UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(MARK ONE)


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

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED ~~SEPTEMBER 30, 2007~~MARCH 31, 2008


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

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________

Commission file number 001-15149

LENNOX INTERNATIONAL INC.

Incorporated pursuant to the Laws of the State of DELAWARE

Internal Revenue Service Employer Identification No. 42-0991521

2140 LAKE PARK BLVD.
RICHARDSON, TEXAS
75080
(972-497-5000)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a ~~non-accelerated filer.~~smaller reporting company. See ~~definition~~the definitions of “large accelerated filer”, “accelerated filer” and ~~“large accelerated filer”~~“smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.



Large Accelerated Filerþ	Accelerated Filero	þ ~~Accelerated Filer~~oNon-Accelerated Filero	Smaller Reporting Companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yeso Noþ

As of ~~October 24, 2007,~~April 28, 2008, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was ~~63,962,882.~~56,614,285.

PART I — FINANCIAL INFORMATION

~~Item 1. Financial Statements.~~


Item 1.		Financial Statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of ~~September 30, 2007~~March 31, 2008 and December 31, ~~2006~~

2007
(In millions, except share and per share data)


								March 31,			December 31,
	September 30,			December 31,				2008			2007
	2007			2006				(unaudited)
	(unaudited)
ASSETS							ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	93.5		$	144.3			$	120.3		$	145.5
Short-term investments		25.1			—				34.7			27.7
Accounts and notes receivable, net		630.8			502.6				490.8			492.5
Inventories, net		358.7			305.5				379.5			325.7
Deferred income taxes		20.1			22.2				25.1			30.9
Other assets		51.1			43.8				85.9			48.4

Total current assets		1,179.3			1,018.4				1,136.3			1,070.7
PROPERTY, PLANT AND EQUIPMENT, net		306.4			288.2				318.8			317.9
GOODWILL, net		262.4			239.8				264.5			262.8
DEFERRED INCOME TAXES		108.3			104.3				88.1			94.0
OTHER ASSETS		78.4			69.1				72.7			69.2

TOTAL ASSETS	$	1,934.8		$	1,719.8			$	1,880.4		$	1,814.6


LIABILITIES AND STOCKHOLDERS’ EQUITY							LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Short-term debt	$	3.8		$	1.0			$	5.5		$	4.8
Current maturities of long-term debt		61.3			11.4				36.4			36.4
Accounts payable		349.4			278.6				330.4			289.8
Accrued expenses		346.4			326.3				319.2			352.1
Income taxes payable		25.4	��		33.8				—			1.1

Total current liabilities		786.3			651.1				691.5			684.2

LONG-TERM DEBT		95.4			96.8				359.7			166.7
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS		12.1			12.9				16.1			16.2
PENSIONS		47.0			49.6				34.3			34.8
OTHER LIABILITIES		124.3			105.0				109.8			104.2

Total liabilities		1,065.1			915.4				1,211.4			1,006.1

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding		—			—				—			—
Common stock, $.01 par value, 200,000,000 shares authorized, 81,326,014 shares and 76,974,791 shares issued for 2007 and 2006, respectively		0.8			0.8
Common stock, $.01 par value, 200,000,000 shares authorized, 83,546,395 shares and 81,897,439 shares issued for 2008 and 2007, respectively									0.8			0.8
Additional paid-in capital		750.4			706.6				788.4			760.7
Retained earnings		417.6			312.5				445.4			447.4
Accumulated other comprehensive income (loss)		61.8			(5.1	)
Treasury stock, at cost, 16,883,456 shares and 9,818,904 shares for 2007 and 2006, respectively		(360.9	)		(210.4	)
Accumulated other comprehensive income									81.5			63.6
Treasury stock, at cost, 24,866,016 shares and 19,844,677 shares for 2008 and 2007, respectively									(647.1	)		(464.0	)

Total stockholders’ equity		869.7			804.4				669.0			808.5

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,934.8		$	1,719.8			$	1,880.4		$	1,814.6

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2008 and ~~Nine Months Ended September 30,~~ 2007 ~~and 2006~~

(Unaudited, in millions, except per share data)


	For the						For the						For the
	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2007			2006			2007			2006			2008			2007
NET SALES	$	1,029.8		$	1,020.3		$	2,863.1		$	2,841.7		$	767.1		$	791.5
COST OF GOODS SOLD		736.2			763.5			2,075.8			2,105.5			564.3			586.9

Gross profit		293.6			256.8			787.3			736.2			202.8			204.6
OPERATING EXPENSES:
Selling, general and administrative expenses		194.3			200.8			582.7			589.9			193.7			191.1
(Gains), losses and other expenses, net		(1.2	)		(3.0	)		(5.2	)		(47.3	)		(3.3	)		(0.7	)
Restructuring charges		4.3			4.5			14.2			13.1			2.8			2.3
Equity in earnings of unconsolidated affiliates		(2.7	)		(2.5	)		(8.9	)		(7.5	)		(3.1	)		(2.7	)

Operational income		98.9			57.0			204.5			188.0			12.7			14.6
INTEREST EXPENSE, net		1.9			1.2			4.8			3.6			2.7			0.9
OTHER EXPENSE (INCOME), net		0.2			0.1			0.3			0.1

Income before income taxes		96.8			55.7			199.4			184.3			10.0			13.7
PROVISION FOR INCOME TAXES		35.6			20.1			69.3			59.4			3.7			5.1

Net income	$	61.2		$	35.6		$	130.1		$	124.9		$	6.3		$	8.6


NET INCOME PER SHARE:
Basic	$	0.92		$	0.51		$	1.93		$	1.77		$	0.10		$	0.13
Diluted	$	0.88		$	0.49		$	1.84		$	1.67		$	0.10		$	0.12

AVERAGE SHARES OUTSTANDING:
Basic		66.6			69.5			67.4			70.7			60.3			67.5
Diluted		69.8			72.9			70.7			74.6			62.7			70.9

CASH DIVIDENDS DECLARED PER SHARE	$	0.13		$	0.11		$	0.39		$	0.33		$	0.14		$	0.13

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the ~~Nine~~Three Months Ended ~~September 30, 2007~~March 31, 2008 (unaudited) and the Year Ended December 31, ~~2006~~

2007
(In millions, except per share data)


	Common Stock				Additional						Accumulated Other			Treasury			Total																Accumulated
	Issued				Paid-In			Retained			Comprehensive			Stock			Stockholders’			Comprehensive			Common Stock				Additional						Other			Treasury			Total
	Shares		Amount		Capital			Earnings			Income (Loss)			at Cost			Equity			Income (Loss)			Issued				Paid-In			Retained			Comprehensive			Stock			Stockholders’			Comprehensive
BALANCE AT DECEMBER 31, 2005		74.7	$	0.7	$	649.3		$	191.0		$	0.4		$	(47.0	)	$	794.4
Impact of adjustments recorded under provisions of SAB No. 108		—		—		—			(12.4	)		—			—			(12.4	)
																							Shares		Amount		Capital			Earnings			Income (Loss)			at Cost			Equity			Income (Loss)
ADJUSTED BALANCE AT JANUARY 1, 2006		74.7	$	0.7	$	649.3		$	178.6		$	0.4		$	(47.0	)	$	782.0
BALANCE AS OF DECEMBER 31, 2006																								77.0	$	0.8	$	706.6		$	312.5		$	(5.1	)	$	(210.4	)	$	804.4
Impact of adoption of FIN No. 48																								—		—		—			0.9			—			—			0.9

ADJUSTED BALANCE AS OF JANUARY 1, 2007																								77.0	$	0.8	$	706.6		$	313.4		$	(5.1	)	$	(210.4	)	$	805.3
Net income		—		—		—			166.0			—			—			166.0		$	166.0			—		—		—			169.0			—			—			169.0		$	169.0
Dividends, $0.46 per share		—		—		—			(32.1	)		—			—			(32.1	)		—
Dividends, $0.53 per share																								—		—		—			(35.0	)		—			—			(35.0	)		—
Foreign currency translation adjustments, net		—		—		—			—			20.8			—			20.8			20.8			—		—		—			—			62.9			—			62.9			62.9
Minimum pension liability adjustments, net of tax benefit of $2.0		—		—		—			—			4.0			—			4.0			4.0
Pension and postretirement liability changes, net of tax benefit of $0.0																								—		—		—			—			3.2			—			3.2			3.2
Stock-based compensation expense		—		—		24.4			—			—			—			24.4			—			—		—		21.0			—			—			—			21.0			—
Derivatives, net of tax provision of $1.0		—		—		—			—			(1.9	)		—			(1.9	)		(1.9	)
Reversal of previously recorded stock-based compensation expense related to share-based awards canceled in restructuring																								—		—		(2.1	)		—			—			—			(2.1	)		—
Derivatives, net of tax provision of $1.3																								—		—		—			—			2.6			—			2.6			2.6
Common stock issued		2.3		0.1		19.7			—			—			—			19.8			—			4.9		—		21.5			—			—			—			21.5			—
Treasury stock purchases		—		—		—			—			—			(163.4	)		(163.4	)		—			—		—		—			—			—			(253.6	)		(253.6	)		—
Tax benefits of stock-based compensation		—		—		13.2			—			—			—			13.2			—			—		—		20.1			—			—			—			20.1			—
Other tax-related items																								—		—		(6.4	)		—			—			—			(6.4	)		—

Comprehensive income		—		—		—			—			—			—			—		$	188.9			—		—		—			—			—			—			—		$	237.7

Adjustments resulting from adoption of SFAS No. 158, net of tax benefit of $15.0		—		—		—			—			(28.4	)		—			(28.4	)

BALANCE AT DECEMBER 31, 2006		77.0	$	0.8	$	706.6		$	312.5		$	(5.1	)	$	(210.4	)	$	804.4

Impact of adoption of FIN No. 48		—		—		—			1.2			—			—			1.2

ADJUSTED BALANCE AT JANUARY 1, 2007		77.0	$	0.8	$	706.6		$	313.7		$	(5.1	)	$	(210.4	)	$	805.6
BALANCE AS OF DECEMBER 31, 2007																								81.9	$	0.8	$	760.7		$	447.4		$	63.6		$	(464.0	)	$	808.5
Net income		—		—		—			130.1			—			—			130.1		$	130.1			—		—		—			6.3			—			—			6.3		$	6.3
Dividends, $0.39 per share		—		—		—			(26.2	)		—			—			(26.2	)		—
Dividends, $0.14 per share																								—		—		—			(8.3	)		—			—			(8.3	)		—
Foreign currency translation adjustments, net		—		—		—			—			57.1			—			57.1			57.1			—		—		—			—			9.2			—			9.2			9.2
Stock-based compensation expense		—		—		16.6			—			—			—			16.6			—			—		—		3.2			—			—			—			3.2			—
Reversal of previously recorded stock-based compensation expense related to share-based awards canceled in restructuring		—		—		(1.4	)		—			—			—			(1.4	)		—
Derivatives, net of tax provision of $5.2		—		—		—			—			9.8			—			9.8			9.8
Derivatives, net of tax provision of $4.8																								—		—		—			—			8.7			—			8.7			8.7
Common stock issued		4.3		—		18.6			—			—			—			18.6			—			1.6		—		12.3			—			—			—			12.3			—
Treasury stock purchases		—		—		—			—			—			(150.5	)		(150.5	)		—			—		—		—			—			—			(183.1	)		(183.1	)		—
Tax benefits of stock-based compensation		—		—		16.3			—			—			—			16.3			—			—		—		12.2			—			—			—			12.2			—
Other tax related items		—		—		(6.3	)		—			—			—			(6.3	)		—

Comprehensive income		—		—		—			—			—			—			—		$	197.0			—		—		—			—			—			—			—		$	24.2

BALANCE AT SEPTEMBER 30, 2007		81.3	$	0.8	$	750.4		$	417.6		$	61.8		$	(360.9	)	$	869.7
BALANCE AS OF MARCH 31, 2008																								83.5	$	0.8	$	788.4		$	445.4		$	81.5		$	(647.1	)	$	669.0

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2008 and 2007
(Unaudited, in millions)


	For the
	Three Months Ended
	March 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6.3		$	8.6
Adjustments to reconcile net income to net cash used in operating activities:
Equity in earnings of unconsolidated affiliates		(3.1	)		(2.7	)
Restructuring expenses, net of cash paid		(1.1	)		(1.8	)
Unrealized gain on futures contracts		(2.8	)		(0.5	)
Stock-based compensation expense		3.2			6.2
Depreciation and amortization		12.7			11.8
Capitalized interest		(0.3	)		(0.4	)
Deferred income taxes		7.2			2.8
Other items, net		10.8			3.7
Changes in assets and liabilities, net of effects of acquisitions:
Accounts and notes receivable		5.5			2.8
Inventories		(54.7	)		(93.2	)
Other current assets		(13.6	)		(3.2	)
Accounts payable		34.4			59.9
Accrued expenses		(33.7	)		(38.4	)
Income taxes payable		(15.4	)		(35.3	)
Long-term warranty, deferred income and other liabilities		11.7			4.6

Net cash used in operating activities		(32.9	)		(75.1	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment		0.3			0.1
Purchases of property, plant and equipment		(9.5	)		(9.9	)
Purchases of short-term investments		(21.7	)		—
Proceeds from sales and maturities of short-term investments		14.9			—

Net cash used in investing activities		(16.0	)		(9.8	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (payments), net		0.5			(0.2	)
Revolver long-term borrowings		193.0			35.5
Proceeds from stock option exercises		12.3			12.0
Repurchases of common stock		(183.1	)		(16.5	)
Excess tax benefits related to share-based payments		10.8			11.0
Cash dividends paid		(8.7	)		(8.7	)

Net cash provided by financing activities		24.8			33.1

DECREASE IN CASH AND CASH EQUIVALENTS		(24.1	)		(51.8	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		(1.1	)		1.1
CASH AND CASH EQUIVALENTS, beginning of period		145.5			144.3

CASH AND CASH EQUIVALENTS, end of period	$	120.3		$	93.6


Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2.5		$	0.3

Income taxes (net of refunds)	$	5.9		$	28.9

Non-cash items:
Impact of adoption of FIN No. 48	$	—		$	0.9

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

~~LENNOX INTERNATIONAL INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~For the Nine Months Ended September 30, 2007 and 2006~~

~~(Unaudited, in millions)~~

For the
Nine Months Ended
September 30,
2007 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 130.1 $ 124.9
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest 0.3 0.3
Equity in earnings of unconsolidated affiliates (8.9 ) (7.5 )
Dividends from affiliates — 1.3
Restructuring expenses, net of cash paid 8.0 9.8
Unrealized loss on futures contracts 1.1 5.3
Stock-based compensation expense 16.6 17.6
Depreciation and amortization 35.9 32.8
Capitalized interest (1.2 ) (0.6 )
Deferred income taxes 5.1 (21.6 )
Other losses, (gains) and expenses, net 10.7 1.2
Changes in assets and liabilities, net of effects of acquisitions:
Accounts and notes receivable (111.3 ) (93.3 )
Inventories (45.1 ) (96.9 )
Other current assets (6.7 ) 5.1
Accounts payable 67.4 69.3
Accrued expenses 3.7 (2.6 )
Income taxes payable (2.4 ) 40.7
Long-term warranty, deferred income and other liabilities 7.2 (1.0 )

Net cash provided by operating activities 110.5 84.8

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment 0.5 0.8
Purchases of property, plant and equipment (44.5 ) (49.8 )
Additional investment in affiliates — (5.4 )
Purchases of short-term investments (32.4 ) —
Proceeds from sales and maturities of short-term investments 7.4 —

Net cash used in investing activities (69.0 ) (54.4 )

CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (payments), net 2.8 (0.6 )
Long-term borrowings (payments), net 48.5 (0.1 )
Proceeds from stock option exercises 18.6 15.1
Payments of deferred financing costs (0.3 ) (0.3 )
Repurchases of common stock (150.5 ) (128.8 )
Excess tax benefits related to share-based payments 14.5 8.8
Cash dividends paid (35.0 ) (31.2 )

Net cash (used in) financing activities (101.4 ) (137.1 )

DECREASE IN CASH AND CASH EQUIVALENTS (59.9 ) (106.7 )
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 9.1 2.6
CASH AND CASH EQUIVALENTS, beginning of period 144.3 213.5

CASH AND CASH EQUIVALENTS, end of period $ 93.5 $ 109.4

Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6.5 $ 5.4

Income taxes (net of refunds) $ 57.2 $ 33.0

Non-cash items:
Impact of adjustments recorded under provisions of SAB No. 108 $ — $ (12.4 )

Impact of adoption of FIN No. 48 $ 1.2 $ —

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

LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

~~(unaudited)~~

General:

~~1. General:~~

References in this Quarterly Report on Form 10-Q to “we,” ~~“our”, “us”,~~“our,” “us,” “LII” or the “Company” refer to Lennox International Inc. and its subsidiaries, unless the context requires otherwise.

