UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

              For the thirteen week period ended November 28, 1998

                                       OR

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

              For the transition period from _________ to _________

                       Commission File Number 333-44969-01

                            DESA HOLDINGS CORPORATION
             (Exact name of registrant as specified in its charter)


            Delaware                                   22-2940760  
(State or other jurisdiction of              (IRS Employer Identification No.)
  incorporation or organization) 

                 2701 Industrial Drive, Bowling Green, KY 42101
               (Address of principal executive offices) (Zip Code)

                                 (502) 781-9600
              (Registrant's telephone number, including area code)

Indicate by check 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. Yes [ X ] No [ ]

As of January  4, 1999,  there were  15,548,692  shares of  Registrant's  Common
Stock, $.01 par value per share, and 90,604 shares of the Registrant's Nonvoting
Common Stock, $.01 par value per share, outstanding.


<PAGE>
<TABLE>
<CAPTION>
                            DESA HOLDINGS CORPORATION

                                    FORM 10-Q

                                November 28, 1998

                                      INDEX

                                                                                     Page

<S>      <C>                                                                        <C>
PART I    Financial Information

Item 1.   Consolidated Financial Statements (Unaudited)

          Consolidated Balance Sheets - November 28, 1998 and February 28,            3
          1998

          Consolidated Statements of Income - Thirteen Weeks and Thirty-nine          4
          Weeks ended November 28, 1998 and November 29, 1997

          Consolidated Statements of Stockholders' Equity (Deficit)                   5

          Consolidated Statements of Cash Flows - Thirty-nine Weeks ended             6
          November 28, 1998 and November 29, 1997

          Notes to Consolidated Financial Statements                                   7

Item 2.   Management's Discussion and Analysis of Financial Condition and             16
          Results of Operations

PART II   Other Information

Item 6.   Exhibits and Reports on Form 8-K                                            23
          Signatures                                                                  24

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                           DESA Holdings Corporation

                                          Consolidated Balance Sheets
                                    (in thousands, except number of shares)
                                                                                   November 28   February 28
                                                                                       1998          1998
                                                                                   --------------------------
                                                                                    (unaudited)
<S>                                                                                <C>          <C>
Assets
Current assets:

     Cash and cash equivalents                                                      $     582    $     794
     Accounts receivable, net                                                          80,961       20,838
     Inventories:
        Raw materials                                                                   1,036        1,257
        Work-in-process                                                                 8,549        8,908
        Finished goods                                                                 42,350       30,191
                                                                                    ----------------------
                                                                                       51,935       40,356
     Deferred tax assets                                                                4,156        3,730
     Other current assets                                                               2,127        1,440
                                                                                    ----------------------
Total current assets                                                                  139,761       67,158

Property, plant and equipment:
     Land                                                                                 390          390
     Buildings and improvements                                                         5,339        5,241
     Machinery and equipment                                                           34,473       29,891
     Furniture and fixtures                                                               781          630
                                                                                    ----------------------
                                                                                       40,983       36,152
     Less accumulated depreciation                                                     25,535       22,593
                                                                                    ----------------------
                                                                                       15,448       13,559
Goodwill, net                                                                          82,999       63,430
Other assets                                                                           26,162       11,489
                                                                                    ----------------------
Total assets                                                                        $ 264,370    $ 155,636
                                                                                    ======================
Liabilities and stockholders' deficit Current liabilities:
     Accounts payable                                                               $  40,536    $  15,035
     Accrued interest                                                                   6,739        5,725
     Other accrued liabilities                                                         15,994       14,004
     Income taxes payable                                                               2,808           49
     Current portion of long-term debt                                                 39,437        5,250
                                                                                    ----------------------
Total current liabilities                                                             105,514       40,063

Long-term debt                                                                        287,910      261,105
Deferred tax liabilities                                                                1,962        1,781
Other liabilities                                                                         579          433
                                                                                    ----------------------
Total liabilities                                                                     395,965      303,382

Commitments

Series C redeemable preferred stock, $.01 par value; authorized--
     40,000 shares; issued and outstanding-- 17,600 shares at February 28, 1998  
     and 18,850 shares at November 28, 1998                                            16,002       14,661

Stockholders' deficit:
     Common stock, $.01 par value; authorized--50,000,000 shares; issued and
     outstanding-- 13,688,015 shares February 28, 1998 and 15,548,692 155                 137
     shares at November 28, 1998

     Nonvoting  common stock,  $.01 par value; authorized--2,000,000 shares;
     issued and outstanding-- 90,604 shares at February 28, 1998  
     and November 28, 1998                                                                  1            1

     Capital in excess of par value                                                    97,984       85,926
     Carryover predecessor basis adjustment                                           (32,309)     (32,309)
     Accumulated deficit                                                             (212,458)    (215,598)
     Cumulative other comprehensive loss                                                 (970)        (564)
                                                                                    ----------------------
Total stockholders' deficit                                                          (147,597)    (162,407)
                                                                                    ----------------------
Total liabilities and stockholders' deficit                                         $ 264,370    $ 155,636
                                                                                    ======================
See accompanying notes

</TABLE>
                                                         3
<PAGE>
<TABLE>
<CAPTION>
                                             DESA Holdings Corporation

                                         Consolidated Statements of Income
                                                   (in thousands)

                                                    (Unaudited)



                                                          Thirteen Weeks Ended           Thirty-nine Weeks Ended

                                                      November 28    November 29       November 28    November 29
                                                         1998           1997              1998           1997
                                                      --------------------------       --------------------------

<S>                                                  <C>            <C>                <C>            <C>     
Net sales                                             $134,679       $103,015           $250,849       $193,404
Cost of sales                                           87,055         65,185            166,996        123,243
                                                      -----------------------           -----------------------
Gross profit                                            47,624         37,830             83,853         70,161
                                                                                                      
Operating costs and expenses:                                                                         
     Selling                                            19,570         13,277             40,323         27,165
     General and administrative                          3,762          3,770              9,726          8,312
     Other                                               1,712            410              3,850          2,082
                                                      -----------------------           -----------------------
                                                        25,044         17,457             53,899         37,559
                                                      -----------------------           -----------------------
                                                                                                      
Operating Profit                                        22,580         20,373             29,954         32,602
                                                                                                      
Interest expense                                         7,559          4,159             20,796         11,321
                                                      -----------------------           -----------------------
Income before provision for income taxes                15,021         16,214              9,158         21,281
                                                                                                      
Provision for income taxes                               6,808          6,639              4,188          8,769
                                                      -----------------------           -----------------------
                                                                                                      
Income before extraordinary loss                         8,213          9,575              4,970         12,512
                                                                                                      
Extraordinary loss, net of income taxes of $1,495            0          2,308                  0          2,308
                                                      -----------------------           -----------------------
                                                                                                      
