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 August 29, 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 [ ] No [X ]

As of September 30, 1998,  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

                                 August 29, 1998

                                      INDEX

                                                                                           Page
<S>            <C>                                                                         <C>

PART I          Financial Information 
Item 1.         Consolidated Financial Statements (Unaudited)
                Consolidated Balance Sheets - August 29, 1998 and February 28, 1998          3
                Consolidated Statements of Income - Thirteen Weeks and Twenty-six            4
                Weeks ended August 29, 1998 and August 30, 1997

                Consolidated Statements of Stockholders' Equity (Deficit)                    5

                Consolidated Statements of Cash Flows - Twenty-six Weeks ended               6
                August 29, 1998 and August 30, 1997
                Notes to Consolidated Financial Statements                                   7
Item 2.         Management's Discussion and Analysis of Financial Condition and             13
                Results of Operations
PART II         Other Information
Item 2.         Changes in Securities                                                       20
Item 4.         Submission of Matters to a Vote of Securities Holders                       20
Item 6.         Exhibits and Reports on Form 8-K                                            20
                Signatures                                                                  21

</TABLE>

                                       2
<PAGE>
<TABLE>
<CAPTION>
                                              DESA Holdings Corporation

                                             Consolidated Balance Sheets
                                       (in thousands, except number of shares)

                                                                                    February 28           August 29
                                                                                      1998                  1998
                                                                                 ----------------------------------
                                                                                                        (unaudited)
<S>                                                                               <C>                    <C>
Assets 
Current assets:
    Cash and cash equivalents                                                      $     794              $     517 
    Accounts receivable, net                                                          20,838                 50,940
    Inventories:                                                                                         
        Raw materials                                                                  1,257                    841
        Work-in-process                                                                8,908                 10,583
        Finished goods                                                                30,191                 47,395
                                                                                   --------------------------------
                                                                                      40,356                 58,819
    Deferred tax assets                                                                3,730                  4,156
    Other current assets                                                               1,440                  2,086
                                                                                   --------------------------------
Total current assets                                                                  67,158                116,518
                                                                                                         
Property, plant and equipment:                                                                           
    Land                                                                                 390                    390
    Buildings and improvements                                                         5,241                  5,273
    Machinery and equipment                                                           29,891                 33,393
    Furniture and fixtures                                                               630                  1,103
                                                                                   --------------------------------
                                                                                      36,152                 40,159
    Less accumulated depreciation                                                     22,593                 24,105
                                                                                   --------------------------------
                                                                                      13,559                 16,054
                                                                                                         
Goodwill                                                                              63,430                 82,574
                                                                                                         
Other assets                                                                          11,489                 26,647
                                                                                   --------------------------------
Total assets                                                                       $ 155,636              $ 241,793
                                                                                   ================================               
Liabilities and stockholders' equity (deficit)                                                           
Current liabilities:                                                                                     
    Accounts payable                                                               $  15,035              $  38,930
    Accrued interest                                                                   5,725                  3,936
    Other accrued liabilities                                                         14,004                 10,433
    Income taxes payable                                                                  49                 (3,782)
    Current portion of long-term debt                                                  5,250                  6,000
                                                                                   --------------------------------
Total current liabilities                                                             40,063                 55,517
                                                                                                         
Long-term debt                                                                       261,105                322,952
Deferred tax liabilities                                                               1,781                  1,962
Other liabilities                                                                        433                    641
                                                                                   --------------------------------
Total liabilities                                                                    303,382                381,072
                                                                                              
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 August 29, 1998                                              14,661                 16,035

Stockholders' equity (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                     137                    155
    shares at August 29, 1998

    Nonvoting common stock, $.01 par value;  authorized--  2,000,000 
    shares; issued and outstanding--90,604 shares at February 28, 1998
    and August 29, 1998                                                                    1                      1

    Capital in excess of par value                                                    85,926                 97,984
    Carryover predecessor basis adjustment                                           (32,309)               (32,309)
    Retained earnings (deficit)                                                     (215,598)              (220,044)
    Cumulative other comprehensive income                                               (564)                (1,101)
                                                                                   --------------------------------
Total stockholders' equity (deficit)                                                (162,407)              (155,314)
                                                                                   --------------------------------
Total liabilities and stockholders' equity (deficit)                               $ 155,636             $  241,793
                                                                                   ================================
See accompanying notes
</TABLE>
                                       3
<PAGE>
<TABLE>
<CAPTION>