Basis of Presentation

The accompanying unaudited Consolidated Balance Sheet as of ~~September 30, 2007,~~March 31, 2008, the accompanying unaudited Consolidated Statements of Operations for the three months ended March 31, 2008 and ~~nine months ended September 30,~~ 2007, ~~and 2006,~~ the accompanying unaudited Consolidated Statement of Stockholders’ Equity for the ~~nine~~three months ended ~~September 30, 2007~~March 31, 2008 and the accompanying unaudited Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2008 and 2007 ~~and 2006~~ should be read in conjunction with LII’s audited consolidated financial statements and footnotes as of December 31, ~~2006~~2007 and ~~2005~~2006 and for each year in the ~~three year~~three-year period ended December 31, ~~2006.~~2007. The accompanying unaudited consolidated financial statements of LII have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to applicable rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. The operating results for the interim periods are not necessarily indicative of the results that may be expected for a full year.

The Company’s fiscal year ends on December 31 and the Company’s quarters are each comprised of 13 weeks. For convenience, throughout these financial statements, the 13 weeks comprising each three-month period are denoted by the last day of the respective calendar quarter.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior-period balances in the accompanying condensed consolidated financial statements have been reclassified to conform to the current period’s presentation of financial information. Shipping and handling costs related to post-production activities are included as a component of Gross Profit in the accompanying Consolidated Statements of Operations. Such costs were previously reported as part of Selling, General and Administrative Expenses.

Recently Adopted Accounting Pronouncements

Effective January 1, ~~2007,~~2008, the Company adopted Statement of Financial Accounting Standards No. 157,Fair Value Measurements(“SFAS No. 157”), which establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB ~~Interpretation~~Staff Position No. ~~48,~~FA5 157-2,~~Accounting for Uncertainty in Income Taxes – an Interpretation~~ Effective Date of FASB Statement ~~109~~~~(“FIN~~ No. ~~48”). FIN~~157 (“FSP No. ~~48 clarifies~~157-2”), which deferred the ~~accounting~~effective date of SFAS No. 157 for ~~income taxes by prescribing a minimum threshold~~one year for non-financial assets and liabilities, except for certain items that ~~a tax position is required to meet before being~~are recognized or disclosed at fair value in the financial ~~statements. FIN~~statements on a recurring basis (at least annually). The Company is currently evaluating the impact of SFAS No. 48157 on its Consolidated Financial Statements for items within the scope of FSP No. 157-2, which will become effective on January 1, 2009.

Effective January 1, 2008, the Company also ~~provides guidance~~adopted Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS No. 159”). SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on ~~derecognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition. For more information see Note 10.~~a contract-by-contract basis. The adoption of SFAS No. 159 had no impact on the Company’s Consolidated Financial Statements.

~~2. Accounts and Notes Receivable:~~

Accounts and Notes Receivable:

Accounts and Notes Receivable have been reported in the accompanying Consolidated Balance Sheets net of allowance for doubtful accounts of ~~$18.9~~$19.1 million and ~~$16.7~~$17.1 million as of ~~September 30, 2007~~March 31, 2008 and December 31, ~~2006, respectively.~~2007, respectively, and net of accounts receivable sold under an ongoing asset securitization arrangement, if any. As of ~~September 30, 2007~~March 31, 2008 and December 31, ~~2006,~~2007, no accounts receivable were sold under the Company’s ongoing asset securitization arrangement. Additionally, none of the accounts receivable as reported in the accompanying Consolidated Balance Sheets ~~at September 30, 2007~~as of March 31, 2008 and December 31, ~~2006~~2007 represent retained interests in securitized receivables that have restricted disposition rights per the terms of the asset securitization agreement and would not be available to satisfy obligations to creditors. The Company has no significant concentration of credit risk within its accounts and notes receivable.

~~3. Inventories:~~

Inventories:

Components of inventories are as follows (in millions):


	As of			As of			As of			As of
	September 30,			December 31,			March 31,			December 31,
	2007			2006			2008			2007
Finished goods	$	265.8		$	223.2		$	288.8		$	247.7
Work in process		11.3			8.1			13.3			10.5
Raw materials and repair parts		155.5			131.1			150.4			137.9

		432.6			362.4			452.5			396.1
Excess of current cost over last-in, first-out cost		(73.9	)		(56.9	)		(73.0	)		(70.4	)

Total inventories, net	$	358.7		$	305.5
Total inventories							$	379.5		$	325.7

~~As of September 30, 2007 the~~The Company’s captive insurance subsidiary (the “Captive”) ~~held approximately $25.1 million in~~holds debt securities, consisting of ~~U.S. Treasury securities,~~ U.S. government agency securities, corporate bonds, ~~commercial paper,~~asset-backed securities, collateralized mortgage obligations and various securitized debt instruments. ~~The Company did not hold these types of investments at December 31, 2006.~~ In accordance with Statement of Financial Accounting Standards No. 115 (as amended),Accounting for Certain Investments in Debt and Equity Securities, the Company classifies these investments as ~~available-for-sale and carries them at amortized cost, which approximates fair value.~~available-for-sale. Any unrealized holding gains and losses are reported in Accumulated Other Comprehensive Income (Loss) (“AOCI”), net of applicable taxes, until the gain or loss is realized. These instruments are not classified as cash and cash equivalents as their original maturity dates are greater than three months. The Company places its investments in high credit quality financial instruments only and limits the amount invested in any one institution or in any one instrument.

Captive’s intention that these investments be available to support its current operations as needed. ~~Therefore, due~~Due to the liquidity of these investments, they are classified as current assets in the accompanying Consolidated Balance Sheets. ~~The Company places its~~For more information on the valuation of these investments, ~~only in high credit quality financial instruments and limits the amount invested in any one institution or in any one instrument.~~see Note 16.

~~6. Cash, Lines of Credit and Financing Arrangements:~~

Cash, Lines of Credit and Financing Arrangements:

The following ~~table summarizes~~tables summarize the Company’s outstanding debt obligations ~~as of September 30, 2007~~ and the classification in the accompanying Consolidated Balance ~~Sheet~~Sheets as of March 31, 2008 and December 31, 2007 (in millions):


	Short-		Current		Long-Term				Short-Term		Current		Long-Term
Description of Obligation	Term Debt		Maturities		Maturities		Total
Description of Obligation as of March 31, 2008									Debt		Maturities		Maturities		Total
Domestic promissory notes(1)	$	—	$	61.1	$	46.1	$	107.2	$	—	$	36.1	$	35.0	$	71.1
Domestic revolving credit facility		—		—		48.5		48.5		—		—		324.0		324.0
Other foreign obligations		3.8		0.2		0.8		4.8		5.5		0.3		0.7		6.5

Total Debt	$	3.8	$	61.3	$	95.4	$	160.5	$	5.5	$	36.4	$	359.7	$	401.6

The domestic revolving credit facility includes a subfacility for swingline loans of ~~September 30, 2007 and December 31, 2006, the Company has unamortized debt issuance costs of $1.6~~up to $50 million and ~~$1.9 million, respectively, which are included in Other Assets~~provides for the issuance of letters of credit for the full amount of the credit facility. The revolving loans bear interest at either (i) the Eurodollar rate plus a margin of between 0.5% and 1% that is based on the Company’s Debt to Adjusted EBITDA Ratio (as defined in the ~~accompanying Consolidated Balance Sheets. The facility bears interest at a rate equal to, at~~Credit Agreement) or (ii) the ~~Company’s option, either~~higher of (a) the ~~greater of the bank’s prime rate or the federal funds rate~~Federal Funds Rate plus 0.5%, or (b) the ~~London Interbank Offered Rate plus a margin equal to 0.475% to 1.20%, depending upon~~prime rate set by Bank of America, N.A. The Company may prepay the ~~ratio of total funded debt-to-adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), as defined~~revolving loans at any time without premium or penalty, other than customary breakage costs in the ~~facility.~~case of Eurodollar loans. The Company ~~pays~~will pay a facility fee ~~depending upon~~in the ~~ratio~~range of ~~total funded debt~~0.125% to 0.25% based on the Company’s Debt to Adjusted EBITDA ~~equal~~Ratio. The Company will also pay a letter of credit fee in the range of 0.5% to ~~0.15%~~1% based on the Company’s Debt to ~~0.30%~~Adjusted EBITDA Ratio, as well as an additional issuance fee of 0.125% for letters of credit issued.

The Credit Agreement contains financial covenants relating to leverage and interest coverage. Other covenants contained in the ~~capacity. The facility includes restrictive covenants that limit~~Credit Agreement restrict, among other things, mergers, asset dispositions, guarantees, debt, liens, acquisitions, investments, affiliate transactions and the Company’s ability to ~~incur additional indebtedness, encumber its assets, sell its assets~~make restricted payments.

The Credit Agreement contains customary events of default. If any event of default occurs and ~~make certain payments, including~~is continuing, lenders with a majority of the aggregate commitments may require the administrative agent to terminate the Company’s right to borrow under the Credit Agreement and accelerate amounts due under the Credit Agreement (except for ~~share repurchases~~a bankruptcy event of default, in which case such amounts will automatically become due and ~~dividends. The facility requires that LII annually~~payable and ~~quarterly deliver financial statements, as well as compliance certificates,~~the lenders’ commitments will automatically terminate).

In addition to the ~~banks within specified time periods.~~

~~As of September 30, 2007 and December 31, 2006,~~financial covenants contained in the ~~Company had outstanding domestic promissory notes totaling approximately $107.2 million. The promissory notes mature at various dates through 2010 and have interest rates ranging from 6.73% to 8.00%.~~

Credit Agreement outlined above, LII’s domestic ~~revolving facility and~~ promissory notes contain certain financial covenant restrictions. As of ~~September 30, 2007,~~March 31, 2008, LII believes it was in compliance with all covenant requirements. The Company’s revolving credit facility and promissory notes are guaranteed by the Company’s material subsidiaries.

The Company has additional borrowing capacity through several foreign facilities governed by agreements between the Company and a syndicate of banks, used primarily to finance seasonal borrowing needs of its foreign subsidiaries. LII had ~~$4.8~~$6.5 million and $5.8 million of obligations outstanding through its foreign subsidiaries as of ~~September 30, 2007.~~March 31, 2008 and December 31, 2007, respectively.

Under a revolving period asset securitization arrangement, the Company ~~transfers~~is eligible to transfer beneficial interests in a portion of its trade accounts receivable to a third ~~party~~parties in exchange for cash. The Company’s continued involvement in the transferred assets is limited to servicing. These transfers are accounted for as sales rather than secured borrowings. The fair values assigned to the retained and transferred interests are based primarily on the receivables’ carrying value given the short term to maturity and low credit risk. As of ~~September 30, 2007~~March 31, 2008 and December 31, ~~2006,~~2007, the Company had not sold any beneficial interests in accounts receivable.

LII periodically reviews its capital structure, including its primary bank facility, to ensure that it has adequate liquidity. LII believes that cash flows from operations, as well as available borrowings under its revolving credit facility and other sources of funding will be sufficient to fund its operations for the foreseeable future.

The Company ~~has included $18.0 million~~considers all highly liquid temporary investments with original maturity dates of ~~restricted~~three months or less to be cash inequivalents. Cash and ~~Cash Equivalents in the accompanying unaudited Consolidated Balance Sheet~~cash equivalents of $120.3 million and $145.5 million as of ~~September 30, 2007. The~~March 31, 2008 and December 31, 2007, respectively, consisted of cash, overnight repurchase agreements and investment-grade securities and are stated at cost, which approximates fair value.

As of March 31, 2008 and December 31, 2007, $16.3 million and $20.2 million, respectively, of cash and cash equivalents were restricted ~~cash~~ primarily

~~relates~~ due to routine lockbox collections and letters of credit issued with respect to the operations of the Captive, which expire on December 31, ~~2007.~~

~~On October 12, 2007, the Company entered into a $650 million Third Amended and Restated Revolving Credit Facility Agreement which replaces~~2008. The restrictions related to lockbox collections typically expire within three to five business days after receipt. The letter of credit restrictions can be transferred to the Company’s ~~previous domestic~~ revolving lines of credit ~~facility. For more information see Note 20.~~as needed.

~~7. Product Warranties:~~

Product Warranties:

The changes in the carrying amount of the Company’s total product warranty liabilities for the ~~nine~~three months ended ~~September 30, 2007 were~~March 31, 2008 are as follows (in millions):

Total product warranty liability at December 31, 2006 $ 104.7
Payments made in 2007, net of recoveries (23.3 )
Changes resulting from issuance of new warranties 23.7
Changes in estimates associated with pre-existing warranties 10.8

Total product warranty liability at September 30, 2007 $ 115.9


Total product warranty liability at December 31, 2007	$	98.4
Payments made in 2008		(5.9	)
Changes resulting from issuance of new warranties		6.5
Changes in estimates associated with pre-existing liabilities		0.3
Changes in foreign currency translation rates		0.4

Total product warranty liability at March 31, 2008	$	99.7

The change in product warranty liability that results from changes in estimates of warranties issued prior to ~~2007~~2008 was primarily due to revaluing warranty reserves based on higher material input costs, adjustments to failure rates for products the Company no longer manufactures, and changes in foreign currency translation rates. In the third quarter, the Company recorded $1.2 million related to changes in estimates associated with pre-existing warranties which was primarily due to changes in foreign currency translation rates. Productcosts. The current portion of product warranty liabilities of ~~$34.3~~$31.9 million and ~~$27.2~~$33.8 million ~~are~~is included in Accrued Expenses and ~~$81.6~~the long-term portion of $67.8 million and ~~$77.5~~$64.6 million ~~are~~is included in Other Liabilities in the accompanying Consolidated Balance Sheets as of ~~September 30, 2007~~March 31, 2008 and December 31, ~~2006,~~2007, respectively.

The Company accounts for stock-based awards under the provisions of Statement of Financial Accounting Standards No. 123R,Share-Based Payment. Compensation expense of ~~$3.3~~$3.2 million and ~~$4.8 million and $16.6 million and $17.6~~$6.2 million was recognized for the three months ended March 31, 2008 and ~~the nine months ended September 30,~~ 2007, ~~and 2006,~~ respectively, and is included in Selling, General and Administrative Expenses in the accompanying Consolidated Statements of Operations. The decrease in stock-based compensation expense was primarily due to an increase in forfeiture rates and a decrease in the estimated pay-out percentage on outstanding performance share units in the first quarter of 2008 as compared to the same period in 2007. Cash flows from the tax benefits of tax deductions in excess of the compensation costs recognized for stock-based awards of ~~$14.5~~$10.8 million and ~~$8.8~~$11.0 million were included in cash flows from financing activities for the ~~nine~~three months ended ~~September 30,~~March 31, 2008 and 2007, ~~and 2006,~~ respectively.

The following tables summarize certain information concerning the Company’s stock options, stock appreciation rights, performance ~~shares~~share units and restricted stock ~~awards~~units as of ~~September 30, 2007~~March 31, 2008 (in millions, except per share data, years, and forfeiture rates):


				Stock					Stock
	Stock			Appreciation			Stock		Appreciation
	Options			Rights			Options		Rights
Shares outstanding		2.4			1.6			1.4		1.9
Weighted-average exercise price per share outstanding	$	15.03		$	26.66		$	15.45	$	30.15
Shares exercisable		2.3			0.6			1.4		0.8
Weighted-average exercise price per exercisable share	$	14.86		$	20.43		$	15.45	$	25.82
Unrecognized expense	$	0.1		$	4.4			—	$	7.4
Expected weighted-average period to be recognized (in years)		0.3			1.9			—		2.2
Weighted-average estimated forfeiture rate		7	%		14	%		—		15	%

10.

Income Taxes:

~~10. Income Taxes:~~

As a result of the adoption of FIN No. 48, the Company recognized a $1.2 million decrease in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 retained earnings balance.