Net income                                               8,213          7,267              4,970         10,204
                                                                                                      
Less dividends on preferred stock                          564             17              1,642             17
                                                      -----------------------           -----------------------
Income available for common stockholders              $  7,649       $  7,250           $  3,328       $ 10,187
                                                      =======================           =======================
                                                                                          

See accompanying notes

</TABLE>

                                                         4
<PAGE>
<TABLE>
<CAPTION>
                                                      DESA Holdings Corporation
                                          Consolidated Statements of Stockholders' Deficit

                                                                                                      Cumulative
                                          Nonvoting    Capital in     Carryover                         Other           Total
                               Common       Common     Excess of      Predecssor     Accumulated    Comprehensive    Stockholders'
                                Stock       Stock      Par Value      Adjustment       Deficit           Loss           Deficit
                             -------------------------------------------------------------------------------------------------------

<S>                             <C>         <C>         <C>          <C>              <C>              <C>           <C>
Balance at
February 28, 1998                $137         $1         $85,926      ($32,309)        ($215,598)       ($564)        ($162,407)

Comprehensive income:

   Net Income                                                                              4,970                          4,970

   Foreign currency
     translation adjustment                                                                              (406)             (406)
                                                                                                                    -----------

Comprehensive income                                                                                                      4,564
                                                                                                                    -----------


Accretion of preferred stock                                                                (188)                          (188)

Dividends on preferred stock                                                              (1,642)                        (1,642)

Issuance of common stock           18                     12,058                                                         12,076
                             --------------------------------------------------------------------------------       -----------
Balance at
November 28, 1998                $155         $1         $97,984      ($32,309)        ($212,458)       ($970)        ($147,597)
                             ================================================================================       ===========

</TABLE>

See accompanying notes


                                                                  5
<PAGE>
<TABLE>
<CAPTION>
                                             DESA Holdings Corporation
                                       Consolidated Statements of Cash Flows
                                                   (in thousands)

                                                    (Unaudited)

                                                                                     Thirty-nine Weeks Ended

                                                                                    November 28   November 29
                                                                                        1998         1997
                                                                                    -------------------------
<S>                                                                                 <C>          <C>
Operating activities
Net income                                                                           $   4,970    $  10,204

Adjustments to reconcile net income to net cash used in operating activities:

     Depreciation                                                                        2,957        2,363
     Amortization                                                                        3,511        1,570
     Deferred income taxes                                                                 (15)          28
     Equity in undistributed earnings of joint venture                                    (117)        (124)
     Extraordinary loss                                                                      0        2,308
     Increase in operating assets, net of effects of acquisitions:
         Accounts receivable, net                                                      (58,457)     (52,520)
         Inventories                                                                    (7,674)     (11,386)
         Other current assets                                                             (570)        (599)
     Increase (decrease) in operating liabilities, net of effects of acquisitions:
         Accounts payable                                                               23,896        7,117
         Accrued interest                                                                1,074         (957)
         Other accrued liabilities                                                        (272)       2,564
         Income taxes payable                                                            2,759        3,834
         Other liabilities                                                                 146          105
                                                                                     ----------------------
Net cash used in operating activities                                                  (27,792)     (35,493)
                                                                                     ----------------------
Investing activities
Capital expenditures                                                                    (3,645)      (3,690)
Dividends received from joint venture                                                      123          124
Net cash paid for acquisition of businesses                                            (39,635)
Other                                                                                     (986)         270
                                                                                     ----------------------
Net cash used in investing activities                                                  (44,143)      (3,296)
                                                                                     ----------------------
Financing activities Recapitalization transactions:
     Proceeds from Working Capital Loan                                                      0       35,500
     Proceeds from Term Loans                                                                0      100,000
     Proceeds from issuance of Senior Subordinated Notes                                     0      130,000
     Proceeds from issuance of Series C Redeemable Preferred Stock                           0       14,598
     Proceeds from issuance of warrants                                                      0        3,002
     Proceeds from issuance of common stock                                                  0       73,815
     Exercise of options                                                                     0          150
     Repurchase of common stock                                                              0     (156,587)
     Repayment of Term Loans                                                                 0     (183,095)
     Payment of expenses                                                                     0      (16,772)
Increase in revolving loan                                                                   0       43,000
Increase (decrease) in Working Capital Loan                                             32,657       (2,645)
Proceeds from issuance of common stock                                                  12,076            0
Principal payments of Term Loans                                                        (1,725)      (6,855)
Payments for repurchase of common stock                                                      0          (30)
Exercise of stock options                                                                    0            5
Increase in Acquisition Loans                                                           30,000            0
Payment of debt financings costs in connection with debt issuance                       (1,193)           0
Payment of expenses related to issuance of preferred stock                                 (96)           0
                                                                                     ----------------------
Net cash provided by financing activities                                               71,719       34,086

Effect of exchange rates on cash                                                             4         (154)
                                                                                     ----------------------
Decrease in cash and cash equivalents for the period                                      (212)      (4,857)
Cash and cash equivalents at beginning of period                                           794        5,058
                                                                                     ----------------------
Cash and cash equivalents at end of period                                           $     582    $     201
                                                                                     ======================

See accompanying notes

</TABLE>
                                                         6

<PAGE>
                            DESA HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



1.       Basis of Presentation

         The interim consolidated financial statements for the periods presented
herein have not been audited by independent public  accountants.  In the opinion
of management of DESA Holdings  Corporation  (the  "Company"),  all  adjustments
(consisting only of normal recurring accruals)  considered  necessary to present
fairly the results of  operations  for the periods have been  included.  Interim
results are not necessarily  indicative of results for a full year. Sales of the
Company's  zone  heating  products  follow  seasonal  patterns  that  affect the
Company's results of operations.

         The unaudited  consolidated  financial statements have been prepared by
the Company in accordance  with  generally  accepted  accounting  principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation  S-X.  Certain  information and footnote  disclosures  normally
included in the  financial  statements  prepared in  accordance  with  generally
accepted  accounting  principles have been condensed or omitted pursuant to such
rules and regulations.

         The  consolidated  balance sheet presented as of February 28, 1998, has
been derived from the consolidated  financial  statements that have been audited
by the Company's independent auditors. The consolidated financial statements and
notes  thereto   included  herein  should  be  read  in  conjunction   with  the
consolidated  financial  statements and notes thereto  included in the Company's
Registration Statement on Form S-4 (SEC File No. 333-44969-01).

         Other than a small amount of goodwill and a $2.06 million note payable,
the  Company  has no  assets,  operations  or  cash  flows  independent  of DESA
International, Inc. ("Desa") and, accordingly, separate financial statements for
Desa  have  not  been  provided  as  management  believes  that  such  financial
statements are not material to an investor.