                                                      DESA Holdings Corporation

                                                  Consolidated Statements of Income
                                                           (in thousands)

                                                             (Unaudited)



                                                         Thirteen Weeks Ended                     Twenty-six Weeks Ended

                                                  August 30            August 29             August 30            August 29
                                                    1997                 1998                  1997                  1998
                                                -----------------------------------------------------------------------------

<S>                                             <C>                  <C>                   <C>                   <C>       
Net sales                                        $  65,635            $  75,416             $   90,389            $  116,170
Cost of sales                                       41,398               50,332                 58,058                79,941
                                                 ---------------------------------------------------------------------------
Gross profit                                        24,237               25,084                 32,331                36,229

Operating costs and expenses:
     Selling                                         9,035               11,970                 13,888                20,753
     General and administrative                      2,292                3,096                  4,542                 5,964
     Other                                             753                1,272                  1,672                 2,138
                                                 ---------------------------------------------------------------------------
                                                    12,080               16,338                 20,102                28,855
                                                 ---------------------------------------------------------------------------

Operating Profit                                    12,157                8,746                 12,229                 7,374

Interest expense                                     3,858                6,745                  7,162                13,237
                                                 ---------------------------------------------------------------------------
Income before provision for income taxes             8,299                2,001                  5,067                (5,863)

Provision for Income Taxes                           3,483                  878                  2,130                (2,620)
                                                 ---------------------------------------------------------------------------

Net Income                                           4,816                1,123                  2,937                (3,243)

Less dividends on preferred stock                        0                  551                      0                 1,078
                                                 ---------------------------------------------------------------------------
Income (loss) available for common stockholders  $   4,816            $     572             $    2,937            $   (4,321)
                                                 ===========================================================================

See accompanying notes
</TABLE>
                                       4
<PAGE>
<TABLE>
<CAPTION>

                                                      DESA Holdings Corporation
                                      Consolidated Statements of Stockholders' Equity (Deficit)

                                                                                                       Cumulative
                                          Nonvoting    Capital in      Carryover      Retained          Other             Total
                               Common       Common     Excess of      Predecssor      Earnings      Comprehensive     Shareholders'
                                Stock       Stock      Par Value      Adjustment      (Deficit)         Income           Equity
                             -------------------------------------------------------------------------------------------------------
<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                                                                           (3,243)                           (3,243)

   Foreign currency
     translation adjustment                                                                              (537)              (537)
                                                                                                                       ---------

Comprehensive income                                                                                                      (3,780)
                                                                                                                       ---------

Accretion of preferred stock                                                              (125)                             (125)

Dividends on preferred stock                                                            (1,078)                           (1,078)

Issuance of common stock         18                      12,058                                                           12,076
                               ------------------------------------------------------------------------------          ---------
Balance at
August 29, 1998                $155           $1        $97,984        ($32,309)     ($220,044)       ($1,101)         ($155,314)
                               ==============================================================================          =========
See accompanying notes
</TABLE>
                                       5
<PAGE>
<TABLE>
<CAPTION>
                                      DESA Holdings Corporation
                                Consolidated Statements of Cash Flows
                                            (in thousands)

                                             (Unaudited)
                                                                            Twenty-six Weeks Ended

                                                                        August 30          August 29
                                                                          1997                1998
                                                                       -----------------------------
<S>                                                                   <C>                 <C>
Operating activities
Net income                                                             $  2,937            $ (3,243) 
                                                                                         
Adjustments to reconcile net earnings (loss) to net cash provided by                     
(used in) operating activities:                                                          
     Depreciation                                                         1,357               1,512
     Amortization                                                         1,046               1,945
     Deferred income taxes                                                    0                 (15)
     Equity in undistributed earnings of joint venture                      (85)                (78)
     (Increase) decrease in operating assets:                                            
         Accounts receivable, net                                       (35,176)            (28,436)
         Inventories                                                    (26,316)            (14,558)
         Other current assets                                              (423)               (529)
     Increase (decrease) in operating liabilities:                                       
         Accounts payable                                                13,528              22,290
         Accrued interest                                                   485              (1,789)
         Other accrued liabilities                                         (445)             (5,391)
         Income taxes payable                                               275              (3,831)
         Other liabilities                                                   52                 208
                                                                        --------           --------
Net cash used in operating activities                                   (42,765)            (31,915)
                                                                        --------           --------
                                                                                         