As of ~~January 1, 2007,~~March 31, 2008, the Company had approximately ~~$20.0~~$23.9 million in total gross unrecognized tax benefits. Of this amount, ~~$14.4~~$12.8 million (net of federal benefit on state issues) ~~will~~, if recognized, would be ~~recognized~~recorded through the statement of ~~operations,~~operations. Also included in the balance of unrecognized tax benefits as of March 31, 2008 are $3.2 million ~~will~~that, if recognized, would be ~~recognized through~~recorded as an adjustment to goodwill and ~~$1.0~~$6.4 million ~~will~~that, if recognized, would be ~~recognized through~~recorded as an adjustment to stockholders’ equity. In addition, the Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense in accordance with FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109(“FIN No. ~~48.~~48”). As of ~~January 1, 2007,~~March 31, 2008, the Company had recognized ~~$1.2~~$1.9 million (net of federal tax benefits) in interest and penalties.

The Internal Revenue Service (“IRS”) completed its examination of the Company’s consolidated tax returns for the years 1999 –— 2003 and issued a Revenue Agent’s Report (“RAR”) on April 6, 2006. The IRS has proposed certain significant adjustments to the Company’s insurance deductions and research tax credits. The Company disagrees with the RAR, which is currently under review by the administrative appeals division of the IRS, and anticipates resolution by the end of ~~2007.~~2008. It is possible that a reduction in the unrecognized tax benefits may occur but an estimate of the impact on the statement of operations cannot be made at this time.

The Company is subject to examination by numerous taxing authorities in jurisdictions such as Australia, Belgium, Canada, Germany, and the United States. The Company is generally no longer subject to U.S. federal, state and local, or ~~non-US~~non-U.S. income tax examinations by taxing authorities for years before 1999.

Since January 1, ~~2007, Michigan, New York, South Carolina, and~~2008, West Virginia ~~have~~has enacted legislation

effective for tax years beginning on or after January 1, ~~2007.~~2008 to adjust tax rates and require combined reporting in future years. The Company believes any adjustments will be immaterial.

~~11. Restructuring Charges:~~

11.

Restructuring Charges:

Restructuring charges incurred include the following amounts for the three months ended March 31, 2008 and ~~nine months ended September 30,~~ 2007 ~~and 2006 include the following amounts~~ (in millions):

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2007 2006 2007 2006
Consolidation of Hearth Products operations $ 2.4 $ — $ 2.4 $ —
Reorganization of corporate administrative function 1.1 — 7.7 —
Facility lease — 1.2 0.3 1.2
Allied Air Enterprises consolidation 0.3 3.3 3.2 12.7
Pension settlement⁽¹⁾
— — 0.7 —
Gain on sale of land — — — (0.8 )
Other 0.5 — (0.1 ) —

Total $ 4.3 $ 4.5 $ 14.2 $ 13.1


	For the Three Months
	Ended March 31,
	2008		2007
Consolidation of U.S. Refrigeration operations	$	1.3	$	—
Consolidation of Lennox Hearth Products operations		1.2		—
Integration of Australia and New Zealand operations		0.3		—
Allied Air Enterprises consolidation		—		2.2
Pension settlement⁽¹⁾		—		0.7
Other		—		(0.6	)

Total	$	2.8	$	2.3


(1)		Amount not reflected in restructuring reserves as this item is related to the Company’s pension ~~obligation.~~obligation and is included in pension liabilities as of March 31, 2007.

The table below provides further analysis of the Company’s restructuring reserves for the ~~nine~~three months ended ~~September 30, 2007~~March 31, 2008 (in millions):


					Reversal													Balance as					Reversal							Balance as
	Balance at		Charged		of Prior											Balance at		of		Charged		of Prior								of
Description of	December 31,		to		Period			Cash			Non-cash					September 30,
Reserves	2006		Earnings		Charges			Utilization			Utilization			Other		2007
																		December 31,		to		Period		Cash			Non-Cash			March 31,
Description of reserves																		2007		Earnings		Charges		Utilization			Utilization			2008
Severance and related expense	$	1.8	$	10.6	$	—		$	(2.8	)	$	—		$	1.4	$	11.0	$	15.2	$	0.2	$	—	$	(1.9	)	$	—		$	13.5
Equipment moves		—		1.0		—			(1.0	)		—			—		—		—		0.8		—		(0.8	)		—			—
Recruiting and relocation		—		0.7		—			(0.7	)		—			—		—		—		—		—		—			—			—
Lease termination		1.5		0.3		—			(0.4	)		—			—		1.4		1.5		—		—		(0.3	)		—			1.2
Other		0.8		1.5		(0.6	)		(1.3	)		(0.4	)		—		—		—		1.8		—		(0.9	)		(0.9	)		—

Total restructuring reserves	$	4.1	$	14.1	$	(0.6	)	$	(6.2	)	$	(0.4	)	$	1.4	$	12.4	$	16.7	$	2.8	$	—	$	(3.9	)	$	(0.9	)	$	14.7

In the fourth quarter of 2007, the Company announced plans to close its refrigeration operations in Danville, Illinois and consolidate its Danville manufacturing, support and warehouse functions in its Tifton, Georgia and Stone Mountain, Georgia operations. The consolidation is a phased process and is expected to be completed in the first quarter of 2009. In connection with this consolidation project, the Company recorded pre-tax restructuring charges of $1.3 million in its Refrigeration segment for the three months ended March 31, 2008. The restructuring charges primarily related to costs to move certain equipment and disposal of certain long-lived assets, including charges of $0.8 million of accelerated depreciation recorded in 2008 related to the reduction in useful lives and disposal of certain long-lived assets. In addition to the amounts accrued as of March 31, 2008, the Company expects to incur pre-tax restructuring charges of approximately $8.1 million over the next 12 months due to this consolidation project.

In the fourth quarter of 2007, the Company’s Australian-based manufacturing facilities in Milperra assumed all heat transfer equipment manufacturing, while the smaller coil production facility in New Zealand was closed. In connection with this integration project, the Company recorded pre-tax restructuring charges of $0.3 million in its Refrigeration segment for the three months ended March 31, 2008. The restructuring charges primarily related to severance costs and disposal of certain long-lived assets. The integration was substantially complete as of March 31, 2008.

In the third quarter of 2007, the Company announced plans to close ~~its hearth products~~Lennox Hearth Products Inc.’s operations in Lynwood, California and consolidate its U.S. factory-built fireplace manufacturing operations in its facility in Union City, Tennessee. ~~The consolidation will be a phased process and is expected to be completed by the end of the second quarter of 2008.~~ In connection with this consolidation project, the Company recorded pre-tax restructuring charges of ~~$2.4~~$1.2 million in its Residential Heating & Cooling segment for the three months ended ~~September 30, 2007.~~March 31, 2008. The restructuring charges primarily related to ~~severance related~~ costs to move equipment and the disposal of certain long-lived assets. ~~LII currently expects to incur pre-tax restructuring charges of approximately $2.7 million over the next six months due to this~~The consolidation ~~project.~~

In the second quarter of 2007, the Company reorganized its corporate administrative function and eliminated the position of chief administrative officer. In connection with this action, the Company entered into negotiations with its former chief administrative officer to settle the terms of his employment agreement. As of June 30, 2007, these negotiations continued and the final settlement was ~~unknown. Therefore, the Company recorded a liability of approximately $8.0 million~~substantially complete as of June 30, 2007, which represented the Company’s estimate of the amounts to be paid to settle the employment agreement. Restructuring expense of $6.6 million was recorded in the second quarter of 2007, which represented the $8.0 million estimate of the amounts to be paid to settle the employment agreement, net of $1.4 million of previously recorded stock-based compensation expense. March 31, 2008.

In September 2007, the Company reached an agreement to settle the terms of the former chief administrative officer’s employment agreement. As a result, the Company recorded an additional $1.1 million of restructuring expense related to this matter in the third quarter of 2007.

~~A division of the Company’s Residential Heating & Cooling segment commenced plans to close its Burlington, Washington facility in 2005. During the three months ended September 30,~~ 2006, the Company ~~recorded a pre-tax restructuring charge~~commenced consolidation of ~~approximately $1.2 million related to an operating lease on~~ the idle facility in Burlington. The charge reflected the net present value of the remaining lease payments on the operating lease, net of estimated sublease income on the facility. In the second quarter of 2007, the Company entered into a sub-lease agreement for the idle facility. As a result, the Company recorded a pre-tax restructuring charge of approximately $0.3 million to reflect the net present value of the remaining lease payments on the operating lease, net of sublease income on the facility. The operating lease and sub-lease both expire in June 2011.

~~In February 2006, Allied Air Enterprises, a division of the Company’s Residential Heating & Cooling segment, announced that it had commenced plans to consolidate its~~ manufacturing, distribution, research &and development, and administrative operations of Allied Air Enterprises Inc., the Company’s two-step Residential Heating & Cooling operations in South Carolina, and ~~close~~closure of its ~~current~~ operations in Bellevue, Ohio. The consolidation was substantially ~~completed during~~complete as of March 31, 2007. In connection with this consolidation project, the ~~first quarter of 2007. The amounts~~Company recorded ~~related primarily to severance and benefits and other exit costs incurred, including~~pre-tax restructuring charges of ~~$1.5~~$2.2 million ~~and $3.7 million of accelerated depreciation recorded in~~for the three months ~~and nine months~~ ended ~~September 30, 2006, respectively, related to the reduction in useful lives and disposal of certain long-lived assets.~~March 31, 2007.

A pension settlement loss of approximately $0.7 million is included in ~~the Company’s Residential Heating & Cooling segment’s~~ restructuring expense for the ~~nine~~three months ended ~~September 30, 2007. The pension settlement loss~~March 31, 2007, which related to the Company’s full funding of ~~lump sum~~lump-sum pension payments to selected participants in March ~~2007.~~2007 as part of a prior restructuring initiative in 2001.

~~Also included in restructuring expense for~~During the ~~nine~~three months ended ~~September 30, 2006 is a gain~~March 31, 2007, the Company reversed to income approximately $0.6 million of ~~$0.8 million related to the sale of a parcel of land. The Company~~restructuring reserves that had ~~reduced the carrying value of the land to its then net realizable value~~been established in connection with a prior restructuring initiative ~~of its Service Experts operations~~ in 2001.

~~12. Earnings per Share:~~

12.

Earnings per Share:

Basic earnings per share are computed by dividing net income by the ~~weighted-average~~weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares and the number of equivalent shares assumed outstanding, if dilutive, under the Company’s stock-based compensation plans. As of ~~September 30, 2007,~~March 31, 2008, the Company had ~~81,326,014~~83,546,395 shares issued, of which ~~16,883,456~~24,866,016 were held as treasury shares. Diluted earnings per share are computed as follows (in millions, except per share data):


	For the				For the				For the
	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2007		2006		2007		2006		2008		2007
Net income	$	61.2	$	35.6	$	130.1	$	124.9	$	6.3	$	8.6


Weighted-average shares outstanding — basic		66.6		69.5		67.4		70.7		60.3		67.5
Effect of diluted securities attributable to share-based payments		3.2		3.4		3.3		3.9		2.4		3.4

Weighted-average shares outstanding — diluted		69.8		72.9		70.7		74.6		62.7		70.9


Diluted earnings per share	$	0.88	$	0.49	$	1.84	$	1.67	$	0.10	$	0.12

The Company accounts for instruments that qualify as cash flow hedges utilizing Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”). Beginning in the fourth quarter of 2006, futures contracts entered into that met established accounting criteria were formally designated as cash flow hedges. For futures contracts that are designated and qualify as cash flow hedges, the Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly throughout the designated period. The effective portion of the gain or loss on the futures contracts ~~are~~is recorded, net of applicable taxes, in AOCI, a component of Stockholders’ Equity in the accompanying Consolidated Balance Sheets. When net income is affected by the variability of the underlying cash flow, the applicable offsetting amount of the gain or loss from the futures contracts that is deferred in AOCI is released to net income and is reported as a component of Cost of Goods Sold in the accompanying Consolidated Statements of Operations. During the three months ended March 31, 2008 and ~~the nine months ended September 30,~~ 2007, ~~$3.2~~($2.1) million and ~~$4.6~~$1.6 million, respectively, in ~~gains, respectively,~~(gains), losses were reclassified from AOCI to net income. Changes in the fair value of futures contracts that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period (“ineffectiveness”) are recorded in net income each period and are reported in (Gains), Losses and Other Expenses, net in the accompanying Consolidated Statements of Operations. ~~Losses~~For the three months ended March 31, 2008 and 2007, net gains of $0.1 million and $0.2 million, respectively, were recognized in net income representing hedge ~~ineffectiveness were not material for the three months or the nine months ended September 30, 2007.~~ineffectiveness.

The Company may enter into instruments that economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting under SFAS No. 133 to such instruments. In these cases, there exists a natural hedging relationship in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying item(s). Changes in the fair value of instruments not designated as cash flow hedges are recorded in net income throughout the term of the derivative instrument and are reported in (Gains), Losses and Other Expenses, net in the accompanying Consolidated Statements of Operations. For the three months ended March 31, 2008 and ~~the nine months ended September 30,~~ 2007, ~~and 2006,~~ net gains of ~~$0.4~~$3.1 million and ~~$2.2 million and $1.6 million and $47.0~~$0.8 million, respectively, were recognized in earnings related to instruments not accounted for as cash flow hedges. For more information on the valuation of these derivative instruments, see Note 16.

16.

Fair Value Measurements:

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the Company’s creditworthiness when valuing certain liabilities.

~~16. Commitments~~Fair Value Hierarchy

The three-level fair value hierarchy for disclosure of fair value measurements defined by SFAS No. 157 is as follows:


Level 1	—	Quoted prices foridenticalinstruments in active markets at the measurement date.

Level 2	—	Quoted prices forsimilarinstruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.

Level 3	—	Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers areunobservableinputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Fair Value Techniques

The Company’s valuation techniques are applied to all of the assets and ~~Contingencies:~~liabilities carried at fair value as of January 1, 2008, upon adoption of SFAS No. 157. Where available, the fair values are based upon quoted prices in active markets. However, if quoted prices are not available, then the fair values are based upon quoted prices for similar assets or liabilities or independently sourced market parameters, such as credit default swap spreads, yields curves, reported trades, broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities with a lack of observable market activity, if any, the fair values are based upon discounted cash flow methodologies incorporating assumptions that, in management’s judgment, reflect the assumptions a marketplace participant would use. To ensure that financial assets and liabilities are recorded at fair value, valuation adjustments may be required to reflect the creditworthiness of either party and constraints on liquidity. Where appropriate, these amounts were incorporated into the Company’s valuations as of March 31, 2008, the measurement date.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2008 (in millions):


	Fair Value Measurements on a Recurring Basis as of March 31, 2008
			Significant
	Quoted Prices in		Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Derivatives, net⁽¹⁾	$	—	$	14.3	$	—	$	14.3
Short-term investments		—		34.7		—		34.7


(1)		Derivatives are recorded in Other Current Assets and Other Non-Current Assets in the accompanying Consolidated Balance Sheets.

The Company’s adoption of SFAS No. 157 has resulted in changes to the valuation techniques used by the Company when determining the fair value of its derivative instruments. These derivatives are primarily valued using estimated future cash flows that are based directly on observed prices from exchange-traded derivatives. The Company also takes into account the counterparty’s creditworthiness, or the Company’s own creditworthiness, as appropriate. The calculation of the credit adjustment for derivatives is based upon observable credit default swap spreads and interpolation between these observable spreads for interim periods without observable spreads; however, these inputs are insignificant to the fair value measurement. The effect of adopting these changes to the valuation techniques resulted in a net credit adjustment to the fair value of the Company’s derivative instruments of $0.1 million as of March 31, 2008.

The majority of the Company’s short-term investments are managed by professional investment advisors. The net asset values are furnished in statements received from the investment advisor and reflect valuations based upon the respective pricing policies utilized by the investment advisor. The Company has assessed the classification of the inputs used to value these investments as Level 2 through examination of pricing policies and significant inputs and through discussions with investment managers. The fair values of the Company’s short-term investments are based on several observable inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads and benchmark securities. The adoption of SFAS No. 157 resulted in no net changes to the valuations for these securities.

17.

Commitments and Contingencies:

Guarantees

On June 22, 2006, Lennox Procurement Company Inc. (“Procurement”), a wholly-owned subsidiary of the Company, entered into a lease agreement with BTMU Capital Corporation (“BTMUCC”), pursuant to which BTMUCC is leasing certain property located in Richardson, Texas to Procurement for a term of seven years (the “Lake Park Lease”). The leased property consists of an office building of approximately 192,000 square feet, which includes the Company’s corporate headquarters, ~~and~~ land and related improvements.