2.       Summary of Significant Accounting Policies

         Consolidation

         The accompanying consolidated financial statements include the accounts
of  the  Company  and  its  wholly-owned  subsidiary,   Desa,  and  all  of  its
wholly-owned  subsidiaries,  including  Desa  Industries of Canada,  Inc.,  Desa
Europe B.V.,  DESA  Industries of V.I.,  Inc.,  and Heath Company  Limited.  All
significant intercompany accounts and transactions have been eliminated.  Desa's
50% interest in a joint venture is accounted for using the equity method.


                                        7

<PAGE>

                            DESA HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



         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 reported
period. Actual results can differ from those estimates.

         Impact of Recently Issued Accounting Pronouncements

         In February  1998,  the  Financial  Accounting  Standards  Board issued
Statement of Financial  Accounting  Standards No. 132,  "Employers'  Disclosures
about  Pensions  and  Other  Postretirement  Benefits  ("FAS  132").  FAS 132 is
effective  for fiscal years  beginning  after  December  15,  1997,  and will be
adopted by the Company in  conjunction  with its 1999  year-end  reporting.  The
overall  objective of FAS 132 is to improve and  standardize  disclosures  about
pensions and other postretirement  benefits and to make the required information
easier to prepare and more  understandable.  Management does not anticipate that
FAS 132 will have a significant effect on the Company's  consolidated  financial
statements.

         In June 1998, the Financial Accounting Standards Board issued Statement
of  Financial   Accounting   Standards  No.  133,   "Accounting  for  Derivative
Instruments and Hedging  Activities"  ("FAS 133"). FAS 133 must first be applied
in the first  quarter of fiscal  years that begin after June 15,  1999.  FAS 133
will require the Company to recognize  all  derivatives  on the balance sheet at
fair  value.  Derivatives  that are not hedges  must be  adjusted  to fair value
through  income.  If the  derivative is a hedge,  depending on the nature of the
hedge,  changes in the fair value of  derivatives  will either be offset against
the change in fair value of the hedged assets,  liabilities or firm  commitments
through  earnings or recognized in other  comprehensive  income until the hedged
item is recognized in earnings.  The ineffective portion of a derivatives change
in fair value will immediately be recognized in earnings. Management has not yet
determined  what the  effect of FAS 133 will be on the  earnings  and  financial
position of the Company.

3.       Financing Arrangements

         The Company  entered  into a new credit  agreement on November 26, 1997
with   NationsBank,   N.A.,  UBS  Securities  LLC  and  Nationsbanc   Montgomery
Securities,  Inc.,  which was  amended in May 1998,  that  consists of a Working
Capital Loan  Commitment of up to $75,000,000  (which includes a Swing-Line Loan
Commitment of up to $5,000,000  and provides that the Company can use Letters of
Credit up to $10,000,000  under the Working Capital Loan  Commitment),  a Term A
Loan Commitment ("Term A Loan") of $50,000,000,  a Term B Loan Commitment ("Term
B Loan") of $50,000,000, an Acquisition Loan Commitment of up to $20,000,000 and
an Acquisition Loan Commitment B of up to $30,000,000 (collectively, the "Credit
Facility").

                                        8
<PAGE>

                            DESA HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


<TABLE>
<CAPTION>
         Outstanding borrowings consist of the following (in thousands):

                                                            November 28,   February 28,
                                                               1998            1998  
                                                            ------------   ------------       
<S>                                                         <C>             <C>     
9 7/8% Senior Subordinated Notes Due 2007 (A)                $130,000        $130,000
Term A Loan (B)                                                47,900          49,125
Term B Loan (C)                                                49,250          49,750
Working Capital Loan Commitment (D)                            48,137          15,480
Acquisition Loan (E)                                           20,000          20,000
Acquisition Loan B (F)                                         30,000            --
Note payable related to acquisition of Heath/Zenith (G)         2,060           2,000
                                                             --------        --------
Total outstanding borrowings                                 $327,347        $266,355
Less current portion of long-term debt                         39,437           5,250
                                                             --------        --------
                                                                            
Total long-term debt                                         $287,910        $261,105
                                                             ========        ========
                           
<FN>                               
(A)      The Senior  Subordinated  Notes are  payable on  December  15, 2007 and
         accrue  interest  at a rate of 9.875%  per annum.  Interest  is payable
         semi-annually  on June 15 and  December  15.  The  Senior  Notes can be
         redeemed  prior  to  the  mandatory  redemption  date  based  upon  the
         occurrence  of certain  events,  as defined.  Desa is the issuer of the
         Senior   Subordinated   Notes,  which  are  fully  and  unconditionally
         guaranteed by the Company.

(B)      The Term A Loan is payable in quarterly  installments  through November
         26,  2003,  and accrues  interest at the prime rate plus 1.50% or LIBOR
         plus  2.50% at the  option of the  Company.  Interest  is  payable on a
         quarterly basis under the prime rate option or at the end of each LIBOR
         period. Once repaid, the Term A Loan may not be reborrowed.

(C)      The Term B Loan is payable in quarterly  installments  through November
         26, 2004,  and accrues  interest at the prime rate plus 1.875% or LIBOR
         plus  2.875% at the  option of the  Company.  Interest  is payable on a
         quarterly basis under the prime rate option or at the end of each LIBOR
         period. Once repaid, the Term B Loan may not be reborrowed.

(D)      The  Working  Capital  Loan  Commitment  is  payable at any time at the
         option of the Company prior to November 26, 2003, and accrues  interest
         at the prime rate plus 1.50% or LIBOR plus 2.50%,  at the option of the
         Company.  Interest is payable on a quarterly basis under the prime rate
         option or at the end of each LIBOR  period.  As of November  28,  1998,
         letters of credit of  $2,614,371  were  outstanding  under the  Working
         Capital Loan Commitment.  Borrowings are generally  limited to specific
         percentages of eligible  trade  receivables  and inventory.  The Credit
         Facility  requires a Clean-Up  Period,  as  defined  under the  Working
         Capital Loan

                                        9
<PAGE>
                            DESA HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


         Commitment,  for a period  of 30  consecutive  days  occurring  between
         January 1 and May 30. During each Clean-Up  Period,  the sum of Working
         Capital  advances,  Letter  of  Credit  advances  and  Swing  Line loan
         advances  outstanding  may not exceed  $15,000,000.  As of November 28,
         1998, approximately $33 million of working capital borrowings have been
         classified as current,  reflecting the Company's  intention to pay down
         such advances in order to comply with the Clean-Up Period requirements.
         Such amount may be reborrowed after compliance with the Clean-Up Period
         requirements.