                                                                                         
Investing activities                                                                     
Capital expenditures                                                     (2,860)             (2,806)
Dividends received from joint venture                                        85                  83
Net cash paid for acquisition of businesses                                   0             (39,635)         
Other                                                                       120                (672)
                                                                        --------           --------
Net cash used in investing activities                                    (2,655)            (43,030)
                                                                        --------           --------
                                                                                         
                                                                                         
Financing activities Recapitalization transactions:                                      
     Increase in Working Capital Loan                                         0              33,722          
     Increase in revolving loan                                          47,576                   0
     Principal payments of Term Loans                                    (6,855)             (1,125)
     Issuance of Common Stock                                                12              12,076          
     Increase in Acquisition Loans                                            0              30,000 
                                                                        --------           --------
     Net cash provided by financing activities                           40,733              74,673
                                                                                         
Effect of exchange rates on cash                                             (5)                 (5)
                                                                        --------           --------
Decrease in cash and cash equivalents for the period                     (4,692)               (277)
Cash and cash equivalents at beginning of period                          5,058                 794
                                                                        --------           --------
Cash and cash equivalents at end of period                              $   366            $    517
                                                                        ========           ========
                                                                                 
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
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.

         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 accountants.  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 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. 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.

3.       Financing Arrangements
<TABLE>
<CAPTION>
         Outstanding borrowings consist of the following (in thousands):

                                                         February 28,      August 29,
                                                             1998             1998
                                                             ----             ----
<S>                                                      <C>              <C>
9 7/8% Senior Subordinated Notes Due 2007 (A)             $130,000         $130,000
Term A Loan (B)                                             49,125           48,250
Term B Loan (C)                                             49,750           49,500
Working Capital Loan Commitment (D)                         15,480           49,202
Acquisition Loan (E)                                        20,000           20,000
Acquisition B Loan (F)                                        --             30,000
Note payable related to acquisition of Heath/Zenith (G)      2,000            2,000
                                                          --------         --------          
Total outstanding borrowings                              $266,355         $328,952
Less current portion of long-term debt                       5,250            6,000
                                                          --------         --------                 
Total long-term debt                                      $261,105         $322,952
                                                          ========         ========
<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,  commencing on June 15, 1998.
         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 1.25% or LIBOR
         plus  2.25% 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.  Term Loan
         A, Term Loan B, the Working  Capital Loan  Commitment,  the Acquisition
         Loan and the  Acquisition  B Loan  are all  part of a  credit  facility
         entered into by the Company and Desa with the lenders  party thereto in
         November 1997 (the "Credit Facility").

                                        8

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

  
(C)      The Term B Loan is payable in quarterly  installments  through November
         26, 2004,  and accrues  interest at the prime rate plus 1.625% or LIBOR
         plus  2.625% 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 1.25% or LIBOR plus 2.25%,  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.  The  Company  can  utilize
         letters of credit  under the  Working  Capital  Loan  Commitment  up to
         $10,000,000.  As of August 29,  1998,  letters of credit of  $9,008,218
         were outstanding under the Working Capital Loan Commitment.  Borrowings
         are  generally  limited  to  specific  percentages  of  eligible  trade
         receivables and inventory.

(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 1.625% or
         LIBOR  plus  2.625% at the  option of the  Company.  Once  repaid,  the
         Acquisition Loan may not be reborrowed.

(F)      The  Acquisition B Loan has available  borrowings of up to  $30,000,000
         and 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 1.625% or LIBOR plus 2.625%,
         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  beginning  June 30, 1998, 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 August 29,  1998,  the Company had the ability to incur
         additional indebtedness of $16.8 million.

4.       Stockholders' Equity (Deficit)

         Effective  March 1998,  the Company  established  the 1998 Stock Option
Plan which  terminates  in ten years and  provides for the issuance of incentive
options or  nonqualified  stock  

                                        9

<PAGE>

                            DESA HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


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.

         Effective 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 option  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.

5.       Segment Information

         The Company is organized into two primary product categories:  (a) zone
heating  products,  which  includes  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.