During the term, the Lake Park Lease requires Procurement to pay base rent in quarterly installments, payable in arrears. At the end of the term, if Procurement is not in default, Procurement must elect to do one of the following: (i) purchase the leased property for a net price of approximately $41.2 million (the “Lease Balance”); (ii) make a final supplemental payment to BTMUCC equal to approximately 82% of the Lease Balance and return the leased property to BTMUCC in good condition; (iii) arrange a sale of the leased property to a third party; or (iv) renew the Lake Park Lease under mutually agreeable terms. If Procurement elects to arrange a sale of the leased property to a third party, then Procurement must pay to BTMUCC the amount (if any) by which the Lease Balance exceeds the net sales proceeds paid by the third party; provided, however, that, absent certain defaults, such amount cannot exceed approximately 82% of the Lease Balance. If the net sales proceeds paid by the third party are greater than the Lease Balance, the excess sales proceeds will be paid to Procurement.

Procurement’s obligations under the Lake Park Lease and related documents are secured by a pledge of Procurement’s interest in the leased property. Procurement’s obligations under such documents are also guaranteed by the Company pursuant to a Guaranty, dated as of June 22, 2006, in favor of BTMUCC.

The Company is accounting for the Lake Park Lease as an operating lease.

The majority of the Service Experts segment’s motor vehicle fleet is leased through operating leases. The lease terms are generally non-cancelable for the first 12-month term and then are month-to-month, cancelable at the Company’s option. While there are residual value guarantees on these vehicles, the Company has not historically made significant payments to the lessors as the leases are maintained until the fair value of the assets fully mitigates the Company’s obligations under the lease agreements. As of ~~September 30, 2007,~~March 31, 2008, the Company estimates that it will incur an additional ~~$7.9~~$7.8 million above the contractual obligations on these leases until the fair value of the leased vehicles fully mitigates the Company’s residual value guarantee obligation under the lease agreements.

Environmental

Applicable environmental laws can potentially impose obligations on the Company to remediate hazardous substances at the Company’s properties, at properties formerly owned or operated by the Company and at facilities to which the Company has sent or sends waste for treatment or disposal. The Company is aware of contamination at some facilities; however, the Company does not presently believe that any future remediation costs at such facilities will be material to the Company’s results of operations. No amounts have been recorded for non-asset retirement obligation environmental liabilities that are not probable or estimable.

At one site located in Brazil, the Company is currently evaluating the remediation efforts that may be required under applicable environmental laws related to the release of certain hazardous materials. The Company currently believes that the release of the hazardous materials occurred over an extended period of time, including a time when the Company did not own the site. ~~The~~Extensive investigations have been performed and the Company continues to conduct additional assessments of the site to help determine the possible remediation activities that may be conducted at this site. Once the site assessments are completed and the possible remediation activities have been evaluated, the Company plans to

commence remediation efforts, pending any required approvals by local governmental authorities. The Company believes that containment is one of several viable options to comply with local regulatory standards. As a result, the Company recorded a charge of approximately $1.7 million in 2006 for estimated containment costs at the site. During the nine months ended September 30, 2007, the Company recorded a charge of $0.4 million primarily related to additional site assessments. As of ~~September 30, 2007~~March 31, 2008 and December 31, ~~2006,~~2007, the Company had discounted liabilities ~~recorded of approximately $2.1 million and $1.7 million~~ related to this matter ~~which are included~~of $2.0 million at each balance sheet date. As of March 31, 2008 and December 31, 2007, $0.1 million and $1.9 million were recorded in Accrued Expenses and Other ~~Long Term~~Long-Term Liabilities, respectively, in the accompanying Consolidated Balance Sheets. ~~These liabilities are~~The amount recorded as of March 31, 2008 reflects an undiscounted liability of $2.4 million, which is discounted at approximately 6%8% as the aggregate amount of the obligation and the amount and timing of cash payments are reliably determinable. If, after the site assessments are completed, it is determined that ~~containment~~remediation is more costly or ~~the~~ local governmental authorities require more costly remediation activities, the costs to contain or remediate the site could be as high as ~~$5.1~~$3.1 million (undiscounted). The Company is exploring options for recoveries.

The Company ~~has~~had additional reserves of approximately ~~$4.2~~$3.7 million and $3.9 million related to various other environmental matters recorded as of ~~September 30, 2007.~~March 31, 2008 and December 31, 2007, respectively. Balances of approximately ~~$1.7~~$0.7 million and ~~$2.5~~$2.0 million ~~are~~were recorded in Accrued Expenses as of March 31, 2008 and ~~Other Liabilities,~~December 31, 2007, respectively, in the Consolidated Balance ~~Sheet~~Sheets. Balances of approximately $3.0 million and $1.9 million were recorded in Other Liabilities as of ~~September 30, 2007.~~March 31, 2008 and December 31, 2007, respectively, in the Consolidated Balance Sheets. The amount recorded as of March 31, 2008 reflects undiscounted liabilities of approximately $6.4 million, which are discounted at approximately 7% as the aggregate amount of the obligations and the amount and timing of cash payments are reliably determinable.

Estimates of future costs are subject to change due to ~~prorated cleanup periods and~~ changing environmental remediation ~~regulations.~~regulations and/or site-specific requirements.

Litigation

The Company is involved in various claims and lawsuits incidental to its business. As previously reported, in January 2003, the Company, along with one of its subsidiaries, Heatcraft Inc., was named in the following lawsuits in connection with the Company’s former heat transfer operations:

	•		Lynette Brown, et al., vs. Koppers Industries, Inc., Heatcraft Inc., Lennox International Inc., et al., Circuit Court of Washington County, Civil Action No. CI 2002-479;

	•		Likisha Booker, et al., vs. Koppers Industries, Inc., Heatcraft Inc., Lennox International Inc., et al., Circuit Court of Holmes County; Civil Action No. 2002-549;

	•		Walter Crowder, et al., vs. Koppers Industries, Inc., Heatcraft Inc. and Lennox International Inc., et al., Circuit Court of Leflore County, Civil Action No. 2002-0225; and

	•		Benobe Beck, et al., vs. Koppers Industries, Inc., Heatcraft Inc. and Lennox International Inc., et al., Circuit Court of the First Judicial District of Hinds County, No. 03-000030.

On behalf of approximately 100 plaintiffs, the lawsuits allege personal injury resulting from alleged emissions of trichloroethylene, dichloroethylene, and vinyl chloride and other unspecified emissions from the South Plant in Grenada, Mississippi, previously owned by Heatcraft Inc. Each plaintiff seeks to recover actual and punitive damages. On Heatcraft Inc.’s motion to transfer venue, two of the four lawsuits (Booker andCrowder) were ordered severed and transferred to Grenada County by the Mississippi Supreme Court, requiring plaintiffs’ counsel to maintain a separate lawsuit for each of the individual plaintiffs named in these suits. To the Company’s knowledge, as of ~~October 19, 2007,~~April 15, 2008, plaintiffs’ counsel has requested the transfer of files regarding five individual plaintiffs from theBooker case and five individual plaintiffs from theCrowder case. ~~Additionally,~~While at this time, only the Booker and Crowder cases have been ordered severed and transferred by the Mississippi Supreme Court, LII ~~has joined in motions~~expects the Beck and Brown cases to dismiss filed by co-defendants in the four original lawsuits. These motions, which are still pending, seek dismissal (rather than transfer), without prejudice to refiling in Grenada County, of all cases not yetbe transferred ~~to Grenada County.~~as well. It is not possible to predict with certainty the outcome of these matters or an estimate of any potential loss. Based on ~~current negotiations,~~present knowledge, management believes that it is unlikely that any final resolution of these matters will ~~have~~result in a material ~~impact on the Company’s financial statements.~~liability.

~~17. Share Repurchase Plan:~~

18.

Share Repurchase Plan:

On July 25, 2007, ~~the Company~~LII announced that ~~its~~the Board of Directors approved a ~~new $500 million~~ share repurchase plan, pursuant to which ~~LII plans~~the Company is authorized to repurchase up to $500 million of shares of its common stock through open market purchases (the “2007 Share Repurchase Plan”). ~~Based on the closing price of LII’s common stock on July 24, 2007,~~LII is party to a ~~$500 million repurchase would represent over 20%~~written trading plan under Rule 10b5-1 of the ~~Company’s market capitalization. The~~Securities Exchange Act of 1934, as amended (the “10b5-1 Plan”), to facilitate share repurchases under the 2007

~~Share Repurchase Plan terminates and replaces the 2005~~ Share Repurchase Plan. ~~The Company currently intends~~Prior to ~~fully execute~~January 1, 2008, LII had repurchased 5,878,987 shares of common stock for approximately $203,347,263 under the ~~repurchase by~~2007 Share Repurchase Plan. In the ~~end of the third~~first quarter of ~~2008. During the third quarter of 2007, the Company purchased 3,026,100~~2008, LII repurchased shares of its common stock ~~for $104.2 million, representing approximately 21% of the $500 million repurchase authorization.~~as follows:

~~18. Reportable Business Segments:~~


			Average Price		Total Number of		Approximate Dollar
			Paid per		Shares Purchased		Value of Shares that
	Total Number		Share		as Part of Publicly		may yet be Purchased
	of Shares		(including		Announced Plans		Under the Plans or
Period	Purchased⁽¹⁾		fees)		or Programs		Programs

January 1 through January 31		1,951,792	$	36.51		1,926,669	$	226,412,444

February 1 through February 29		1,419,035	$	37.24		1,409,415	$	173,925,208

March 1 through March 31		1,650,512	$	35.75		1,394,678	$	123,905,357


Total		5,021,339	$	36.47		4,730,762


(1)		In addition to purchases under the 2007 Share Repurchase Plan, this column reflects the surrender to LII of 290,577 shares of common stock to satisfy tax-withholding obligations in connection with the exercise of stock appreciation rights and the distribution of shares of the Company’s common stock pursuant to vested performance share units.

19.

Reportable Business Segments:

The Company operates in four reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) ~~markets.~~industry. The first reportable segment is Residential Heating & Cooling, in which LII manufactures and markets a full line of heating, air conditioning and hearth products for the residential replacement and new construction markets in the United States and Canada. The second reportable segment is Commercial Heating & Cooling, in which LII manufactures and sells rooftop products and related equipment for light commercial applications in the United States and Canada and primarily rooftop products, chillers and air handlers in Europe. The third reportable segment is Service Experts, which includes sales, installation, maintenance and repair services for heating, ventilation and air conditioning (“HVAC”) equipment by LII-owned service centers in the United States and Canada. The fourth reportable segment is Refrigeration, which manufactures and sells unit coolers, condensing units and other commercial refrigeration products in the United States and international markets.

Transactions between segments, such as products sold to Service Experts by the Residential Heating & Cooling segment, are recorded on an arms-length basis using the market price for these products. The eliminations of these intercompany sales and any associated profit are noted in the reconciliation of segment results to the income from continuing operations before income taxes below.

The Company uses segment profit (loss) as the primary measure of profitability to evaluate operating performance and to allocate capital resources. The Company defines segment profit (loss) as a segment’s income (loss) from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations, excluding unusual and nonrecurring items; (gains), losses and other expenses, net; restructuring charges; goodwill impairment; interest expense, net; and other expense (income), net; less (plus) realized gains (losses) on settled futures contracts not designated as cash flow hedges and the ineffective portion of settled cash flow hedges; and less (plus)foreign currency exchange gains (losses).

The Company’s corporate costs include those costs related to corporate functions such as legal, internal audit, treasury, human resources, tax compliance and senior executive staff. Corporate costs also include the long-term share-based incentive awards provided to employees throughout LII. The Company recorded these share-based awards as Corporate costs as they are determined at the discretion of the Board of Directors and based on the historical practice of doing so for internal reporting purposes.

Net sales and segment profit (loss) by business segment, along with a reconciliation of segment profit (loss) to net earnings (loss), for the three months ended March 31, 2008 and ~~the nine months ended September 30,~~ 2007 ~~and 2006,~~ are shown below (in millions):

For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
Net Sales

Residential Heating & Cooling $ 456.5 $ 502.4 $ 1,315.5 $ 1,464.2
Commercial Heating & Cooling 255.1 228.0 650.6 554.1
Service Experts 183.9 174.0 512.0 492.8
Refrigeration 157.5 137.3 450.1 394.6
Eliminations⁽¹⁾
(23.2 ) (21.4 ) (65.1 ) (64.0 )

$ 1,029.8 $ 1,020.3 $ 2,863.1 $ 2,841.7

Segment Profit (Loss)

Residential Heating & Cooling $ 63.7 $ 53.4 $ 143.2 $ 168.7
Commercial Heating & Cooling 37.8 25.8 76.6 53.2
Service Experts 9.2 7.4 18.4 10.2
Refrigeration 17.8 13.8 46.6 40.2
Corporate and other (23.4 ) (21.2 ) (64.2 ) (66.5 )
Eliminations⁽¹⁾
— 0.5 (0.2 ) 0.3

Subtotal that includes segment profit and eliminations 105.1 79.7 220.4 206.1
Reconciliation to income before income taxes:
(Gains), losses and other expenses, net (1.2 ) (3.0 ) (5.2 ) (47.3 )
Restructuring charges 4.3 4.5 14.2 13.1
Interest expense, net 1.9 1.2 4.8 3.6
Other expense (income), net 0.2 0.1 0.3 0.1
Less: Realized gains on settled futures contracts not designated as cash flow hedges and the ineffective portion of settled cash flow hedges⁽²⁾
1.5 20.2 3.2 52.3
Less: Foreign currency exchange gains (losses)⁽²⁾
1.6 1.0 3.7 —

$ 96.8 $ 55.7 $ 199.4 $ 184.3


	For the
	Three Months Ended
	March 31,
	2008			2007
Net Sales
Residential Heating & Cooling	$	329.2		$	361.1
Commercial Heating & Cooling		165.2			162.7
Service Experts		140.1			143.9
Refrigeration		154.8			141.3
Eliminations⁽¹⁾		(22.2	)		(17.5	)

	$	767.1		$	791.5


Segment Profit (Loss)
Residential Heating & Cooling	$	13.2		$	19.9
Commercial Heating & Cooling		6.2			8.5
Service Experts		(7.6	)		(3.8	)
Refrigeration		14.8			12.5
Corporate and other		(12.2	)		(20.6	)
Eliminations⁽¹⁾		(1.7	)		(0.1	)

Subtotal that includes segment profit and eliminations		12.7			16.4
Reconciliation to income before income taxes:
(Gains), losses and other expenses, net		(3.3	)		(0.7	)
Restructuring charges		2.8			2.3
Interest expense, net		2.7			0.9
Less: Realized gains on settled futures contracts not designated as cash flowhedges⁽²⁾		0.4			0.5
Less: Foreign currency exchange gains (losses)⁽²⁾		0.1			(0.3	)

	$	10.0		$	13.7


(1)		Eliminations consist of intercompany sales between business segments, such as products sold to Service Experts by the Residential Heating & Cooling segment.

(2)		Realized gains (losses) on settled futures contracts not designated as cash flow hedges ~~the ineffective portion of settled cash flow hedges~~ and foreign currency ~~exchange~~ gains (losses) are ~~components~~a component of (Gains), Losses and Other Expenses, net in the accompanying Consolidated Statements of Operations.

Total assets by business segment as of ~~September 30, 2007~~March 31, 2008 and December 31, ~~2006~~2007 are shown below (in millions). The assets in the Corporate segment are primarily comprised of cash, deferred tax assets, and investments in consolidated subsidiaries. Assets recorded in the operating segments represent those assets directly associated with those segments.

As of As of
September 30, December 31,
2007 2006
Total Assets

Residential Heating & Cooling $ 648.0 $ 587.0
Commercial Heating & Cooling 383.8 285.7
Service Experts 212.6 183.4
Refrigeration 391.6 344.3
Corporate and other 311.2 328.7
Eliminations⁽¹⁾
(12.4 ) (9.3 )

Segment assets $ 1,934.8 $ 1,719.8


	As of			As of
	March 31,			December 31,
	2008			2007
Total Assets
Residential Heating & Cooling	$	579.1		$	548.5
Commercial Heating & Cooling		347.6			336.6
Service Experts		203.5			200.4
Refrigeration		409.3			388.1
Corporate and other		355.5			349.6
Eliminations⁽¹⁾		(14.6	)		(8.6	)

Segment assets	$	1,880.4		$	1,814.6


(1)		Eliminations consist of net intercompany receivables and intercompany profit included in inventory from products sold between business segments, such as products sold to Service Experts by the Residential Heating & Cooling segment.

~~19. Related Party Transactions:~~

20.