(E)      The Acquisition Loan is payable in quarterly installments commencing in
         February  2000 and  extending  through  November 26, 2003,  and accrues
         interest,  which is payable quarterly, at the prime rate plus 1.875% or
         LIBOR  plus  2.875% at the  option of the  Company.  Once  repaid,  the
         Acquisition Loan may not be reborrowed.

(F)      The Acquisition Loan B is payable in quarterly installments  commencing
         in February 2000 and extending  through  November 26, 2003, and accrues
         interest,  which is payable quarterly, at the prime rate plus 1.875% or
         LIBOR  plus  2.875% at the  option of the  Company.  Once  repaid,  the
         Acquisition  B Loan may not be  reborrowed.  On August  19,  1998,  the
         Acquisition  B Loan was drawn on to fund the  Fireplace  Manufacturers,
         Inc.  and  Universal  Heating,  Inc.   acquisitions.   $30,000,000  was
         borrowed,  of which $4,423,170 was used to pay down the Working Capital
         Loan.

(G)      The note  payable is due on December  31,  2008 and  accrues  interest,
         which  is  payable  semi-annually,  at a rate of 7.5%  per  annum.  The
         Company may elect, upon written notice, to defer any interest payments,
         in which event such  interest  payments  shall  effectively  convert to
         principal and accrue interest at a rate of 7.5% per annum.
</FN>
</TABLE>

                  In  accordance  with the  terms of the  Working  Capital  Loan
         Commitment, the ability of the Company to incur additional indebtedness
         is limited,  as  defined.  At November  28,  1998,  the Company had the
         ability to incur additional indebtedness of $24.2 million.

                  On October 1, 1998, Desa entered into a binding agreement with
         NationsBank   for  an  interest  rate  swap.  The  terms  of  the  swap
         transaction  have an effective  date of November 27, 1998 and terminate
         on November  29, 1999 and  obligate  the Company to pay a fixed rate of
         4.75% on  $75,000,000  and  NationsBank to pay a floating rate based on
         LIBOR on $75,000,000.

         4.       Comprehensive Income

                  As  of  March  2,  1997,  the  Company  adopted  Statement  of
         Financial  Accounting  Standards  No.  130,  "Reporting   Comprehensive
         Income" ("FAS 130").  FAS 130  established  new rules for the reporting
         and display of comprehensive  income and its components;  however,  the

                                       10
<PAGE>
                            DESA HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


         adoption  of FAS 130 has had no effect on the  Company's  net income or
         stockholders'  deficit. FAS 130 requires the Company's foreign currency
         translation adjustment, which prior to adoption was reported separately
         in stockholders' deficit, to be included in other comprehensive income.
         Amounts   reported  in  prior  year  financial   statements  have  been
         reclassified  to  conform  with  the  requirements  of FAS  130.  As of
         November 28, 1998 the  cumulative  other  comprehensive  loss consisted
         solely of the Company's foreign currency translation adjustment.
<TABLE>
<CAPTION>
         Comprehensive income consisted of the following (in thousands):

                                           Thirteen Weeks Ended        Thirty-nine Weeks Ended
                                           November    November         November     November
                                           28, 1998    29, 1997         28, 1998     29, 1997

        <S>                              <C>         <C>              <C>          <C>     
         Net income                       $  8,213    $  7,267         $  4,970     $ 10,204
         Net change in foreign                                      
         currency translation                                       
         adjustment                            131         (56)            (406)        (154)
                                          --------    --------         --------     --------
         Comprehensive income             $  8,344    $  7,211         $  4,564     $ 10,050
                                          ========    ========         ========     ========
</TABLE>

5.       Stockholders' Deficit

         Effective in March 1998, the Company  established the 1998 Stock Option
         Plan. The plan terminates in ten years and provides for the issuance of
         incentive  options or  nonqualified  stock  options for up to 1,462,222
         shares  of common  stock,  $.01 par value  per  share,  of the  Company
         ("Common Stock").  The stock options may be granted to key employees or
         eligible  non-employees  as defined,  as determined by the Compensation
         Committee of the Board of Directors, and the term of the options cannot
         exceed ten years from the grant  date,  except  for  employees  who own
         stock  possessing  more than 10% of the  combined  voting  power of all
         classes of stock of the  Company,  for whom the term of the  options is
         five years.  The exercise price of the incentive  options must be equal
         to or greater  than the fair  market  value of the Common  Stock on the
         date of grant,  except for employees who own stock possessing more than
         10% of the combined voting power of all classes of stock,  for whom the
         exercise price cannot be less than 110% of the fair market value of the
         Common  Stock  on  the  date  of  grant.  The  exercise  price  of  the
         nonqualified options is determined by the Compensation Committee of the
         Board of Directors.

                                       11
<PAGE>
                            DESA HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
       

         5.       Stockholders' Deficit (continued)

         Effective in March and July of 1998, the Compensation Committee awarded
incentive  stock  options to purchase an aggregate  of 187,750  shares of Common
Stock to certain key  employees at an exercise  price of $6.50 per share.  These
options vest as follows:  5% at the end of year one, 10% at the end of year two,
60% at the end of year three, 80% at the end of year four and 100% at the end of
year five.

         In September 1998, the Compensation  Committee  awarded incentive stock
options to purchase an aggregate of 1,179,777  shares of Common Stock to certain
key employees at an option price of $6.50 per share. These options vest upon the
attainment of certain performance goals.

6.       Segment Information

         The Company is organized into two primary product categories:  (a) zone
heating products, which include indoor room heaters, hearth products and outdoor
heaters,  and (b) specialty  products,  which include  specialty  tools and home
security products.

         Corporate  expenses  include  corporate  headquarters  staff,  a modest
portion  of  the  cost  of  certain  support  functions,  including  accounting,
management   information   systems,   human   resources  and  treasury  and  the
amortization of deferred financing costs.

         Identifiable assets are those assets of the Company that are identified
with the operations in each product segment.  Corporate assets include primarily
cash, deferred income taxes and deferred financing costs.

