3, 2004, 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, s teel, copper, packaging materials, plastics, resins, glass, wood and aluminum) and purchased components, the level of domestic and foreign construction and remodeling activity affecting residential and commercial markets, interest rates, employment, inflation, foreign currency fluctuations, consumer spending levels, exposure to foreign economies, the rate of sales growth, price, and product and warranty liability claims. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Readers are also urged to carefully review and consider the various disclosures made by the Company, in this document, as well as the Company's periodic reports on Forms 10-K, 10-Q and 8-K, filed with the SEC.

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 c onsolidated 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 6. Exhibits and Reports on Form 8-K

(a) 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

* 32.1 Certificate of Chief Executive 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

* 32.2 Certificate of 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

(b) Reports on Form 8-K

May 18, 2004, Item 7, Financial Statements and Exhibits

Item 12, Results of Operations and Financial Condition

July 16, 2004, Item 5, Other Events

Item 7, Financial Statements and Exhibits

August 3, 2004, Item 5, Other Events

Item 7, Financial Statements and Exhibits

August 3, 2004, Item 5, Other Events

Item 7, Financial Statements and Exhibits

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.

NORTEK, INC.

(Registrant)

/s/ Almon C. Hall

Almon C. Hall,
Vice President and Chief Financial Officer

August 5, 2004

Delaware	05-0314991
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

50 Kennedy Plaza, Providence, RI	02903-2360
(Address of principal executive offices)	(Zip Code)

	July 3,		December 31,
	2004		2003

Assets	(Unaudited)
Current Assets:	(Amounts in thousands)
Unrestricted:
Cash and cash equivalents	$	123,295	$	182,349
Marketable securities available for sale		5,011		-
Restricted:
Cash, investments and marketable securities at cost,
which approximates market		8,523		1,223
Accounts receivable, less allowances
of $6,334 and $5,880		263,156		214,267
Inventories:
Raw materials		67,716		54,144
Work in process		22,239		19,229
Finished goods		112,033		86,042

		201,988		159,415

Prepaid expenses		11,463		6,765
Other current assets		16,750		14,868
Prepaid income taxes		20,700		17,826
Assets of discontinued operations		---		494,851

Total current assets		650,886		1,091,564

Property and Equipment, at Cost:
Land		12,475		12,578
Buildings and improvements		78,299		79,007
Machinery and equipment		127,711		120,589

		218,485		212,174
Less accumulated depreciation		28,291		17,719

Total property and equipment, net		190,194		194,455

Other Assets:
Goodwill		686,897		678,063
Intangible assets, less accumulated amortization
of $16,074 and $9,122		89,043		94,645
Deferred debt expense		6,221		2,788
Other		17,239		16,893

		799,400		792,389

Total Assets	$	1,640,480	$	2,078,408


Liabilities and Stockholder’s Investment

Current Liabilities:
Notes payable and other short-term obligations	$	6,239	$	8,120
Current maturities of long-term debt		7,171		7,229
Accounts payable		159,678		112,764
Accrued expenses and taxes, net		172,397		142,135
Liabilities of discontinued operations		---		137,683

Total current liabilities		345,485		407,931

Other Liabilities:
Deferred income taxes		32,600		21,449
Other		150,313		136,833

		182,913		158,282

Notes, Mortgage Notes and Obligations
Payable, Less Current Maturities		471,402		971,710

Stockholder’s Investment:
Common stock, $.01 par value; authorized 1,000 shares,
104 shares issued and outstanding		---		---
Additional paid-in capital		449,789		444,548
Retained earnings		175,200		76,500
Accumulated other comprehensive income		15,691		19,437

Total stockholder’s investment		640,680		540,485

Total Liabilities and Stockholder’s Investment	$	1,640,480	$	2,078,408

									Accumulated
			Additional						Other
	Common		Paid in			Retained			Comprehensive			Comprehensive
	Stock		Capital			Earnings			Income (Loss)			Income (Loss)
	(Unaudited)

Balance, December 31, 2002	$	---	$	119,621		$	255,366		$	(57,482	)	$	---
Net loss		---		---			(61,900	)		---			(61,900	)
Other comprehensive income:
Currency translation adjustment		---		---			---			1,096			1,096
Minimum pension liability, net of tax of $9,906		---		---			---			18,398			18,398

Comprehensive loss												$	(42,406	)