Related Party Transactions:

Thomas W. Booth, ~~Stephen~~Steven R. Booth and John W. Norris, III, each a member of the Company’s Board of Directors, John W. Norris, Jr., ~~LII’s former Chairman~~the father of ~~the Board, other former directors of the Company,~~Mr. Norris, III, and Lynn B. Storey, the mother of Jeffrey D. Storey, M.D., a director of the Company, as well as other stockholders of the Company who may be immediate family members of the foregoing persons, ~~are,~~were, individually or through trust arrangements, ~~members~~shareholders of A.O.C. Corporation (“AOC”). As previously announced, on March 16, 2007, LII entered into an agreement with AOC to issue up to 2,239,589 shares of LII common stock in exchange for 2,695,770 shares of LII common stock owned by AOC. ~~This~~Upon completion of the transaction ~~was completed on~~in September ~~6, 2007.~~2007, LII acquired 2,695,770 shares of LII common stock owned by AOC in exchange for 2,239,563 newly issued shares of LII common ~~shares.~~stock. The transaction reduced the number of outstanding shares of LII common stock by 456,207 shares, at minimal cost to LII. Following the issuance and exchange of LII common stock, AOC distributed the newly acquired shares of LII common stock pro rata to its shareholders. The issuance, exchange and liquidating distribution are referred to ~~herein~~ as the “AOC Transaction.”

There were no special benefits provided for any of the related persons described above under the AOC Transaction. Each related person’s participation in the AOC Transaction arose out of his or her ownership of common stock of AOC and was on the same basis as all other shareholders of AOC.

Thomas W. Booth, Stephen R. Booth and John W. Norris, III, each a member of the Company’s Board of Directors, John W. Norris, Jr., LII’s former Chairman of the Board, other former directors of the Company, and Lynn B. Storey, the mother of Jeffrey D. Storey, M.D., a director of the Company, as well as other stockholders of the Company who may be immediate family members of the foregoing persons, are also, individually or through trust arrangements, members of AOC Land Investment, L.L.C. (“AOC Land”). AOC Land owned 70% of AOC Development II, L.L.C. (“AOC Development”), which owned substantially all of One Lake Park, L.L.C. (“One Lake Park”) prior to the dissolution of AOC Development and One Lake Park in the second half of 2006. Beginning in 1998, the Company leased part of an office building in Richardson, Texas owned by One Lake Park for use as its corporate headquarters. LII terminated these leases in June 2006. Lease payments for the six months ended June 30, 2006 totaled approximately $1.4 million. LII believes that the terms of its leases with One Lake Park were, at the time entered into, comparable to terms that could have been obtained from unaffiliated third parties.

~~20. Subsequent Events:~~

On October 10, 2007 the Company announced plans to close its refrigeration operations in Danville, Illinois and consolidate its Danville manufacturing, support, and warehouse functions in its Tifton, Georgia and Stone Mountain, Georgia operations. The facility in Danville manufactures evaporators and other heat transfer products for the commercial refrigeration industry. The consolidation will be a phased process and is expected to be completed over the next 18 months with pre-tax restructuring-related charges of approximately $17 million over that time.

The Company entered into a $650 million Third Amended and Restated Revolving Credit Facility Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, swingline lender and issuing bank (the “Administrative Agent”), JPMorgan Chase Bank, N.A. and Wachovia Bank, National Association, as co-syndication agents, and the lenders party thereto on October 12, 2007. The Credit Agreement replaces the Company’s previous domestic revolving credit facility, the Second Amended and Restated Credit Facility Agreement, dated as of July 8, 2005, among the Company, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, and the lenders named therein.

The Credit Agreement provides for an unsecured $650 million revolving credit facility that matures on October 12, 2012. The revolving credit facility includes a subfacility for swingline loans of up to $50 million and provides for the issuance of letters of credit for the full amount of the credit facility. The revolving loans bear interest at either (i) the Eurodollar rate plus a margin of between 0.5% and 1% that is based on the Company’s Debt to Adjusted EBITDA Ratio (as defined in the Credit Agreement) or (ii) the higher of (a) the Federal Funds Rate plus 0.5% and (b) the prime rate set by Bank of America, N.A. The Company may prepay the revolving loans at any time without premium or penalty, other than customary breakage costs in the case of Eurodollar loans.

The Company will pay a facility fee in the range of 0.125% to 0.25% based on the Company’s Debt to Adjusted EBITDA Ratio. The Company will also pay a letter of credit fee in the range of 0.5% to 1% based on the Company’s Debt to Adjusted EBITDA Ratio, as well as an additional issuance fee of 0.125% for letters of credit issued.

The Credit Agreement contains financial covenants relating to leverage and interest coverage. Other covenants contained in the Credit Agreement restrict, among other things, mergers, asset dispositions, guarantees, debt, liens, acquisitions, investments, affiliate transactions and the Company’s ability to make restricted payments.

The Credit Agreement contains customary events of default. If any event of default occurs and is continuing, lenders with a majority of the aggregate commitments may require the Administrative Agent to terminate the Company’s right to borrow under the Credit Agreement and accelerate amounts due under the Credit Agreement (except for a bankruptcy event of default, in which case such amounts will automatically become due and payable and the lenders’ commitments will automatically terminate).

The Company’s obligations under the Credit Agreement are guaranteed by certain of its material domestic subsidiaries, including Lennox Industries Inc., Allied Air Enterprises Inc., Service Experts Inc. and Lennox Global Ltd.

The Company made a $25 million prepayment on a domestic promissory note to facilitate the amendment of the Credit Agreement, resulting in a make-whole payment of $0.2 million which will be recognized as interest expense in the fourth quarter of 2007.

1920

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


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

~~Forward-Looking Information~~

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on information currently available to management as well as management’s assumptions and beliefs. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements identified by the words “may,” “will,” “should,” “plan,” “predict,” “anticipate,” “believe,” “intend,” “estimate” and “expect” and similar expressions. Such statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions; however, such statements are subject to certain risks and uncertainties. In addition to the specific uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, the risk factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2006,~~2007, and those set forth in Part II, “Item 1A. Risk Factors” of this report, if any, may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise.

Overview

We operate in four reportable business segments of the ~~heating, ventilation, air conditioning and refrigeration (“HVACR”) markets.~~HVACR industry. The first reportable segment is Residential Heating & Cooling, in which we manufacture and market a full line of heating, air conditioning and hearth products for the residential replacement and new construction markets in the ~~United States~~U.S. and Canada. The second reportable segment is Commercial Heating & Cooling, in which we manufacture and sell rooftop products and related equipment for light commercial applications in the ~~United States~~U.S. and Canada and primarily rooftop products, chillers and air handlers in Europe. The third reportable segment is Service Experts, which includes sales, installation, maintenance and repair services for ~~heating, ventilation and air conditioning (“HVAC”)~~HVAC equipment by ~~Company-owned~~company-owned service centers in the ~~United States~~U.S. and Canada. The fourth reportable segment is Refrigeration, in which we manufacture and sell unit coolers, condensing units and other commercial refrigeration products in the ~~United States~~U.S. and international markets.

Our products and services are sold through a combination of distributors, independent and ~~Company-owned~~company-owned dealer service centers, other installing contractors, wholesalers, manufacturers’ representatives and original equipment manufacturers and to national accounts. The demand for our products and services is seasonal and dependent on the weather. Hotter than normal summers generate strong demand for replacement air conditioning and refrigeration products and services and colder than normal winters have the same effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress HVACR sales and services. In addition to weather, demand for our products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions and consumer spending habits and confidence.

The principal elements of cost of goods sold in our manufacturing operations are components, raw materials, factory overhead, labor and estimated costs of warranty expense. In our Service Experts segment, the principal components of cost of goods sold are equipment, parts and supplies and labor. The principal raw materials used in our manufacturing processes are steel, copper and aluminum. Higher prices for these commodities and related components continue to present a challenge to us and the HVACR industry in general. We partially mitigate the impact of higher commodity prices through a combination of price increases, commodity contracts, improved production efficiency and cost reduction initiatives.

We estimate approximately 30% of the sales of our Residential Heating & Cooling segment is for new construction, with the balance attributable to repair, retrofit and replacement. With the current downturn in residential new construction activity, we are continuing to see a decline in the demand for the products and services we sell into this market.

Our fiscal year ends on December 31 and our interim fiscal quarters are each comprised of 13 weeks. For convenience, throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the 13-week periods comprising each fiscal quarter are denoted by the last day of the calendar quarter.

Company Highlights

	•		~~Our Commercial Heating & Cooling, Service Experts,~~Net sales for the three months ended March 31, 2008 were $767.1 million and ~~Refrigeration segments experienced increases~~were negatively impacted on a year-over-year basis due primarily to unfavorable economic conditions in the U.S. and Southern Europe. Foreign currency translation rates had a favorable impact on net sales in the third quarter of 2007 compared to the prior year quarter due to favorable product price and mix changes, increased volumes and the favorable impact of changes in foreign currency exchange rates. Our Residential Heating & Cooling segment’s sales decreased for the third quarter of 2007 compared to the prior year quarter largely due to weak residential new construction sales.2008.

	•		Operational income for the ~~third quarter of 2007 increased $41.9 million, or 73.5%, from the prior year quarter.~~three months ended March 31, 2008 was $12.7 million. As a percentage of net sales, operational income ~~increased~~decreased from 1.8% in 2007 to ~~9.6%~~1.7% in the third quarter of 2007 as compared to 5.6% in the third quarter of 2006. The increase in operational income was due to price increases implemented since the third quarter of 2006 offsetting increases in commodity and other manufacturing costs. Additionally, we reduced selling, general and administrative expenses through cost management and cost reduction initiatives.2008.

	•		Net income for the ~~third quarter of 2007 increased $25.6 million, or 71.9%, as compared to the prior year quarter due to higher gross profit and lower operating expenses.~~three months ended March 31, 2008 was $6.3 million. Diluted net income per share was $0.10 per share in 2008, down from $0.12 per share in 2007.

	•		~~On July 25,~~Cash used in operating activities was $32.9 million for the three months ended March 31, 2008, improved from $75.1 million in 2007, ~~we announced that our Board of Directors approved a new $500 million share repurchase plan, pursuant~~primarily due to which we plan to repurchase shares of our common stock through open market purchases (the “2007 Share Repurchase Plan”). Based on the closing price of our common stock on July 24, 2007, a $500 million repurchase would represent over 20% of our market capitalization. We currently intend to fully execute the repurchase by the end of the third quarter of 2008. The 2007 Share Repurchase Plan terminatesfavorable changes in inventory and replaces the 2005 Share Repurchase Plan. During the third quarter, we purchased 3,026,100 shares of our common stock for $104.2 million, representing approximately 21% of the $500 million repurchase authorization.

	•		~~On October 12, 2007, we entered into a $650 million Third Amended and Restated Revolving Credit Facility Agreement which replaces our previous $400 million domestic revolving credit facility.~~income taxes payable.

Results of Operations

The following table presents certain information concerning our financial results, including information presented as a percentage of net sales for the ~~third quarter~~three months ended March 31, 2008 and ~~year-to-date through September 30,~~ 2007 ~~and 2006~~ (dollars in millions):


	Third Quarter												Year-to-Date September 30,												For the Three Months Ended March 31,
	2007						2006						2007						2006						2008						2007
	Dollars			Percent			Dollars			Percent			Dollars			Percent			Dollars			Percent			Dollars			Percent			Dollars			Percent
Net sales	$	1,029.8			100.0	%	$	1,020.3			100.0	%	$	2,863.1			100.0	%	$	2,841.7			100.0	%	$	767.1			100.0	%	$	791.5			100.0	%
Cost of goods sold		736.2			71.5			763.5			74.8			2,075.8			72.5			2,105.5			74.1			564.3			73.6			586.9			74.2

Gross profit		293.6			28.5			256.8			25.2			787.3			27.5			736.2			25.9			202.8			26.4			204.6			25.8
Selling, general and administrative expenses		194.3			18.9			200.8			19.7			582.7			20.4			589.9			20.8			193.7			25.3			191.1			24.1
(Gains), losses and other expenses, net		(1.2	)		(0.1	)		(3.0	)		(0.3	)		(5.2	)		(0.2	)		(47.3	)		(1.7	)		(3.3	)		(0.4	)		(0.7	)		(0.1	)
Restructuring charges		4.3			0.4			4.5			0.4			14.2			0.5			13.1			0.5			2.8			0.4			2.3			0.3
Equity in earnings of unconsolidated affiliates		(2.7	)		(0.3	)		(2.5	)		(0.2	)		(8.9	)		(0.3	)		(7.5	)		(0.3	)		(3.1	)		(0.4	)		(2.7	)		(0.3	)

Operational income	$	98.9			9.6	%	$	57.0			5.6	%	$	204.5			7.1	%	$	188.0			6.6	%	$	12.7			1.7	%	$	14.6			1.8	%


Net income	$	61.2			5.9	%	$	35.6			3.5	%	$	130.1			4.5	%	$	124.9			4.4	%	$	6.3			0.8	%	$	8.6			1.1	%

Net sales ~~increased $9.5~~decreased $24.4 million, or ~~0.9%~~3.1%, to ~~$1,029.8~~$767.1 million for the ~~third quarter of 2007~~three months ended March 31, 2008 from ~~$1,020.3~~$791.5 million for the ~~third quarter~~three months ended March 31, 2007. Declines in unit volumes more than offset the $31.4 million of ~~2006. The~~ favorable impact of ~~changes in~~ foreign currency exchange ~~rates increased net~~rates. Our Residential Heating & Cooling and Service Experts segments experienced decreases in sales ~~by $21.0 million.~~due primarily to the weakened residential new construction market in the U.S. Our Commercial Heating & Cooling ~~Service Experts,~~segment experienced a decrease in unit volumes in our domestic and ~~Refrigeration segments experienced increases in net sales~~European operations primarily due to ~~favorable product price and mix changes and increased volumes. Our Residential Heating & Cooling segment’s sales decreased~~unfavorable economic conditions. Sales for ~~the third quarter of 2007 compared to the prior year quarter largely due to weak residential new construction sales.~~our Refrigeration segment were relatively flat year-over-year.

Gross Profit

Gross profit was ~~$293.6~~$202.8 million for the ~~third quarter of 2007~~three months ended March 31, 2008 compared to ~~$256.8~~$204.6 million for the ~~prior year quarter, an increase~~three months ended March 31, 2007, a decrease of ~~$36.8~~$1.8 million. Gross profit margin increased to ~~28.5%~~26.4% for the ~~third~~first quarter of ~~2007~~2008 compared to ~~25.2%~~25.8% in ~~2006~~2007 primarily due to favorable product mix and price increases implemented since the ~~third~~first quarter of ~~2006 combined with lower manufacturing costs.~~2007.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses ~~decreased $6.5~~increased $2.6 million, or ~~3.2%~~1.4%, ~~for the third quarter of 2007 compared to the prior year quarter. As~~in 2008 and as a percentage of total net sales increased to 25.3% for the first quarter of 2008 from 24.1% for the first quarter of 2007. The increase in SG&A expenses ~~decreased~~was primarily due to ~~18.9% for the third quarter of 2007 from 19.7% for the third quarter of 2006. A decrease in volume~~a $7.2 million increase related ~~selling expenses had a favorable impact on SG&A expenses. Additionally, cost reduction initiatives resulted in lower SG&A expenses~~to foreign currency exchange rates and higher bad debt expense as weakness in the ~~third quarter~~economy has impacted collection efforts in certain areas of ~~2007 as compared to~~ the ~~prior year quarter.~~business. These ~~savings~~increases were partially offset by lower stock-based compensation expenses, a ~~one-time pension settlement charge of $3.9 million related to the retirement of our former chief executive officer~~reduction in professional fees and ~~changes in foreign currency exchange rates.~~cost control measures.

(Gains), Losses and Other Expenses, Net

(Gains), losses and other expenses, net were ~~$(1.2)~~$(3.3) million for the ~~third quarter of 2007 compared to $(3.0)~~three months ended March 31, 2008 and $(0.7) million for the ~~third quarter of 2006~~three months ended March 31, 2007 and included the following (in millions):

Third Quarter
2007 2006
Realized gains on settled futures contracts not designated as cash flow hedges $ (1.4 ) $ (20.2 )
Unrealized losses on unsettled futures contracts not designated as cash flow hedges 1.0 18.6
Ineffective portion of losses on cash flow hedges 0.3 —
Foreign currency exchange gains (1.6 ) (1.0 )
Other items, net 0.5 (0.4 )

(Gains), losses and other expenses, net $ (1.2 ) $ (3.0 )


	For the Three Months Ended
	March 31,
	2008			2007
Realized (gains) on settled future contracts not designated as cash flow hedges	$	(0.4	)	$	(0.5	)
Unrealized (gains) on unsettled future contracts not designated as cash flow hedges		(2.7	)		(0.3	)
Ineffective portion of (gains) on cash flow hedges		(0.1	)		(0.2	)
Other items, net		(0.1	)		0.3

(Gains), losses and other expenses, net	$	(3.3	)	$	(0.7	)

~~Realized and~~The increase in unrealized gains on settled ~~futures~~future contracts not designated as cash flow hedges ~~decreased~~was primarily due to increases in commodity prices during the three months ended March 31, 2008 as ~~we had fewer futures contracts not designated as cash flow hedges in the third quarter of 2007~~ compared to the same period in ~~2006. Beginning in the fourth quarter of 2006, futures contracts entered into that met established accounting criteria were formally designated as cash flow hedges.~~2007. For more information see Note 15 in the Notes to our Consolidated Financial Statements.