                                       12
<PAGE>
                            DESA HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


         Operational  results  and  other  financial  data for the two  business
segments  for the periods  ended  November  28, 1998 and  November  29, 1997 are
presented below (in thousands):
<TABLE>
<CAPTION>
                                              Zone
                                            Heating   Specialty     General
                                            Products   Products    Corporate    Total
                                            --------   --------    ---------    -----
<S>                                        <C>        <C>         <C>        <C>   
Thirteen weeks ended November 28, 1998
Net sales                                   $ 95,852   $ 38,827       --      $134,679
Operating profit                              17,776      6,047     (1,243)     22,580
Depreciation and amortization                  2,113        432        466       3,011
Identifiable assets                          153,978     93,345     17,047     264,370
Capital expenditures                             568        268          3         839

Thirteen weeks ended November 29, 1997
Net sales                                     90,650     12,365       --       103,015
Operating profit                              19,644      1,669       (940)     20,373
Depreciation and amortization                  1,231         45        254       1,530
Identifiable assets                          119,086     25,841     12,853     157,780
Capital expenditures                             716        111          3         830

<CAPTION>
                                              Zone
                                            Heating   Specialty     General
                                            Products   Products    Corporate    Total
                                            --------   --------    ---------    -----
<S>                                        <C>        <C>         <C>        <C>   
Thirty-nine weeks ended November 28, 1998

Net sales                                   $148,000   $102,849       --      $250,849
Operating profit                              20,819     12,381     (3,246)     29,954
Depreciation and amortization                  3,891      1,358      1,219       6,468
Identifiable assets                          153,978     93,345     17,047     264,370
Capital expenditures                           3,059        517         69       3,645

Thirty-nine weeks ended November 29, 1997
Net sales                                    158,144     35,260       --       193,404
Operating profit                              30,841      4,731     (2,970)     32,602
Depreciation and amortization                  2,925        246        762       3,933
Identifiable assets                          119,086     25,841     12,853     157,780
Capital expenditures                           3,364        323          3       3,690

</TABLE>

                                       13
<PAGE>
                            DESA HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



7.       Prior Period Acquisitions

         On  February  4,  1998,  the  Company  purchased  all of the issued and
outstanding  stock of Heath  Holding  Corp.  ("Heath/Zenith")  for an  aggregate
purchase price of  $42,365,000.  The purchase price  consisted of $40,365,000 in
cash and a $2,000,000 junior subordinated note payable.  Heath/Zenith is engaged
in the  manufacturing  and distribution of motion-sensor  lighting  products and
wireless  home-controlled  devices,  all of which are included in the  Specialty
Products  segment of the Company.  The Company  accounted  for such  acquisition
using the purchase method. The fair value of the assets acquired and liabilities
assumed at February 4, 1998 is summarized as follows (in thousands):

                  Current assets                            $25,757
                  Property, plant and equipment                 458
                  Other assets                                2,370
                  Goodwill                                   23,769
                  Current liabilities                        (9,989)
                                                            -------
                                                            $42,365

         This  allocation is preliminary and will be adjusted as necessary based
upon our further analysis of the acquisition of Heath/Zenith.

         On August 19,  1998,  the Company  consummated  two  acquisitions.  The
Company acquired all of the outstanding stock of Fireplace  Manufacturers,  Inc.
("FMI"),  which  then  merged  into  Desa,  for a net  cash  purchase  price  of
$21,984,798.  The Company also entered into non-compete  agreements with certain
executives  of FMI  covering a  three-year  period  for  aggregate  payments  of
$3,050,000.  The Company also acquired the worldwide rights (except in China) to
distribute  Universal Heating,  Inc.'s and its affiliates ("UHI") indoor heating
products,  through  Desa U.S.  Inc.,  which then  merged  into Desa,  for a cash
purchase price of $12,332,548, including non-compete payments of $1,998,000. The
Company financed the two acquisitions  through  borrowings of $25,891,500  under
the Credit Facility (Acquisition Loan B) and the issuance of 1,860,677 shares of
Common Stock to existing stockholders for $12,075,500.  The cash purchase prices
set forth above  exclude an aggregate of $600,000 in fees and expenses  incurred
in  connection  with both  acquisitions  and  approximately  $1,200,000  in debt
financing fees paid to obtain Acquisition Loan B.


                                       14
<PAGE>
                            DESA HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



         The Company accounted for such acquisitions  using the purchase method,
and,  accordingly,  the results of  operations  of such  acquisitions  have been
included in the Company's results of operations from the acquisition  dates. The
following  summarizes  the fair value of the  assets  acquired  and  liabilities
assumed at August 19, 1998, for the two acquisitions (in thousands):


               Current assets                                $ 5,080
               Property, plant and equipment                   1,202
               Other assets                                   10,385
               Non-compete agreements                          5,048
               Goodwill                                       18,837
               Current liabilities                            (2,585)
                                                             -------
                                                             $37,967

         This  allocation is preliminary and will be adjusted as necessary based
upon our further analysis of both acquisitions.

         The following supplemental pro forma information is presented as if the
acquisitions  of  Heath/Zenith,  FMI and UHI had been  completed  as of March 1,
1998, and as of March 2, 1997:
<TABLE>
<CAPTION>
                                                          Thirty-nine weeks ended
                                                   November 28, 1998    November 29, 1997 
                                                   -----------------    ----------------- 
                                                           (dollars in thousands)

<S>                                                    <C>                  <C>     
Net sales                                               $263,556             $275,330
Income from operations before extraordinary item        $ 30,050             $ 35,984
Income before extraordinary item                        $  5,211             $  9,426
Net income                                              $  4,754             $  7,118
                                                                     
</TABLE>

                                       15
<PAGE>

                            DESA HOLDINGS CORPORATION
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATION

         This quarterly  report on Form 10-Q of Desa Holdings  Corporation  (the
"Company,"  which  includes  its  consolidated  subsidiaries  unless the context
indicates   otherwise  contains  statements  which  constitute  forward  looking
statements  within the meaning of Section 21E of the Securities  Exchange Act of
1934, as amended.  Those statements  appear in a number of places in this report
and include  statements  regarding  the  strategies,  plans,  beliefs or current
expectations of the Company and its management and other statements that are not
historical facts. Readers are cautioned that any such forward looking statements
are not guaranties of future  performance  and involve risks and  uncertainties,
and that  actual  results  may  differ  materially  from those set forth in such
forward looking statements as a result of various factors. Such factors include,
but are not limited to, the Company's  vulnerability to adverse general economic
and industry conditions because of its leverage, the Company's ability to obtain
future  financing  on  acceptable  terms,  the  Company's  ability to  integrate
acquired  companies and to complete  acquisitions  on  satisfactory  terms,  the
demand and price for the Company's  products  relative to production  costs, the
seasonality of the Company's business and uncertainties regarding the resolution
of Year 2000 problems.  The Company undertakes no obligation to release publicly
the results of any revisions to these  forward  looking  statements  that may be
made to reflect errors or circumstances that occur after the date hereof.

         The following  discussion of the  Company's  results of operations  and
financial  condition  for the  thirteen  and  thirty-nine  week  periods  ending
November 28, 1998, and November 29, 1997, should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto contained
herein, as well as for the fiscal year ended February 28, 1998,  included in the
Company's Registration Statement on Form S-4 (SEC File No. 333-44969-01).

Overview

         The Company is organized into two primary product categories:  (a) zone
heating products, which include indoor room heaters, hearth products and outdoor
heaters,  and (b) specialty  products,  which include  specialty  tools and home
security  products.  The Company  records sales upon shipment of products to its
customers.  Net sales  constitute  gross sales net of an accrual for returns and
allowances and cash discounts.