                                       10

<PAGE>


                            DESA HOLDINGS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)



<TABLE>
<CAPTION>
         Operational  results  and  other  financial  data for the two  business
segments for the periods ended August 30, 1997 and August 29, 1998 are presented
below (in thousands):

                                            Zone
                                           Heating     Specialty        General
                                          Products      Products       Corporate        Total
                                          --------      --------       ---------        -----
<S>                                     <C>            <C>              <C>           <C>
Thirteen weeks ended August 30, 1997
Net sales                                $ 54,119       $ 11,516           --          $ 65,635
Operating profit                           11,054          1,947           (844)         12,157
Depreciation and amortization               1,125             53            251           1,429
Identifiable assets                       111,667         31,181          6,621         149,469
Capital expenditures                          901             72           --               973
Thirteen weeks ended August 29, 1998                                                 
Net sales                                  42,479         32,937           --            75,416
Operating profit                            5,873          3,863           (990)          8,746
Depreciation and amortization               1,396            465            385           2,246
Identifiable assets                       136,639         88,343         16,811         241,793
Capital expenditures                        1,228            132             48           1,408
                                                                                     
<CAPTION>

                                            Zone
                                           Heating     Specialty        General
                                          Products      Products       Corporate        Total
                                          --------      --------       ---------        -----
<S>                                     <C>            <C>              <C>           <C>
Twenty-six weeks ended August 30, 1997                                               
Net sales                                $ 67,494       $ 22,895           --          $ 90,389
Operating profit                           11,197          3,062         (2,030)         12,229
Depreciation and amortization               1,694            201            508           2,403
Identifiable assets                       111,667         31,181          6,621         149,469
Capital expenditures                        2,648            212           --             2,860
Twenty-six weeks ended August 29, 1998                                               
Net sales                                  52,148         64,022           --           116,170
Operating profit                            3,043          6,334         (2,003)          7,374
Depreciation and amortization               1,778            926            753           3,457
Identifiable assets                       136,639         88,343         16,811         241,793
Capital expenditures                        2,491            249             66           2,806
                                                                                 
</TABLE>
                                       11
<PAGE>

6.  Acquisitions

         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  certain  of the  assets of  Universal
Heating,  Inc.  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  (Term  Loan B) and  the  issuance  of  Common  Stock  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.

         The Company accounted for such acquisitions  using the purchase method.
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


         The following supplemental pro forma information is presented as if the
acquisitions had been completed as of March 2, 1997 and as of March 1, 1998:

<TABLE>
<CAPTION>
                                                            Twenty-six weeks ended
                                                     August 30, 1997    August 29, 1998
                                                     ---------------    ---------------
                                                             (dollars in thousands)

<S>                                                    <C>              <C>       
Net Sales                                               $ 135,143        $ 128,877 
Income from operations before extraordinary item           14,079            8,446
Income before extraordinary item                              700           (5,880)
Net income                                                    424           (3,647)
                                                  
</TABLE>
           
                                       12
<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 twenty-six  week periods ending August
29, 1998 and August 30, 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  includes  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

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<PAGE>

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 the first half of its 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 was unusually warm and, consequently, net sales
and operating  profit of zone heating products for the first two 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  Universal Heating,  Inc.'s
and  its  affiliates  ("UHI")  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 $6.49.

         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.


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<PAGE>

Results of Operations

Thirteen  Week Period Ended August 29, 1998 Compared to the Thirteen Week Period
Ended August 30, 1997

         Net Sales.  Net sales in the  thirteen  weeks  ended  August  29,  1998
("second  quarter 1999") were $75.4 million,  an increase of 15% or $9.8 million
compared to the thirteen  weeks ended August 30, 1997 ("second  quarter  1998").
Zone heating  products had net sales of $42.5 million in second  quarter 1999, a
decrease of 22% or $11.6 million from second quarter 1998. This decline reflects
primarily  the effects of last winter's  unusually  warm weather and the related
customer  carryover  inventory of heating products.  Specialty  products had net
sales of $32.9  million in second  quarter  1999,  an  increase of 186% or $21.4
million over second quarter 1998,  primarily  attributable to the acquisition of
Heath   Company   and  its   Heath/Zenith   line  of  home   security   products
("Heath/Zenith")  in  February  1998 and a 17%  growth in the  traditional  tool
business.