Settlement of stock options held by employees,
net of taxes of $1,710		---		(3,000	)		---			---
Dividend to Nortek Holdings, Inc.		---		---			(120,000	)		---
Contribution of capital from Nortek Holdings, Inc.		---		4,603			---			---

Subtotal	$	---	$	121,224		$	73,466		$	(37,988	)
Effect of the Recapitalization		---		321,745			(73,466	)		37,988

Balance, January 9, 2003	$	---	$	442,969		$	---		$	---

									Accumulated
			Additional						Other
	Common		Paid in		Retained		Treasury		Comprehensive		Comprehensive
	Stock		Capital		Earnings		Stock		Income		Income
	(Unaudited)

Balance, April 5, 2003	$	---	$	443,659	$	5,500	$	---	$	3,267	$	---
Net earnings		---		---		25,900		---		---		25,900
Other comprehensive income:
Currency translation adjustment		---		---		---		---		9,716		9,716

Comprehensive income											$	35,616

Stock based compensation		---		262		---		---		---

Balance, July 5, 2003	$	---	$	443,921	$	31,400	$	---	$	12,983

							Accumulated
			Additional				Other
	Common		Paid in		Retained		Comprehensive			Comprehensive
	Stock		Capital		Earnings		Income (Loss)			Income (Loss)
	(Unaudited)

Balance, April 3, 2004	$	---	$	445,520	$	153,100	$	16,202		$	---
Net earnings		---		---		22,100		---			22,100
Other comprehensive income (loss):
Currency translation adjustment		---		---		---		(511	)		(511	)

Comprehensive income										$	21,589

Stock based compensation		---		4,269		---		---

Balance, July 3, 2004	$	---	$	449,789	$	175,200	$	15,691

	Initial Allocation			Final Allocation
Inventories	$	13,234,000		$	12,908,000
Property, plant and equipment		102,474,000			38,035,000
Intangible assets		72,953,000			21,686,000
Indebtedness		(33,777,000	)		(33,777,000	)
Pension and post retirement health care benefits		(32,195,000	)		(23,781,000	)
Prepaid and deferred income taxes		(38,325,000	)		(11,370,000	)
Goodwill		227,671,000			310,240,000
Other		---			226,000

Total	$	312,035,000		$	314,167,000

	Initial Allocation			Final Allocation
Fair Value Adjustments:
Inventories	$	892,000		$	892,000
Property, plant and equipment		30,429,000			3,026,000
Intangible assets		(2,429,000	)		(18,429,000	)
Prepaid and deferred income taxes		(12,972,000	)		5,450,000
Goodwill		(11,513,000	)		(40,567,000	)
Other		90,000			542,000

Total	$	4,497,000		$	(49,086,000	)

	Continuing			Discontinued
	Operations			Operations			Total
	(Amounts in thousands)

Balance as of December 31, 2002	$	287,164		$	263,998		$	551,162
Impact of foreign currency translation		269			74			343

Balance as of January 9, 2003		287,433			264,072			551,505
Effect of Recapitalization		350,807			(40,567	)		310,240
Acquisitions during the period from January 10, 2003 to December 31, 2003		46,248			---			46,248
Purchase accounting adjustments		(11,979	)		(4,195	)		(16,174	)
Impact of foreign currency translation		5,554			667			6,221

Balance December 31, 2003		678,063			219,977			898,040
Acquisitions during the period from January 1, 2004 to July 3, 2004 (Note E)		8,623			---			8,623
Sale of Ply Gem (Note H)		---			(219,977	)		(219,977	)
Impact of foreign currency translation		211			---			211

Balance July 3, 2004	$	686,897		$	---		$	686,897

	Post-Recapitalization						Pre-Recapitalization
	Three Months Ended			Jan. 10, 2003 -			Jan. 1, 2003 -
	July 5, 2003			July 5, 2003			Jan. 9, 2003
	(Amounts in thousands)
	(Unaudited)
Net income (loss) as reported in the Company’s Form 10-Q for the quarterly period ended July 5, 2003		$ 26,200			$ 32,400			$(64,900	)
Impact of the adoption of SFAS No. 123		(300	)		(1,000	)		3,000

Net income (loss) as reported in the accompanying unaudited condensed consolidated statement of operations		$ 25,900			$ 31,400			$(61,900	)