         Sales of the Company's zone heating  products follow seasonal  patterns
that affect the Company's  results of operations.  Demand for the Company's zone
heating  products  has  been  historically  highest  in the  third  quarter,  as
consumers  prepare  for  winter.  Consequently,  the  Company's  net  sales  and
operating profit have also been  historically  highest during the third quarter.
Management  believes that the Company's  results of operations  will continue to
follow this  pattern;  there can be no  assurance,  however,  that third quarter
results will always surpass those of the first and second quarters,  or that any
improvement  shown  will be as  great  as  that  shown  in  previous  years.  In
particular,  unusually  warm  weather  in the fall may  reduce  demand  for zone
heating products.

         The Company's net sales and operating  profit of zone heating  products
in its current fiscal year may be adversely  affected by warm weather during the
preceding  winter,  which can result in  inventory  carryover  by the  Company's
customers. Last winter and this fall were unusually warm

                                       16
<PAGE>

and,  consequently,  net sales and operating profit of zone heating products for
the first three  quarters of the current  fiscal year were lower than in similar
periods in the previous fiscal year.

         Sales of the Company's  specialty  products do not follow a significant
seasonal pattern and are not affected by weather patterns.  Historically,  these
sales have followed a relatively level quarterly pattern.

Acquisitions

         On August 19, 1998, the Company consummated the acquisitions of FMI and
the  worldwide  rights  (except in China) to  distribute  UHI's  indoor  heating
products.  FMI is a Santa Ana,  California  based  manufacturer  of wood-burning
metal  fireplaces,  decorative gas appliances with  refractory-lined  fireboxes,
direct vent gas  fireplaces,  and related  chimney  flues.  UHI,  based in Yorba
Linda,  California,  is a  privately  held  manufacturer  of indoor gas  heating
products.  The aggregate  purchase price for the  acquisitions  was  $37,967,346
including non-compete payments.  These acquisitions were accounted for under the
purchase method of accounting.

         The  Company  financed  these  acquisitions  with  the  proceeds  of  a
$25,891,500  advance under its senior  credit  facility and  $12,075,500  of the
proceeds from the issuance of approximately  1,860,677  additional shares of the
Common  Stock  by the  Company.  The  additional  equity  was  sold to  existing
stockholders of the Company at a per-share price of approximately $6.50.

         In August 1998,  the Company  became party to an agreement to negotiate
in good faith for the purpose of entering  into a joint  venture to  manufacture
various  products  in China.  Pursuant to the terms of the joint  venture  under
negotiation, UHI intends to contribute manufacturing facilities located in China
in exchange for a 60% interest in the joint venture and a preferred  interest in
an additional $7 million of profits of the joint venture. The Company intends to
contribute  $3 million in cash for a 40%  interest in the joint  venture,  which
will be  subordinate  to UHI's $7 million  preferred  interest in  profits.  The
Company  intends to finance  its $3 million  contribution  to the joint  venture
through  indebtedness under the Credit Facility.  There can be no assurance that
the joint  venture will be formed or, if formed,  formed on the terms  described
above.

Results of Operations

                  Thirteen Week Period Ended November 28, 1998,  Compared to the
                  Thirteen Week Period Ended November 29, 1997

         Net sales.  Net sales in the  thirteen  weeks ended  November 28, 1998,
("third quarter 1999") were $134.7 million,  an increase of 31% or $31.7 million
compared to the thirteen weeks ended November 29, 1997 ("third  quarter  1998").
Zone heating  products had net sales of $95.9  million in third quarter 1999, an
increase of 6% or $5.2 million from third quarter 1998.  This increase  reflects
primarily the effects of the previously  discussed FMI and UHI  acquisitions  on
indoor and hearth  heating  product sales.  Specialty  products had net sales of
$38.8  million in the third  quarter  1999, an increase of 214% or $26.5 million
over  third  quarter  1998,   primarily   attributable  to  the  acquisition  of
Heath/Zenith  and its line of home security  products in February 1998 and a 38%
growth in the traditional tool business over third quarter 1998.

                                       17
<PAGE>

         Cost of Sales. For third quarter 1999, cost of sales was $87.1 million,
an increase of $21.9 million or 34% from third quarter 1998, attributable to the
higher  net  sales for the  period.  Cost of sales was 65% of net sales in third
quarter 1999 compared to 63% for third quarter 1998. This increase is because of
(i) product mix with proportionately higher sales of acquired business products,
which are sold at lower margins, and (ii) higher manufacturing overhead per unit
of zone heating products,  which resulted from the weather-related  reduction in
production  of  heating  products  along  with an  increase  of $.4  million  in
depreciation expense over third quarter 1998.

         Selling,  General and Administrative  Expenses. For third quarter 1999,
selling,  general and administrative expenses were $25.0 million, an increase of
$7.6 million or 43% from third quarter 1998,  primarily  attributable to the net
sales   increase.   As  a  percentage  of  net  sales,   selling,   general  and
administrative expenses were 19% for third quarter 1999 compared to 17% in third
quarter  1998.  This  higher  level is  associated  with an  increase in selling
expenses  of  1.6%  for  higher  freight,   advertising  and  warranty  expenses
associated  with the  sales  increase  to the  major  home  centers  and  higher
amortization expenses of 0.7% associated with the November 1997 recapitalization
and the acquisitions of Heath/Zenith, FMI and UHI.

         Operating Profit.  Operating profit was $22.6 million for third quarter
1999  compared to $20.4  million  for third  quarter  1998,  an increase of 11%.
Operating  profit  attributable  to zone heating  products was $17.8 million for
third quarter 1999,  down $1.9 million from third quarter 1998.  This decline is
attributable  to the increased cost of goods sold associated with under absorbed
factory  overhead and higher  selling costs  associated  with sales  increase to
major home centers. Specialty products operating profit was $6.0 million for the
third quarter  1999,  an increase of $4.4 million over third quarter 1998.  This
increase is  attributable to increased net sales of specialty  products  related
primarily  to  the  acquisition  of  Heath/Zenith  and a  74%  increase  in  the
traditional tool business over third quarter 1998.

         EBITDA for the third  quarter  1999 was $25.6  million,  an increase of
$3.7 million or 17% over the third quarter 1998 which was $21.9 million.  EBITDA
is defined as income before income taxes plus interest  expense and depreciation
as well  as  amortization  expense  associated  with  intangibles  and  deferred
charges. EBITDA is presented because it is a widely accepted financial indicator
of a  leveraged  company's  ability to service  and/or  incur  indebtedness  and
because  management  believes that EBITDA is a relevant measure of the Company's
ability to generate cash without  regard to the Company's  capital  structure or
working  capital  needs.  However,   EBITDA  should  not  be  considered  as  an
alternative  to net income as a measure of a company's  operating  results or to
cash flows from  operating  activities  as a measure of  liquidity as defined by
generally accepted accounting principles.