         Cost of  Sales.  For  second  quarter  1999,  cost of sales  was  $50.3
million,  an  increase  of  $8.9  million  or  22%  from  second  quarter  1998,
attributable  to the higher net sales for the  period.  Cost of sales was 67% of
net sales in second quarter 1999 compared to 63% for second  quarter 1998.  This
increase  is  because  of (i)  proportionately  higher  sales  of home  security
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.

         Selling,  General and Administrative Expenses. For second quarter 1999,
selling,  general and administrative expenses were $16.3 million, an increase of
$4.3 million or 35% from second quarter 1998, primarily  attributable to the net
sales   increase.   As  a  percentage  of  net  sales,   selling,   general  and
administrative  expenses  were 22% for second  quarter  1999  compared to 18% in
second quarter 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
associated  with the November  1997  recapitalization  and the  acquisitions  of
Heath/Zenith, FMI and UHI.

         Operating Profit.  Operating profit was $8.7 million for second quarter
1999  compared  to $12.2  million  for second  quarter  1998,  a decline of 28%.
Operating  profit  attributable  to zone  heating  products was $5.9 million for
second quarter 1999, down $5.2 million from second quarter 1998. This decline is
attributable  to the  decline  in net  sales of zone  heating  products  and the
increased cost of goods sold  associated with under absorbed  factory  overhead.
Specialty  products  operating  profit was $3.9  million for the second  quarter
1999,  an increase of $1.9 million over second  quarter  1998.  This increase is
attributable to increased net sales of specialty  products related  primarily to
the acquisition of Heath/Zenith.

         Interest  Expense.  Interest  expense for second  quarter 1999 was $6.7
million,  an increase  of $2.9  million or 75%,  reflecting  the  November  1997
recapitalization and the acquisitions of FMI, UHI and Heath/Zenith.

                                       15
<PAGE>


         Income Tax. The provision  for income taxes was 44% for second  quarter
1999, comparable to 42% for second quarter 1998.

         Net  Income.  Net  income was $1.1  million  for  second  quarter  1999
compared to net income of $4.8  million for second  quarter  1998,  a decline of
77%.  This  decline is  attributable  to the lower  operating  profit and higher
interest expense.

Twenty-six  Week Period Ended August 29, 1998  Compared to the  Twenty-six  Week
Period Ended August 30, 1997

         Net Sales.  Net sales for the  twenty-six  weeks ended  August 29, 1998
("year to date 1999") were $116.2  million,  an increase of $25.8 million or 29%
compared to the  twenty-six  weeks ended  August 30, 1997 ("year to date 1998").
Zone heating  products had net sales of $52.1 million for the year to date 1999,
a decrease  of 23% or $15.3  million  from the year to date 1998.  This  decline
primarily  reflects the effects of last winter's  unusually warm weather and the
related customer carryover inventory on heating products. Specialty products had
net sales of $64.0  million  for the year to date 1999,  an  increase of 180% or
$41.1  million  from  the  year  to date  1998,  primarily  attributable  to the
acquisition  of  Heath/Zenith  in  February  1998  and a  15%  increase  in  the
traditional tool business.

         Cost of  Sales.  For the year to date  1999,  cost of sales  was  $79.9
million,  an  increase  of $21.9  million  or 38%  from  the year to date  1998,
reflecting the higher sales.  Cost of sales was 69% of net sales during the year
to date 1999 compared to 64% for the year to date 1998. This increase is because
of (i) proportionately higher sales of home security 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.

         Selling,  General  and  Administrative  Expenses.  For the year to date
1999,  selling,  general and  administrative  expenses  were $28.9  million,  an
increase  of  $8.8  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 25% for the year to date 1999 compared
to 22% 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 associated with the November 1997 recapitalization and the
acquisitions of Heath/Zenith, FMI and UHI.

         Operating  Profit.  Operating  profit was $7.4  million for the year to
date 1999 as compared to $12.2  million for the year to date 1998,  a decline of
40%. Operating profit attributable to zone heating products was $3.0 million for
the year to date  1999,  down  $8.2  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.  Operating  profit  attributable  to specialty
products was $6.3 million for the year to date 1999, an increase of $3.3 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.

                                       16
<PAGE>

         Interest Expense. Interest expenses for the year to date 1999 was $13.2
million an increase of $6.1 million from the year to date 1998,  reflecting  the
November  1997   recapitalization   and  the   acquisitions   of  FMI,  UHI  and
Heath/Zenith.