Restructuring Charges

We recognized ~~$4.3~~$2.8 million and ~~$4.5~~$2.3 million in restructuring charges for the third quarter of 2007 and 2006, respectively. Restructuring charges incurred during the third quarter of 2007 primarily related to the consolidation of our Hearth Products operations and the reorganization of our corporate administrative function. Charges recognized in the third quarter of 2006 primarily related to the consolidation of our manufacturing,

distribution, research and development and administrative operations of our two-step operations into South Carolina and closing of our operations in Bellevue, Ohio (the “Allied Air Enterprises Consolidation”). The restructuring of these operations was substantially completed during the first quarter of 2007. Charges recorded in the third quarter of 2006 reflected the net present value of remaining lease payments on an operating lease at an idle facility in Burlington, Washington, net of estimated sublease income on the facility.2008 and 2007, respectively, as further discussed below.

In the third quarter of 2007, we announced plans to close our Hearth Products operations in Lynwood, California and consolidate our U.S. factory-built fireplace manufacturing operations in our facility in Union City, Tennessee. In connection with this consolidation project, we recorded pre-tax restructuring charges of $2.4 million in our Residential Heating & Cooling segment for the three months ended September 30, 2007. The restructuring charges primarily related to severance related costs and the disposal of certain long-lived assets. The consolidation will be a phased process and is expected to be completed by the end of the second quarter of 2008. We currently expect to incur pre-tax restructuring charges of approximately $2.7 million over the next six months due to this consolidation project and anticipate the consolidation leading to annual cost reductions of over $2.0 million beginning in April of 2008.

In the second quarter of 2007, we reorganized our corporate administrative function and eliminated the position of chief administrative officer. In connection with this action, we entered into negotiations with our former chief administrative officer to settle the terms of his employment agreement. Restructuring expense of $6.6 million was recorded in the second quarter of 2007, which represented the $8.0 million estimate of the amounts to be paid to settle the employment agreement, net of $1.4 million of previously recorded stock-based compensation expense. In September 2007, we reached an agreement to settle the terms of the former chief administrative officer’s employment agreement. As a result, we recorded an additional $1.1 million of restructuring expense related to this matter in the third quarter of 2007. We do not expect to incur any material costs related to this reorganization in the future.

On October 10, 2007, we announced plans to close our refrigeration operations in Danville, Illinois and consolidate our Danville manufacturing, support, and warehouse functions in our Tifton, Georgia and Stone Mountain, Georgia operations. The consolidation ~~will be~~is a phased process and is expected to be completed ~~over~~in the first quarter of 2009. In connection with this consolidation project, we recorded pre-tax restructuring charges of $1.3 million for the three months ended March 31, 2008. Over the next 1812 months, ~~with~~we expect to incur pre-tax restructuring-related charges of approximately ~~$17~~$8.1 million ~~over that time.~~related to this project. We expect the consolidation towill lead to annual pre-tax cost reductions of over $6 million beginning in 2009.

In the third quarter of 2007, we announced plans to close our hearth products operations in Lynwood, California and consolidate our U.S. factory-built fireplace manufacturing operations in our facility in Union City, Tennessee. In connection with this consolidation project, we recorded pre-tax restructuring charges of $1.2 million in our Residential Heating & Cooling segment for the three months ended March 31, 2008. The restructuring charges primarily related to costs to move equipment and the disposal of certain long-lived assets. The consolidation was substantially complete as of March 31, 2008. We currently anticipate the consolidation will lead to annual cost reductions of over $2.0 million beginning in April of 2008.

In the fourth quarter of 2007, our Australian-based manufacturing facilities in Milperra assumed all heat transfer equipment manufacturing, while the smaller coil production facility in New Zealand was closed. In connection with this integration project, we recorded pre-tax restructuring charges of $0.3 million in our Refrigeration segment for the three months ended March 31, 2008. The restructuring charges primarily related to severance costs and disposal of certain long-lived assets. The integration was substantially complete as of March 31, 2008.

Restructuring charges incurred in 2007 primarily related to the consolidation of our manufacturing, distribution, research and development and administrative operations of our two-step operations into South Carolina and closing of our current operations in Bellevue, Ohio. The restructuring of these operations was substantially complete as of March 31, 2007.

Equity in Earnings of Unconsolidated Affiliates

Investments in affiliates in which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Equity in earnings of unconsolidated affiliates increased by ~~$0.2~~$0.4 million to $3.1 million for the three months ended March 31, 2008 as compared to $2.7 million ~~for the third quarter of 2007 compared to $2.5 million for the same period~~ in ~~2006.~~2007. The increase ~~was~~is due to the performance of our unconsolidated affiliates.

Interest Expense, ~~Net~~net

Interest expense, net, increased ~~by $0.7~~$1.8 million to ~~$1.9~~$2.7 million for the ~~third quarter of 2007~~three months ended March 31, 2008 from ~~$1.2~~$0.9 million for the ~~third quarter of 2006.~~three months ended March 31, 2007. The ~~higher net~~increase in interest expense was primarily ~~due to higher interest expense and a decrease in interest income earned during the quarter ended September 30, 2007. Interest expense increased due~~attributable to higher debt balances as the result of our share repurchases. ~~Interest~~Additionally, interest income decreased during the quarter ended March 31, 2008 as the average amount invested over the three months was less than that in the same period in 2007 and due to lower rates in the ~~third~~first quarter of ~~2007~~2008 as compared to the prior year quarter.

Provision for Income Taxes

The provision for income taxes was ~~$35.6~~$3.7 million for the ~~third quarter of 2007~~three months ended March 31, 2008 compared to ~~$20.1~~$5.1 million for the ~~prior year quarter.~~three months ended March 31, 2007. The effective tax rate was ~~36.8%~~37.0% and ~~36.1%~~37.2% for the ~~third quarter of~~three months ended March 31, 2008 and March 31, 2007, ~~and 2006,~~ respectively. Our effective rates differ from the statutory federal rate of 35% for certain items, such as state and local taxes, non-deductible expenses, foreign operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%.

~~Third Quarter 2007~~Three Months Ended March 31, 2008 Compared to ~~Third Quarter 2006 –~~Three Months Ended March 31, 2007 — Results by Segment

Segment profit in Residential Heating & Cooling ~~increased 19.3%~~decreased 33.7% to ~~$63.7~~$13.2 million for the ~~third~~first quarter of ~~2007~~2008 from ~~$53.4~~$19.9 million in the prior year. Segment profit margins ~~improved~~decreased from ~~10.6%~~5.5% for the ~~third~~first quarter of ~~2006~~2007 to ~~14.0%~~4.0% for the ~~third~~first quarter of ~~2007. The~~2008. These decreases were primarily due to the unfavorable impact of lower unit volumes, ~~was more than~~which were partially offset by ~~a reduction in operating~~favorable product mix and ~~administrative expenses. Operating and administrative~~lower expenses ~~were lower in the third quarter of 2007 compared to the prior year primarily~~ due to cost reduction ~~activities and costs savings related~~efforts. Higher bad debt expenses, due to ~~the consolidation of our Allied Air Enterprises manufacturing operations. Our operating margins were also higher~~weakness in the third quarter of 2007 as compared to the prior year quarter as price increases were effective in offsetting higher commodity and component costs. In addition, freight and commission costs were lower as a percentage of sales.

~~In the third quarter of 2007 we revised our warranty policy for fulfilling the terms of our warranty obligation~~U.S. economy, also had an unfavorable impact on certain products that we no longer manufacture. We believe that the revised policy may have a favorable and material impact to our financial results in future periods while still meeting the terms of our warranty obligation to our customers.profitability.

Commercial Heating & Cooling

The following table details our Commercial Heating & Cooling segment’s net sales and profit for the ~~third quarter of~~three months ended March 31, 2008 and 2007 ~~and 2006~~ (dollars in millions):


												Three Months Ended
	Third Quarter											March 31,
	2007			2006			Difference		% Change			2008			2007			Difference			% Change
Net sales	$	255.1		$	228.0		$	27.1		11.9	%	$	165.2		$	162.7		$	2.5			1.5	%
Profit		37.8			25.8			12.0		46.5			6.2			8.5			(2.3	)		(27.1	)
% of net sales		14.8	%		11.3	%							3.8	%		5.2	%

~~Year-to-Date Through September 30, 2007 Compared to Year-to-Date Through September 30, 2006 – Consolidated Results~~

~~Net Sales~~

~~�� Year-to-date net sales increased $21.4 million, or 0.8%, to $2,863.1~~decreased from $20.6 million in 2007 ~~from $2,841.7~~to $12.2 million in 2006. The increase in net sales was due to increased volumes and favorable price and product mix changes in our Commercial Heating & Cooling, Service Experts, and Refrigeration segments, as well as a favorable impact of changes in foreign currency exchange rates of $44.4 million. Net sales decreased in our Residential Heating & Cooling segment largely due to decreased demand in the residential new construction market.

~~Gross Profit~~

Year-to-date gross profit was $787.3 million in 2007 compared to $736.2 million in 2006, an increase of $51.1 million. Gross profit margin increased to 27.5% for 2007 compared to 25.9% for 2006 due to favorable sales mix changes and volume increases. Price increases partially offset increases in commodity and component costs.

~~Selling, General and Administrative Expenses~~

Year-to-date SG&A expenses decreased to $582.7 million in 2007 compared to $589.9 million in 2006. As a percentage of total net sales, SG&A expenses were 20.4% for 2007 and 20.8% for 2006. Year-over-year reductions in unit volumes decreased volume related selling expenses included in SG&A expenses. Additionally, cost management and cost reduction initiatives had a favorable impact on SG&A expenses in the first nine months of 2007 as compared to the prior year. These savings in SG&A expenses were partially offset by a one-time pension settlement charge of $3.9 million recorded in the third quarter of 2007 related to the retirement of our former chief executive officer.

~~(Gains), Losses and Other Expenses, Net~~

~~Year-to-date (gains), losses and other expenses, net were $(5.2) million in 2007 and $(47.3) million in 2006 and included the following (in millions):~~

Year-to-Date September 30,
2007 2006
Realized gains on settled futures contracts not designated as cash flow hedges $ (3.1 ) $ (52.3 )
Unrealized losses on unsettled futures contracts not designated as cash flow hedges 0.9 5.3
Ineffective portion of losses on cash flow hedges 0.1 —
Foreign currency exchange gains (3.7 ) —
Other items, net 0.6 (0.3 )

(Gains), losses and other expenses, net $ (5.2 ) $ (47.3 )

Realized and unrealized gains on settled futures contracts not designated as cash flow hedges decreased as we had fewer futures contracts not designated as cash flow hedges in the first nine months of 2007 compared to the same period in 2006. Beginning in the fourth quarter of 2006, futures contracts entered into that met established accounting criteria were formally designated as cash flow hedges. For more information see Note 15 in the Notes to our Consolidated Financial Statements.

~~Restructuring Charges~~

We recognized $14.2 million and $13.1 million in year-to-date restructuring charges in 2007 and 2006, respectively. In 2007 we incurred restructuring charges of $2.4 million related to the consolidation of our Hearth Products operations, $7.7 million related to the reorganization of our corporate administrative function and $3.2 million related to the Allied Air Enterprises Consolidation. Charges recognized in 2006 primarily related to the Allied Air Enterprises Consolidation, which was substantially completed during the first quarter of 2007.

~~Equity in Earnings of Unconsolidated Affiliates~~

~~Investments in affiliates in which we do not exercise control but have significant influence are accounted for~~

using the equity method of accounting. Year-to-date equity in earnings of unconsolidated affiliates increased by $1.4 million to $8.9 million in 2007 as compared to $7.5 million in 2006. The increase was due to the performance of our unconsolidated affiliates.

~~Interest Expense, Net~~

Year-to-date interest expense, net, increased by $1.2 million to $4.8 million in 2007 from $3.6 million in 2006. The higher net interest expense was due primarily to an increase in interest expense and a decrease in interest income earned. Interest expense increased due to higher debt balances as the result of our share repurchases. Interest income decreased due to lower average investment balances and lower rates in 2007 as compared to 2006.

~~Provision for Income Taxes~~

The year-to-date provision for income taxes was $69.3 million in 2007 compared to $59.4 million in 2006. The year-to-date effective tax rate was 34.8% and 32.2% for 2007 and 2006, respectively. Our effective rates differ from the statutory federal rate of 35% for certain items, such as a $3.2 million benefit in 2007 from a change in estimated gain from the prior year, state and local taxes, non-deductible expenses, foreign operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%.

~~Year-to-Date Through September 30, 2007 Compared to Year-to-Date Through September 30, 2006 – Results by Segment~~

The key performance indicators of our segments’ profitability are net sales and operational profit. We define segment profit (loss) as a segment’s income (loss) from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations excluding (gains), losses and other expenses, net; restructuring charges; goodwill impairment; interest expense, net; and other expense (income), net; less (plus) realized gains (losses) on settled futures contracts not designated as cash flow hedges and the ineffective portion of settled cash flow hedges; and less (plus) foreign currency exchange gains (losses).

~~Residential Heating & Cooling~~

~~The following table details our Residential Heating & Cooling segment’s year-to-date net sales and profit for 2007 and 2006 (dollars in millions):~~

Year-to-Date
September 30,
2007 2006 Difference % Change
Net sales $ 1,315.5 $ 1,464.2 $ (148.7 ) (10.2 )%
Profit 143.2 168.7 (25.5 ) (15.1 )
% of net sales 10.9 % 11.5 %

Year-to-date net sales in our Residential Heating & Cooling segment decreased $148.7 million, or 10.2%, to $1,315.5 million in 2007 from $1,464.2 million in 2006. Net sales decreased primarily due to reduced unit volumes attributable to the U.S. residential new construction market. Unit volumes have generally been lower across the residential HVAC industry in 2007 as compared to 2006 due to softness in the U.S. residential new construction market. We believe the decrease in our unit volumes is consistent with industry trends.2008. The decrease in ~~net sales attributable to lower unit volumes was partially offset by an increase in sales prices implemented as a result of higher commodity and component costs.~~

Year-to-date segment profit in Residential Heating & Cooling decreased 15.1% to $143.2 million in 2007 from $168.7 million in 2006. Segment profit margins declined from 11.5% for 2006 to 10.9% for 2007. The decrease in segment profitcosts was primarily driven by a decrease in unit volumes. Adjustments to failure rates for products we no longer manufacture and the higher cost of claims increased our warranty costs. Favorable price changes partially offset the decrease in segment profit. Lower sales volumes resulted in a reduction of our freight and commission expenses. Additionally, our cost saving initiatives helped to reduce SG&A expenses.

~~Commercial Heating & Cooling~~

~~The following table details our Commercial Heating & Cooling segment’s year-to-date net sales and profit for 2007 and 2006 (dollars in millions):~~

Year-to-Date
September 30,
2007 2006 Difference % Change
Net sales $ 650.6 $ 554.1 $ 96.5 17.4 %
Profit 76.6 53.2 23.4 44.0
% of net sales 11.8 % 9.6 %

Year-to-date net sales in our Commercial Heating & Cooling segment increased $96.5 million, or 17.4%, to $650.6 million in 2007 from $554.1 million in 2006. The increase in net sales was primarily due to favorable price and product mix changes in our domestic operations as customer demand increased for our high-efficiency rooftop units. The favorable impact of the change in foreign currency exchange rates increased net sales by $15.3 million.

Year-to-date segment profit in Commercial Heating & Cooling increased 44.0% to $76.6 million in 2007 from $53.2 million in 2006. As a percentage of net sales, segment profit increased from 9.6% for 2006 to 11.8% for 2007. An increase in demand in our international markets combined with price increases and a favorable product mix shift in our domestic operations has improved segment profit. Additionally, the strategic initiatives related to our Commercial Regional Distribution Network in North America helped to lower freight costs and further contributed to the Commercial Heating & Cooling segment’s year over year increase in profits.