         Interest  Expense.  Interest  expense for third  quarter  1999 was $7.6
million,  an increase  of $3.4  million or 82%,  reflecting  the  November  1997
recapitalization and the financing of the acquisitions of Heath/Zenith, FMI, and
UHI.

         Income Tax. The  provision  for income taxes was 45% for third  quarter
1999, above the 41% rate for third quarter 1998. This increase is because of the
nondeductibility of the higher goodwill amortization charges.

         Net Income. Net income was $8.2 million for third quarter 1999 compared
to net income of $7.3 million for third  quarter  1998, an increase of 13%. This
increase is  attributable to the writeoff

                                       18
<PAGE>

of the extraordinary item associated with the November,  1997  recapitalization.
Net income  before  extraordinary  loss for third  quarter 1999 was $8.2 million
compared to net income before  extraordinary loss for third quarter 1998 of $9.6
million,  a decrease of 14%. This decline is attributable to the lower operating
profit and higher interest expense.

Thirty-nine Week Period Ended November 28, 1998 Compared to the Thirty-nine Week
Period Ended November 29, 1997

         Net Sales. Net sales for the thirty-nine  weeks ended November 28, 1998
("year to date 1999") were $250.8  million,  an increase of $57.4 million or 30%
compared to the thirty-nine weeks ended November 29, 1997 ("year to date 1998").
Zone heating products had net sales of $148.0 million for the year to date 1999,
a  decrease  of 6% or $10.1  million  from the year to date 1998.  This  decline
primarily  reflects the effects of last winter's and this fall's  unusually warm
weather  and the  related  customer  carryover  inventory  on  heating  products
particularly,  outdoor  heating  products.  Specialty  products had net sales of
$102.8  million for the year to date 1999,  an increase of 192% or $67.6 million
from  the  year to date  1998,  primarily  attributable  to the  acquisition  of
Heath/Zenith  in  February  1998  and a 24%  increase  in the  traditional  tool
business over year to date 1998.

         Cost of Sales.  For the year to date  1999,  cost of sales  was  $167.0
million,  an  increase  of $43.8  million  or 36%  from  the year to date  1998,
reflecting the higher sales.  Cost of sales was 67% of net sales during the year
to date 1999 compared to 64% for the year to date 1998. This increase is because
of (i)  product  mix with  proportionately  higher  sales of  acquired  business
products,  which  are  sold at lower  margins,  and  (ii)  higher  manufacturing
overhead  per  unit  of  zone  heating   products,   which   resulted  from  the
weather-related reduction in production of heating products primarily during the
first half of the year and an increase in  depreciation  expense of $0.6 million
over year to date 1998.

         Selling,  General  and  Administrative  Expenses.  For the year to date
1999,  selling,  general and  administrative  expenses  were $53.9  million,  an
increase  of  $16.3  million  or 44%  over  the  year  to date  1998,  primarily
attributable  to the net sales increase.  As a percentage of net sales,  selling
general and administrative  expenses were 21% for the year to date 1999 compared
to 19% for the  year to date  1998.  This  higher  level is  associated  with an
increase  in selling  expenses  for higher  freight,  advertising  and  warranty
expenses associated with the sales increase to the major home centers and higher
amortization  expenses  of $2  million  or 0.8% of  sales  associated  with  the
November 1997  recapitalization  and the acquisitions of  Heath/Zenith,  FMI and
UHI.

         Operating  Profit.  Operating  profit was $30.0 million for the year to
date 1999 as compared to $32.6  million for the year to date 1998,  a decline of
8% attributable  to a $2.5 million  increase in  depreciation  and  amortization
expense.  Operating  profit  attributable  to zone  heating  products  was $20.8
million  for the year to date  1999,  down $10.0  million  from the year to date
1998.  This decline is  attributable to the decline in net sales of zone heating
products  and the  increased  cost of goods sold as discussed  above.  Operating
profit attributable to specialty products was $12.4 million for the year to date
1999,  an increase of $7.7 million over the year to date 1998.  This increase is
attributable to increased net sales of specialty  products related  primarily to
the acquisition of Heath/Zenith  and the growth of the traditional tool business
over year to date 1998.

         EBITDA  for the year to date 1999 was $36.4  million,  in line with the
year to date 1998 of $36.5  million.  EBITDA is defined as income  before income
taxes plus interest  expense and  

                                       19
<PAGE>

depreciation as well as  amortization  expense  associated with  intangibles and
deferred charges.  EBITDA is presented because it is a widely accepted financial
indicator of a leveraged  company's ability to service and/or incur indebtedness
and  because  management  believes  that  EBITDA is a  relevant  measure  of the
Company's  ability to generate  cash  without  regard to the  Company's  capital
structure or working capital needs. However,  EBITDA should not be considered as
an alternative to net income as a measure of a company's operating results or to
cash flows from  operating  activities  as a measure of  liquidity as defined by
generally accepted accounting principles.

         Interest Expense.  Interest expense for the year to date 1999 was $20.8
million, an increase of $9.5 million from the year to date 1998,  reflecting the
November  1997  recapitalization  and  the  financing  of  the  acquisitions  of
Heath/Zenith, FMI, and UHI.

         Income Tax. The provision for income taxes was 46% for the year to date
1999,  above the rate of 41% for the year to date 1998. This increase is because
of the nondeductibility of the higher goodwill amortization charges.

         Net  Income.  Net  income  for the year to date  1999 was $5.0  million
compared  to $10.2  million  for the year to date 1998,  a decline of 51%.  This
decline is  attributable  to the lower  operating  profit  and  higher  interest
expense.

Liquidity and Capital Resources

         The Company's primary cash needs have been for working capital, capital
expenditures and debt service  requirements.  The Company's sources of liquidity
have been cash flows from operations and borrowings  under its revolving  credit
facilities.  The  Company's  business  is  subject  to  a  pattern  of  seasonal
fluctuation.  The Company's needs for working capital and the corresponding debt
levels tend to peak in the second and third fiscal quarters. The amount of sales
generated during the second and third fiscal quarters  generally  depends upon a
number of factors,  including  the level of retail  sales for  heating  products
during the prior year's fall and winter,  weather conditions affecting the level
of sales of heating  products,  general economic  conditions,  and other factors
beyond the Company's control.

         Net cash  used in  operating  activities  for the year to date 1999 was
$27.8  million  compared to net cash used of $35.5  million for the year to date
1998. This positive reduction of $7.7 million reflects the lower inventory build
up associated with the reduced  production of zone heating products and a higher
accounts payable balance of $15.9 million.