         Income Tax. The provision for income taxes was 44% for the year to date
1999, comparable to the rate of 42% for the year to date 1998.

         Net  Income.  Net  income  for the year to date 1999 was a loss of $3.2
million  compared  to a profit  of $2.9  million  for the year to date  1998,  a
decline of 210%. 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 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  twenty-six  weeks ended
August 29, 1998 was $31.9 million  compared to net cash used a year ago of $42.8
million for the same period last year. This positive  reduction of $10.9 million
reflects the lower inventory build up associated with the reduced  production of
zone heating products.

         Net  cash  used in  investing  activities  was  $43.0  million  for the
twenty-six  weeks  ended  August  29,  1998  compared  to $2.7  million  for the
twenty-six  weeks ended  August 30,  1997.  This higher cash used for  investing
activities  reflects  the  acquisition  of UHI and  FMI.  Net cash  provided  by
financing  activities  for the second  quarter  ended  August 29, 1998 was $74.7
million compared to $40.7 million a year ago 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
$197.0  million on August 29,  1998.  Outstanding  letters of credit and foreign
currency  contracts  established to facilitate  merchandise  purchases were $9.0
million and $4.2 million,  respectively, on August 29, 1998. The Company had the
ability to incur  additional  indebtedness  of $16.8  million at August 29, 1998
under the Credit Facility.

         The Company expects that capital  expenditures  during fiscal 1999 will
be approximately  $3.9 million.  Capital  expenditures are expected to be funded
from  internally  generated  cash  flows  and by  borrowings  under  the  Credit
Facility.

                                       17
<PAGE>

         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 Company's ability to fund its operations, make planned capital
expenditures, make scheduled debt payments, refinance 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. Except as
disclosed below, the Company does not have any contingency  plans to address the
Year 2000 problem.

         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 testing those  applications to identify those which require
modification to appropriately address the Year 2000 problem. Management believes
that the Company's MIS staff will be able to modify all such applications  prior
to the Year 2000,  although there can be no assurances  that such  modifications
will be timely completed.  The expenses of the Company's efforts to identify and
address any Year 2000 problems are not expected to be material.

         The  Company  has  begun a  program  to  identify  critical  parts  and
materials  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 well
advanced,  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

                                       18

<PAGE>



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 2.  Changes in Securities

         On August 19, 1998, the Company issued  approximately  1,849,043 shares
of Common Stock to existing  stockholders,  at a price of approximately$6.49 per
share.  Such sales were exempt from  registration  under the  Securities  Act of
1933, as amended, pursuant to Rule 506 thereunder.

         On August 28, 1998, the Company issued  approximately  11,634 shares of
Common  Stock to existing  stockholders,  at a price of  approximately$6.49  per
share.  Such sales were exempt from  registration  under the  Securities  Act of
1933, as amended, pursuant to Rule 506 thereunder.


Item 4.  Submission of Matters to a Vote of Security Holders

         On June 29, 1998, the holders of a majority of the Company's issued and
outstanding  shares of Common Stock, by written consent,  approved,  as of March
19, 1998, the Company's 1998 Stock Option Plan relating options for officers and
employees  of the Company and Desa to acquire up to an  aggregate  of  1,462,222
shares of Common Stock, such options to be granted by the Compensation Committee
of the  Company's  Board of  Directors.  As  required  by the  Delaware  General
Corporation  Law,  notice of such action by written consent was mailed to all of
the Company's stockholders on or about July 7, 1998.


Item 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits

                  10.1     Desa Holdings Corporation 1998 Stock Option Plan
                  10.2     Desa  Holdings  Corporation   Stockholders  Agreement
                           dated as of  November  26, 1997 among the Company and
                           the persons named therein
                  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: October 9, 1998                 /s/ Robert H. Elman
                                       Robert H. Elman
                                       Chairman and Chief Executive Officer

Dated: October 9, 1998                 /s/ Edward G. Patrick
                                       Edward G. Patrick
                                       Vice President of Finance and Treasurer
                                       (Principal Financial Officer)

Dated: October 9, 1998                 /s/ Scott M. Nehm
                                       Scott M. Nehm
                                       Vice President and Controller
                                       (Chief Accounting Officer)


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