~~Service Experts~~

~~The following table details our Service Experts segment’s year-to-date net sales and profit for 2007 and 2006 (dollars in millions):~~

Year-to-Date
September 30,
2007 2006 Difference % Change
Net sales $ 512.0 $ 492.8 $ 19.2 3.9 %
Profit 18.4 10.2 8.2 80.4
% of net sales 3.6 % 2.1 %

Year-to-date net sales in our Service Experts segment increased $19.2 million, or 3.9%, to $512.0 million in 2007 from $492.8 million in 2006. The increase in net sales primarily relates to favorable changes in the mix of our sales and services. Residential sales in our Canadian operations increased in 2007 as compared to 2006 in both residential service and replacement and residential new construction due to favorable market conditions. Additionally, 2007 year-to-date net sales increased in our U.S. operations. As a percentage of total sales, U.S. residential service and replacement sales increased year over year, offsetting a decrease in sales caused by the decline in residential new construction sales.

Year-to-date segment profit in Service Experts increased $8.2 million to $18.4 million in 2007 from $10.2 million in 2006. As a percentage of net sales, segment profit increased from 2.1% for 2006 to 3.6% for 2007. The improvement in our margins was primarily caused by a favorable change in sales and service mix as a larger percentage of our sales came from higher margin service and replacement business in 2007 as compared to 2006 coupled with an increase in sales volumes. We incurred higher commissions expense ~~in 2007 related to the increase in residential service and replacement sales.~~

~~Refrigeration~~

~~The following table details our Refrigeration segment’s year-to-date net sales and profit for 2007 and 2006 (dollars in millions):~~

Year-to-Date
September 30,
2007 2006 Difference % Change
Net sales $ 450.1 $ 394.6 $ 55.5 14.1 %
Profit 46.6 40.2 6.4 15.9
% of net sales 10.4 % 10.2 %

Year-to-date net sales in our Refrigeration segment increased $55.5 million, or 14.1%, to $450.1 million in 2007 from $394.6 million in 2006. The Refrigeration segment’s sales increase was primarily due to an increase in volumes in Europe, Australia, and Brazil. Favorable market conditions in Europe and Australia and an increase in exports in South America improved our foreign operations’ unit volumes. Additionally, increased prices resulting from an increase in commodity and component costs contributed to higher sales. The favorable impact of the change in foreign currency exchange rates increased net sales by $23.3 million.

Year-to-date segment profit in our Refrigeration segment increased $6.4 million to $46.6 million in 2007 from $40.2 million in 2006. Segment profit margins increased to 10.4% for 2007 from 10.2% for 2006. Increases in sales volumes increased segment profit. However, a change in the product mix and geographic mix of our sales generated more sales of products with lower margins during the first half of the year. Additionally, higher commodity and component costs that were not fully offset by price increases lowered profit margins. Lower expenses from cost reduction initiatives were offset by costs associated with expanding our international operations, including our strategic growth initiatives in Asia.

~~Corporate and Other~~

~~Corporate and other’s year-to-date costs decreased from $66.5 million in 2006 to $64.2 million in 2007. The decrease primarily resulted from a~~ reduction in compliance activities, stock-based compensation and professional fees ~~partially offset by a one-time executive retirement pension settlement charge.~~and overall tight budgetary controls.

Liquidity and Capital Resources

Our working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit and a revolving period asset securitization arrangement. Working capital needs are generally greater in the first and second quarter due to the seasonal nature of our business cycle.

As of ~~September 30, 2007,~~March 31, 2008, our debt-to-total-capital ratio was ~~15.6%~~38%, up from ~~12.7%~~15% as of ~~September 30, 2006,~~March 31, 2007, primarily due to an ~~incremental $40.6~~increase of $257 million ofin our outstanding debt ~~in 2007.~~balances as well a reduced stockholders’ equity balance due to share repurchases. Higher debt was primarily due to an increase in borrowings to fund the repurchase of approximately ~~5.4~~11.5 million shares of our common stock for ~~$179.8~~$405.0 million since ~~September 30, 2006~~March 31, 2007 under ~~the 2005 Share Repurchase Plan~~our former and ~~the 2007 Share Repurchase Plan.~~current share repurchase plans.

The following table summarizes our ~~year-to-date~~ cash activity for ~~2007~~the three months ended March 31, 2008 and ~~2006~~2007 (in millions):

Year-to-Date
September 30,
2007 2006
Net cash provided by operating activities $ 110.5 $ 84.8
Net cash used in investing activities (69.0 ) (54.4 )
Net cash used in financing activities (101.4 ) (137.1 )


	Three Months Ended
	March 31,
	2008			2007
Net cash used in operating activities	$	(32.9	)	$	(75.1	)
Net cash used in investing activities		(16.0	)		(9.8	)
Net cash provided by financing activities		24.8			33.1

Net Cash ~~Provided by~~Used in Operating Activities

~~Year-to-date~~During the first three months of 2008, cash ~~provided by~~used in operating activities ~~in 2007~~ was ~~$110.5~~$32.9 million compared to ~~$84.8~~$75.1 million in ~~2006. The primary reason for the increase~~2007. Our cash used in ~~cash provided by~~ operating activities ~~was~~is lower primarily due to a ~~change~~smaller use of cash from changes in inventory ~~from an increase of $45.1 million in 2007 compared to an increase of $96.9 million in 2006. Inventory increased~~and income taxes payable in the first ~~nine~~quarter of 2008 versus the prior year. Seasonal increases in inventory typically result in a use of cash in the first quarter of the year. However, the seasonal growth in inventory of $54.7 million for the first three months of 2008 was down when compared to the $93.2 million of growth in the same period in 2007 due to our adjustment to the preseason cooling equipment build to reflect the continued declines in the residential markets. Changes in income taxes payable resulted in a smaller use of cash in 2008 as compared to 2007 due to a ~~normal seasonal increase. However, inventory increased more~~larger payment of taxes in the first ~~nine months~~quarter of ~~2006~~2007 versus the first quarter of 2008. These changes were partially offset by a smaller increase in accounts payable of $34.4 million during the first quarter of 2008 as compared to $59.9 million in the same period in 2007, primarily due to ~~(i) a planned increase in finished goods to manage through the Allied Air Enterprises Consolidation, (ii) increased costs of 13 SEER units~~lower production during the ~~2006 transition, and (iii) increasing commodity costs impacting raw material~~quarter to better align inventory costs during the first nine months of 2006. The impact of the inventory improvement was partially offset by an increase in accounts receivable of $111.3 million in 2007 compared to $93.3 million in 2006. The increase in accounts receivable was primarily due to increasedgrowth with sales ~~in the third quarter as well as geographic and customer mix. Our third quarter sales were modestly higher in 2007 as compared to 2006.~~expectations.

~~2006.~~ the same period in 2007. Capital expenditures of ~~$44.5~~$9.5 million and ~~$49.8~~$9.9 million in ~~2007~~2008 and ~~2006,~~2007, respectively, were primarily for purchases of production equipment in the manufacturing plants in our Residential Heating & Cooling and Commercial Heating & Cooling segments. ~~We made net short-term investments in debt securities of $25.0 million in 2007.~~

Net Cash ~~Used in~~Provided by Financing Activities

~~Year-to-date~~During the first three months of 2008, net cash ~~used in~~provided by financing activities was ~~$101.4~~$24.8 million ~~in 2007~~ compared to ~~$137.1~~$33.1 million used in ~~2006.~~2007. We paid a total of ~~$35.0~~$8.7 million in dividends on our common stock in the ~~first nine~~three months ~~of 2007 compared to $31.2 million during~~ended March 31, 2008, which is unchanged from the same period in 2006. The increase in cash dividends paid was attributable to an increase in the quarterly cash dividend from $0.11 to $0.13 per share of common stock, effective as of the dividend paid on January 12, 2007. ~~Year-to-date net~~Net short-term and revolving long-term borrowings totaled approximately ~~$51.3~~$193.5 million in ~~2007~~the first three months of 2008 as compared to ~~$(0.7)~~$35.3 million for the same period in ~~2006.~~2007. During the ~~first nine~~three months ~~of 2007,~~ended March 31, 2008, we used approximately ~~$150.5~~$183.1 million to repurchase ~~4,284,100~~4,730,762 shares of our common ~~stock. Such repurchases were made primarily~~stock under our share repurchase plan and 290,577 shares of our common stock to satisfy tax withholding obligations in connection with the ~~2005 Stock Repurchase Plan~~exercise of stock appreciation rights and the ~~2007 Stock Repurchase Plan.~~distribution of shares of our common stock pursuant to vested performance share units.

The following ~~table summarizes~~tables summarize our outstanding debt obligations ~~as of September 30, 2007~~ and the classification in the accompanying Consolidated Balance ~~Sheet~~Sheets as of March 31, 2008 and December 31, 2007 (in millions):


	Short-		Current		Long-Term				Short-Term		Current		Long-Term
Description of Obligation	Term Debt		Maturities		Maturities		Total
Description of Obligation as of March 31, 2008									Debt		Maturities		Maturities		Total
Domestic promissory notes(1)	$	—	$	61.1	$	46.1	$	107.2	$	—	$	36.1	$	35.0	$	71.1
Domestic revolving credit facility		—		—		48.5		48.5		—		—		324.0		324.0
Other foreign obligations		3.8		0.2		0.8		4.8		5.5		0.3		0.7		6.5

Total Debt	$	3.8	$	61.3	$	95.4	$	160.5	$	5.5	$	36.4	$	359.7	$	401.6

As of September 30, 2007, we had a domestic revolving credit facility with a borrowing capacity of $400.0 million, of which $48.5 million was borrowed and outstanding and $92.1 million was committed to standby letters of credit. Of the remaining $259.4 million, the entire amount was available for future borrowings after consideration of covenant limitations. The facility matures in July 2010. The facility contains certain financial covenants and bears interest at a rate equal to, at our option, either (a) the greater of the bank’s prime rate or the federal funds rate plus 0.5% or (b) the London Interbank Offered Rate plus a margin equal to 0.475% to 1.20% depending upon the ratio of total funded debt-to-adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), as defined in the facility. We pay a facility fee, depending upon the ratio of total funded debt to Adjusted EBITDA, equal to 0.15% to 0.30% of the capacity. The facility includes restrictive covenants that limit our ability to incur additional indebtedness, encumber our assets, sell our assets and make certain payments, including amounts for share repurchases and dividends.

~~8, 2005, among us, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, and the lenders named therein.~~

The ~~Credit Agreement provides for an unsecured $650 million revolving credit facility that matures on October 12, 2012. The~~domestic revolving credit facility includes a subfacility for swingline loans of up to $50 million and provides for the issuance of letters of credit for the full amount of the credit facility. The revolving loans bear interest at either (i) the Eurodollar rate plus a margin of between 0.5% and 1% that is based on ~~the Company’s~~our Debt to Adjusted EBITDA Ratio (as defined in the Credit Agreement) or (ii) the higher of (a) the Federal Funds Rate plus 0.5% ~~and~~or (b) the prime rate set by Bank of America, N.A. We may prepay the revolving loans at any time without premium or penalty, other than customary breakage costs in the case of Eurodollar loans.

We will pay a facility fee in the range of 0.125% to 0.25% based on our Debt to Adjusted EBITDA Ratio. We will also pay a letter of credit fee in the range of 0.5% to 1% based on our Debt to Adjusted EBITDA ~~Ratio.~~Ratio, as well as an additional issuance fee of 0.125% for letters of credit issued.

The Credit Agreement contains customary events of default. If any event of default occurs and is continuing, lenders with a majority of the aggregate commitments may require the ~~Administrative Agent~~administrative agent to terminate our right to borrow under the Credit Agreement and accelerate amounts due under the Credit Agreement (except for a bankruptcy event of default, in which case such amounts will automatically become due and payable and the lenders’ commitments will automatically terminate).

~~Our obligations under~~In addition to the financial covenants contained in the Credit Agreement outlined above, our domestic promissory notes contain certain financial covenant restrictions. As of March 31, 2008, we believe we were in compliance with all covenant requirements. Our revolving credit facility and promissory notes are guaranteed by ~~certain~~our material subsidiaries.

We have additional borrowing capacity through several foreign facilities governed by agreements between us and a syndicate of banks, used primarily to finance seasonal borrowing needs of our ~~material domestic~~foreign subsidiaries. We had $6.5 million and $5.8 million of obligations outstanding through our foreign subsidiaries ~~including Lennox Industries Inc., Allied Air Enterprises Inc., Service Experts Inc.~~as of March 31, 2008 and ~~Lennox Global Ltd.~~December 31, 2007, respectively.

Under a revolving period asset securitization arrangement, we are eligible to transfer beneficial interests in a portion of our trade accounts receivable to third parties in exchange for cash. Our continued involvement in the transferred assets is limited to servicing. These transfers are accounted for as sales rather than secured borrowings. The fair values assigned to the retained and transferred interests are based primarily on the receivables’ carrying value given the short term to maturity and low credit risk. As of March 31, 2008 and December 31, 2007, we had not sold any beneficial interests in accounts receivable.

We consider all highly liquid temporary investments with original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents of $120.3 million and $145.5 million as of March 31, 2008 and December 31, 2007, respectively, consisted of cash, overnight repurchase agreements and investment grade securities and are stated at cost, which approximates fair value.

As of March 31, 2008 and December 31, 2007, $16.3 million and $20.2 million, respectively, of cash and cash equivalents were restricted primarily due to routine lockbox collections and letters of credit issued with respect to the operations of our captive insurance subsidiary, which expire on December 31, 2008. The restrictions related to lockbox collections typically expire within three to five business days after receipt. The letter of credit restrictions can be transferred to our revolving lines of credit as needed.

On July 25, 2007, we announced that our Board of Directors approved a new share repurchase plan, ~~for $500 million,~~ pursuant to which we ~~plan~~are authorized to repurchase up to $500 million of shares of our common stock through open market ~~purchases.~~purchases (the “2007 Share Repurchase Plan”). Based on the closing price of our common stock on July 24, 2007, a $500 million repurchase ~~would represent~~represented over 20% of our market capitalization. We are currently ~~intend to fund~~funding the stock repurchases through a combination of cash from operations and third party ~~borrowings and~~borrowings. We plan to fully execute repurchases under the ~~repurchase~~2007 Share Repurchase Plan by the end of the ~~third~~second quarter of 2008. ~~The 2007 Share Repurchase Plan terminates and replaces the 2005 Share Repurchase Plan.~~

We periodically review our capital structure, including our primary bank facility, to ensure that it has adequate liquidity. We believe that cash flows from operations, as well as available borrowings under our ~~amended~~ revolving credit facility and other existing sources of funding, will be sufficient to fund our operations for the foreseeable future and ~~the~~ share repurchases during the term of the ~~new share repurchase plan.~~ 2007 Share Repurchase Plan.

Fair Value Measurements

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157,Fair Value Measurements (“SFAS No. 157”), which establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2,Effective Date of FASB Statement No.157 (“FSP No. 157-2”), which deferred the effective date of SFAS No. 157 for one year for non-financial assets and liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the impact of SFAS No. 157 on our Consolidated Financial Statements for items within the scope of FSP No. 157-2, which will become effective on January 1, 2009.

Fair Value Hierarchy

The three-level fair value hierarchy for disclosure of fair value measurements defined by SFAS No. 157 is as follows:


Level 1 -		Quoted prices foridenticalinstruments in active markets at the measurement date.
Level 2 -		Quoted prices forsimilarinstruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.
Level 3 -		Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers areunobservableinputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Fair Value Techniques

Our valuation techniques are applied to all of the assets and liabilities carried at fair value as of January 1, 2008, upon adoption of SFAS No. 157. Where available, the fair values are based upon quoted prices in active markets. However, if quoted prices are not available, then the fair values are based upon quoted prices for similar assets or liabilities or independently sourced market parameters, such as credit default swap spreads, yields curves, reported trades, broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities with a lack of observable market activity, if any, the fair values are based upon discounted cash flow methodologies incorporating assumptions that, in our judgment, reflect the assumptions a marketplace participant would use. To ensure that financial assets and liabilities are recorded at fair value, valuation adjustments may be required to reflect the creditworthiness of either party and constraints on liquidity. Where appropriate, these amounts were incorporated into our valuations as of March 31, 2008, the measurement date.