         Net cash used in investing activities was $44.1 million for the year to
date 1999,  compared to $3.3 million for the year to date 1998. This higher cash
used for investing  activities reflects the acquisition of UHI and FMI. Net cash
provided by financing  activities  for the year to date 1999 was $71.7  million,
compared  to $34.1  million  for the year to date  1998 due to the  issuance  of
Common Stock and bank loans associated with the acquisitions of UHI and FMI.

         The Credit Facility  provides for commitments in an aggregate amount of
up to $225.0  million.  Borrowings  outstanding  under the Credit  Facility were
$195.3 million on November 28, 1998.  Outstanding  letters of credit and foreign
currency  contracts  established to facilitate  merchandise  purchases were $2.6
million and $2.7 million,  respectively,  on November 28, 1998.  

                                       20

<PAGE>

The Company had the ability to incur additional indebtedness of $24.2 million at
November 28, 1998 under the Credit Facility.

         The Company expects that capital  expenditures  during fiscal 1999 will
be approximately  $4.2 million.  Capital  expenditures are expected to be funded
from  internally  generated  cash  flows  and by  borrowings  under  the  Credit
Facility.

         Management  believes that cash flow from  operations  and  availability
under  the  Credit  Facility  will  provide  adequate  funds  for the  Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations.  The Credit Facility requires a Clean-Up Period, as defined,  under
the  Working  Capital  Loan  Commitment,  for a period  of 30  consecutive  days
occurring between January 1 and May 30 in each calendar year commencing  January
1, 1998. During the Clean-Up Period, the sum of Working Capital advances, Letter
of Credit  advances and Swing Line loan  advances  outstanding  shall not exceed
$15,000,000 for any Clean-Up Period. As of November 28, 1998,  approximately $33
million of  working  capital  borrowings  have been  classified  as current as a
result  of  the  Clean-Up  requirement.  Such  amount  may be  reborrowed  after
compliance of the Clean-Up Period The Company's  ability to fund its operations,
make  planned  capital  expenditures,  make  scheduled  debt  payments,  finance
indebtedness and remain in compliance with all of the financial  covenants under
its debt agreements  depends on its future operating  performance and cash flow,
which in turn, are subject to prevailing  economic  conditions and to financial,
business and other factors, some of which are beyond its control.

Year 2000

         The Company is in the process of reviewing its computer and operational
systems to identify and  determine  the extent to which any such systems will be
vulnerable  to  potential  errors and  failures  as a result of the "Year  2000"
problem.  The Year 2000 problem is a result of computer  programs  being written
using two digits,  rather than four  digits,  to identify  years.  The Year 2000
presents several risks to the Company:  (i) that the Company's  internal systems
may not  function  properly,  (ii)  that  suppliers'  computer  systems  may not
function  properly  and,  consequently,  deliveries  of  required  parts  may be
delayed,  (iii) that customers'  computer systems may not function properly and,
consequently,  orders or payments for the Company's products may be delayed, and
(iv) that the Company's  bank's computer systems could  malfunction,  disrupting
the Company's  orderly posting of deposits,  funds  transfers and payments.  The
occurrence  of any one or more of these  events  could have a  material  adverse
effect on the  Company's  financial  condition  and results of  operations.  The
Company does not have any contingency  plans to address the Year 2000 problem if
the efforts described below are not successful.

         The  Company has written  all of its  internal  management  information
systems ("MIS") applications,  rather than buying applications from vendors, and
is in the process of modifying those  applications to appropriately  address the
Year 2000 problem. Such modifications are approximately 80% complete. Management
believes  that  the  Company's  MIS  staff  will  be  able to  modify  all  such
applications  prior to March 1, 1999,  although there can be no assurances  that
such  modifications  will be  timely  completed.  No  embedded  systems  used in
manufacturing  require  any  modification  for Year 2000  compliance.  Review of
embedded systems used for quality control is expected to be completed in January
1999.  The  expenses of the  Company's  efforts to identify and address any Year
2000 problems are not expected to exceed $100,000, of which $37,000 have already
been spent, exclusive of staff time.

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<PAGE>

         The Company has identified  critical parts and materials  suppliers and
is beginning a program to contact  such  suppliers to evaluate the extent of the
Year 2000 risk to the Company's  continued timely receipt of parts and materials
deliveries.  Management  believes  that such  efforts  will allow the Company to
identify any risk of parts or materials shortages and either to find alternative
suppliers or to order  sufficient  quantities  of critical  parts and  materials
prior to the Year 2000 so as to avoid adverse effects on the Company's financial
condition and results of operations,  although  there can be no assurances  that
such efforts will be successful.

         The Company is also engaged in discussions with certain major customers
to ensure that electronic data  interchange  ("EDI") formats  function  properly
notwithstanding  the advent of the Year 2000. EDI is the primary method by which
customers  place  orders  for  the  Company's  products.  Such  discussions  are
completed,  in the case of the Company's  major home center  customers,  and are
well advanced with other major customers using EDI, and management believes that
transmission  of orders from these  major  customers  will not be  significantly
affected by the advent of the Year 2000,  although there can be no assurances in
this regard. Management does not, however, have sufficient information regarding
the  internal  systems of all of its  customers to form an opinion as to whether
such  customers  will be able to timely  place such  orders or to timely pay for
products.  The  purchasing  patterns of existing and potential  customers may be
affected by Year 2000 problems that could cause  unexpected  fluctuations in the
Company's sales volumes.


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<PAGE>

PART II           Other Information

Item 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits

                  10.1     Desa  Holdings   Corporation   Amended  and  Restated
                           Stockholders  Agreement  dated as of  October 9, 1998
                           among the Company and the persons named therein
                  10.2     Desa Holdings Corporation Purchase Agreement dated as
                           of October 9, 1998 among the  Company and the persons
                           named therein
                  10.3     Preferred  Stock  Tagalong   Agreement  dated  as  of
                           October 9, 1998  among the  Company  and the  persons
                           named therein
                  10.4     Form of Warrant
                  27.1     Financial Data Schedule

         (b)      Reports on Form 8-K

                  The Company filed no reports on Form 8-K during the period for
                  which this report is made.



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<PAGE>



                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                       DESA HOLDINGS CORPORATION
                                    
                                       By:
                                    
Dated:  January 11, 1999               /s/ Robert H. Elman
                                       Robert H. Elman
                                       Chairman and Chief Executive Officer
                                    
Dated:  January 11, 1999               /s/ Edward G. Patrick
                                       Edward G. Patrick
                                       Vice President of Finance and Treasurer
                                       (Principal Financial Officer)
                                    
Dated:  January 11, 1999               /s/ Scott M. Nehm
                                       Scott M. Nehm
                                       Vice President and Controller
                                       (Chief Accounting Officer)
                                    
                              




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