Our adoption of SFAS No. 157 has resulted in changes to the valuation techniques used when determining the fair value of our derivative instruments. These derivatives are primarily valued using estimated future cash flows that are based directly on observed prices from exchange-traded derivatives. We also take into account the counterparty’s creditworthiness, or our own creditworthiness, as appropriate. The calculation of the credit adjustment for derivatives is based upon observable credit default swap spreads and interpolation between these observable spreads for interim periods without observable spreads; however, these inputs are insignificant to the fair value measurement. The effect of adopting these changes to the valuation techniques resulted in a net credit adjustment to the fair value of our derivative instruments of $0.1 million as of March 31, 2008, the measurement date.

The majority of our short-term investments are managed by professional investment advisors. The net asset values are furnished in statements received from the investment advisor and reflect valuations based upon the respective pricing policies utilized by the investment advisor. We have assessed the classification of the inputs used to value these investments as Level 2 through examination of pricing policies and significant inputs and through discussions with investment managers. The fair values of our short-term investments are based on several observable inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads and benchmark securities. The adoption of SFAS No. 157 resulted in no net changes to the valuations for these securities.

Off-Balance Sheet Arrangements

In addition to the revolving and term loans described above, we utilize the following financing arrangements in the course of funding our operations:

	•		~~Trade~~We are eligible to transfer beneficial interests in a portion of our trade accounts receivable ~~are sold on a non-recourse basis~~ to third ~~parties. The~~parties in exchange for cash through the use of a revolving period asset securitization arrangement. Our continued involvement in the transferred assets is limited to servicing. These transfers are accounted for as sales rather than secured borrowings and are reported as a reduction of Accounts and Notes Receivable, Net in the Consolidated Balance Sheets. As of ~~September 30, 2007~~March 31, 2008 and December 31, ~~2006,~~2007, respectively, we had not sold any of such accounts receivable. ~~If receivables are sold, the related discount from face value is included in Selling, General and Administrative Expense in the Consolidated Statements of Operations.~~

	•		We also lease real estate and machinery and equipment pursuant to leases that, in accordance with ~~Generally Accepted Accounting Principles,~~generally accepted accounting principles, are not capitalized on the balance sheet, including high-turnover equipment such as ~~automobiles~~autos and service vehicles and short-lived equipment such as personal computers.

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk.~~


Item 3.		Quantitative and Qualitative Disclosures About Market Risk.

Our results of operations can be affected by changes in exchange rates. Net sales and expenses in foreign currencies are translated into ~~United States~~U.S. dollars for financial reporting purposes based on the average

exchange rate for the period. Net sales from outside the United States represented ~~26.4%~~30.3% and ~~22.6% and 25.6% and 21.4%~~25.5% of total net sales for the ~~third quarter~~three months ended March 31, 2008 and ~~year-to-date through September 30,~~ 2007, ~~and 2006,~~ respectively. Historically, foreign currency ~~transaction~~translation gains (losses) have not had a material effect on our overall operations. ~~The~~As of March 31, 2008, the impact to net income of a 10% change in exchange rates ~~on income from operations~~ is estimated to be approximately ~~$6.4~~$7.6 million on an annual basis.

We enter into commodity futures contracts to stabilize prices expected to be paid for raw materials and parts containing high copper and aluminum content. These contracts are for quantities equal to or less than quantities expected to be consumed in future production. As of ~~September 30, 2007,~~March 31, 2008, we had metal futures contracts maturing at various dates through ~~February~~June 2009 with a fair value as an asset of ~~$11.3~~$14.3 million. The impact of a 10% change in commodity prices would have a significant impact on our results from operations on an annual basis, absent any other contravening actions.

Our results of operations can be affected by changes in interest rates due to variable rates of interest on our revolving credit facilities. A 10% change in interest rates would not be material to our results of operations.

~~Item 4. Controls and Procedures.~~


Item 4.		Controls and Procedures.

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our current management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of ~~September 30, 2007~~March 31, 2008 in alerting them in a timely manner to material information required to be disclosed by us in the reports we ~~filed~~file or ~~submitted~~submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934.

Changes in Internal Control Over Financial Reporting

During the quarter ended ~~September 30, 2007,~~March 31, 2008, there were no changes in our internal ~~controls~~control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal ~~controls~~control over financial reporting.

PART II — OTHER INFORMATION

~~Item 1. Legal Proceedings~~


Item 1.		Legal Proceedings.

There have been no significant changes concerning our legal proceedings since ~~June 30,~~December 31, 2007.

See Note 1617 in the Notes to the Consolidated Financial Statements set forth in Part I, Item 1, of this Quarterly Report on Form 10-Q for additional discussion regarding ~~our~~ legal proceedings.

~~Item 1A. Risk Factors.~~


Item 1A.		Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2006,~~2007, which could materially affect our business, financial condition or results of operations. There have been no material changes in our risk factors from those disclosed in our ~~2006~~2007 Annual Report on Form 10-K.

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

~~ISSUER PURCHASES OF EQUITY SECURITIES (1)~~

Approximate
Total Number of Dollar Value of
Shares Purchased Shares that may
Total Number Average Price Paid as Part of Publicly yet be Purchased
of Shares per Share Announced Plans Under the Plans or
Period Purchased (2) (including fees) (2) or Programs (1) Programs (1)
July 1 through July 31 12,385 $ 34.49 — $ 500,000,000

August 1 through August 31 2,254,753 $ 34.46 2,252,400 $ 422,396,682

September 1 through September 30 777,901 $ 34.41 773,700 $ 395,780,523

3,045,039 $ 34.44 3,026,100
��

AOC Restructuring (3) 2,695,770

Total 5,740,809


~~(1)~~Item 2.		~~On July 25, 2007, we announced that our Board~~Unregistered Sales of ~~Directors approved a new share repurchase plan for $500 million, pursuant to which we plan to repurchase shares~~Equity Securities and Use of our common stock, par value $.01 per share, through open market-purchases (the “2007 Share Repurchase Plan”). The 2007 Share Repurchase Plan terminates and replaces the share repurchase plan approved by our Board of Directors in September 2005 (the “2005 Share Repurchase Plan”). In addition, on August 3, 2007, we entered into a written trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “10b5-1 Plan”), to facilitate share repurchases under the 2007 Share Repurchase Plan. The 10b5-1 Plan became effective on September 4, 2007 and will terminate on February 8, 2008. Prior to July 25, 2007, we had repurchased 7,615,041 shares of common stock under the 2005 Share Repurchase Plan.

~~(2)~~		In addition to purchases under the 2005 Share Repurchase Plan and 2007 Share Repurchase Plan, this column reflects the surrender to us of 18,939 shares of common stock to satisfy tax withholding obligations in connection with the exercise of stock appreciation rights.

~~(3)~~		We acquired 2,695,770 shares of our common stock owned by members of A.O.C. Corporation in exchange for 2,239,563 newly issued common shares. The transaction reduced the number of outstanding shares ofProceeds.


Item 6.		~~our common stock by 456,207 shares at minimal cost to us. For more information see Note 19 in the Notes to our Consolidated Financial Statements.~~Exhibits.

~~Item 5. Other Information.~~

To streamline our management structure, we have made the decision to eliminate the position of Executive Vice President, IT and Business Development, currently held by Linda A. Goodspeed. Accordingly, on October 26, 2007, we informed Ms. Goodspeed that we will not renew her existing employment agreement which presently expires on December 31, 2007. We do not expect any charges related to her existing employment agreement to be material to our financial statements.

~~Item 6. Exhibits~~


3.1	—	Restated Certificate of Incorporation of ~~the~~ Lennox International Inc. (“LII”) (filed as Exhibit 3.1 to LII’s Registration Statement on Form S-1 (Registration Statement No. 333-75725) filed on April 6, 1999 and incorporated herein by reference).

3.2	—	Amended and Restated Bylaws of LII (filed as Exhibit 3.1 to LII’s Current Report on Form 8-K filed on July ~~25,~~26, 2007 and incorporated herein by reference).

4.1	—	Specimen Stock Certificate for the Common Stock, par value $.01 per share, of LII (filed as Exhibit 4.1 to LII’s Amendment to Registration Statement on Form S-1/A (Registration No. 333-75725) filed on June 16, 1999 and incorporated herein by reference).

4.2	—	Rights Agreement, dated as of July 27, 2000, between LII and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes as Exhibit A the form of Certificate of Designations of Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Stock (filed as Exhibit 4.1 to LII’s Current Report on Form 8-K filed on July 28, 2000 and incorporated herein by reference).

		LII is a party to several debt instruments under which the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of LII and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, LII agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request.

31.1	—	Certification of the principal executive officer (filed herewith).

31.2	—	Certification of the principal financial officer (filed herewith).

32.1	—	Certification of the principal executive officer and the principal financial officer ~~of the Company~~ pursuant to 18 U.S.C. Section 1350 (filed herewith).

EXHIBIT INDEX


Exhibit No.		Description

3.1	—	Restated Certificate of Incorporation of Lennox International Inc. (“LII”) (filed as Exhibit 3.1 to LII’s Registration Statement on Form S-1 (Registration Statement No. 333-75725) filed on April 6, 1999 and incorporated herein by reference).

3.2	—	Amended and Restated Bylaws of LII (filed as Exhibit 3.1 to LII’s Current Report on Form 8-K filed on July 26, 2007 and incorporated herein by reference).

4.1	—	Specimen Stock Certificate for the Common Stock, par value $.01 per share, of LII (filed as Exhibit 4.1 to LII’s Amendment to Registration Statement on Form S-1/A (Registration No. 333-75725) filed on June 16, 1999 and incorporated herein by reference).

4.2	—	Rights Agreement, dated as of July 27, 2000, between LII and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes as Exhibit A the form of Certificate of Designations of Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Stock (filed as Exhibit 4.1 to LII’s Current Report on Form 8-K filed on July 28, 2000 and incorporated herein by reference).

		LII is a party to several debt instruments under which the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of LII and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, LII agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request.

31.1	—	Certification of the principal executive officer (filed herewith).

31.2	—	Certification of the principal financial officer (filed herewith).

32.1	—	Certification of the principal executive officer and the principal financial officer pursuant to 18 U.S.C. Section 1350 (filed herewith).


				Page
~~Part I. Financial Information~~
~~Item 1.~~ Part I.	Financial ~~Statements~~Information

	Item 1.		Financial Statements

			Consolidated Balance Sheets ~~– September 30, 2007~~— March 31, 2008 (Unaudited) and December 31, ~~2006~~2007		3

			Consolidated Statements of Operations (Unaudited) –— Three Months Ended March 31, 2008 and ~~Nine Months Ended September 30,~~ 2007 ~~and 2006~~		4

			Consolidated Statements of Stockholders’ Equity ~~– Nine~~— Three Months Ended ~~September 30, 2007~~March 31, 2008 (Unaudited) and Year Ended December 31, ~~2006~~2007		5

			Consolidated Statements of Cash Flows (Unaudited) ~~– Nine~~— Three Months Ended ~~September 30,~~March 31, 2008 and 2007 ~~and 2006~~		6

			Notes to Consolidated Financial Statements (Unaudited)		7

	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		2021

	Item 3.		Quantitative and Qualitative Disclosures About Market Risk		30

	Item 4.		Controls and Procedures		30

Part II.	Other Information

	Item 1.		Legal Proceedings		31
~~Item 4. Controls and Procedures~~		32
~~Part II. Other Information~~
	Item ~~1. Legal Proceedings~~1A.		Risk Factors		3331
~~Item 1A. Risk Factors~~		33
	Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		3331
~~Item 5. Other Items~~		34
~~Item 6. Exhibits~~		34
	Item 6.		Exhibits		31

~~Certification of the Principal Executive Officer~~Exhibit 31.1
~~Certification of the Principal Financial Officer~~Exhibit 31.2
~~Certification Pursuant to 18 U.S.C. Section 1350~~Exhibit 32.1


	Balance at				Balance at
Segment	December 31, 2006		Changes⁽¹⁾		September 30, 2007
Residential Heating & Cooling	$	33.9	$	—	$	33.9
Commercial Heating & Cooling		30.1		1.5		31.6
Service Experts		97.9		14.5		112.4
Refrigeration		77.9		6.6		84.5

Total	$	239.8	$	22.6	$	262.4


	Balance at					Balance at
Segment	December 31, 2007		Changes⁽¹⁾			March 31, 2008
Residential Heating & Cooling	$	33.7	$	—		$	33.7
Commercial Heating & Cooling		32.1		1.7			33.8
Service Experts		112.5		(2.7	)		109.8
Refrigeration		84.5		2.7			87.2

Total	$	262.8	$	1.7		$	264.5


(1)		Domestic promissory notes as of March 31, 2008 and December 31, 2007 consisted of the following (in millions):


Total product warranty liability at December 31, 2006	$	104.7
Payments made in 2007, net of recoveries		(23.3	)
Changes resulting from issuance of new warranties		23.7
Changes in estimates associated with pre-existing warranties		10.8

Total product warranty liability at September 30, 2007	$	115.9


	For the												For the
	Three Months Ended September 30,												Three Months Ended March 31,
	2007			2006			2007			2006			2008			2007			2008			2007
	Pension Benefits						Other Benefits						Pension Benefits						Other Benefits
Service cost	$	1.7		$	1.8		$	0.2		$	0.4		$	1.8		$	1.8		$	0.2		$	0.2
Interest cost		3.7			3.9			0.2			0.3			4.1			3.7			0.2			0.2
Expected return on plan assets		(4.2	)		(4.2	)		—			—			(4.5	)		(4.4	)		—			—
Amortization of prior service cost		0.2			0.2			(0.4	)		(0.1	)		0.1			0.2			(0.5	)		(0.4	)
Amortization of net loss		1.1			1.5			0.2			0.2			1.2			1.2			0.3			0.2
Settlements or curtailments		3.9			—			—			—
Settlements and curtailments														—			0.7			—			—

Total net periodic pension cost	$	6.4		$	3.2		$	0.2		$	0.8
Total net periodic benefit cost													$	2.7		$	3.2		$	0.2		$	0.2


	For the
	Nine Months Ended September 30,
	2007			2006			2007			2006
	Pension Benefits						Other Benefits
Service cost	$	5.3		$	5.5		$	0.5		$	1.0
Interest cost		11.2			11.5			0.6			1.1
Expected return on plan assets		(13.0	)		(12.4	)		—			—
Amortization of prior service cost		0.7			0.8			(1.3	)		(0.4	)
Amortization of net loss		3.5			4.6			0.8			0.6
Settlements or curtailments		4.6			1.9			—			—

Total net periodic pension cost	$	12.3		$	11.9		$	0.6		$	2.3


	Performance			Restricted			Performance			Restricted
	Shares			Stock Awards			Share Units			Stock Units
Nonvested shares		1.1			0.9
Weighted-average grant date fair value per share	$	22.32		$	26.15
Nonvested units								0.8			0.7
Weighted-average grant date fair value per unit							$	27.16		$	31.78
Unrecognized expense	$	13.0		$	8.1		$	13.8		$	11.2
Expected weighted-average period to be recognized (in years)		1.9			1.9			2.1			2.2
Weighted-average estimated forfeiture rate		20	%		12	%		29	%		16	%


	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2007		2006		2007			2006
Consolidation of Hearth Products operations	$	2.4	$	—	$	2.4		$	—
Reorganization of corporate administrative function		1.1		—		7.7			—
Facility lease		—		1.2		0.3			1.2
Allied Air Enterprises consolidation		0.3		3.3		3.2			12.7
Pension settlement⁽¹⁾		—		—		0.7			—
Gain on sale of land		—		—		—			(0.8	)
Other		0.5		—		(0.1	)		—

Total	$	4.3	$	4.5	$	14.2		$	13.1


	Year-to-Date
	September 30,
	2007			2006			Difference			% Change
Net sales	$	1,315.5		$	1,464.2		$	(148.7	)		(10.2	)%
Profit		143.2			168.7			(25.5	)		(15.1	)
% of net sales		10.9	%		11.5	%


							Approximate
					Total Number of		Dollar Value of
					Shares Purchased		Shares that may
	Total Number		Average Price Paid		as Part of Publicly		yet be Purchased
	of Shares		per Share		Announced Plans		Under the Plans or
Period	Purchased (2)		(including fees) (2)		or Programs (1)		Programs (1)
July 1 through July 31		12,385	$	34.49		—	$	500,000,000

August 1 through August 31		2,254,753	$	34.46		2,252,400	$	422,396,682

September 1 through September 30		777,901	$	34.41		773,700	$	395,780,523


		3,045,039	$	34.44		3,026,100
		��

AOC Restructuring (3)		2,695,770


Total		5,740,809


	LENNOX INTERNATIONAL INC.
Date: ~~October 31, 2007~~May 1, 2008	/s/ Susan K. Carter
	Susan K. Carter
	Chief Financial Officer (on behalf of registrant and as principal financial officer)