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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K


(Mark One)
{X}      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

For the fiscal year ended  DECEMBER 31, 1998
                           -----------------
                                       OR
{ }      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

Commission file number   0-26228
                         ------- 
                             MARTIN INDUSTRIES, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            DELAWARE                                       63-0133054
--------------------------------------------           ------------------------
  (State or other jurisdiction                          (I.R.S. Employer
of incorporation or organization)                      Identification No.)

301 EAST TENNESSEE STREET, FLORENCE, ALABAMA                 35630
--------------------------------------------           -------------------------
 (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code   (256) 767-0330
                                                     --------------
Securities registered pursuant to Section 12(b) of the Act:

                                                       Name of each exchange on
      Title of each class                                   which registered

          NONE                                                    NONE
--------------------------------------------           -------------------------
Securities registered pursuant to Section 12(g) of the Act:   COMMON STOCK,
                                                             $0.01 PAR VALUE
                                                             ---------------

         Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

        Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X

         State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.

       AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NONAFFILIATES AS OF
                           MARCH 24, 1999 $12,398,628
       ------------------------------------------------------------------
         Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

      COMMON STOCK, $0.01 PAR VALUE, AS OF MARCH 24, 1999: 8,487,824 SHARES



                       DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).


     (1) Proxy Statement for 1999 annual meeting of stockholders - Part III.
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                                     PART I

ITEM 1.   BUSINESS

GENERAL

         The Company is a manufacturer of gas space heaters, gas logs and
pre-engineered fireplaces. The Company's gas heating products are marketed under
the Martin Gas Products, Martin Fireplace, Atlanta Stove, Warm Morning, Prime
Heat and Hunter brand names, representing over 150 combined years in the gas
heating appliance marketplace. The Company's Ashley brand of wood- and
coal-burning stoves is one of the oldest names in the solid fuel heating
industry. Through acquisitions, the Company has also become a producer of
premium gas barbecue grills and do-it-yourself utility trailer kits. The Company
manufactures its products at three facilities, of which two are located in North
Alabama and one is located in Southern Ontario, Canada, and markets its products
throughout the United States and parts of Canada through a variety of
distribution channels.

         In February 1999, the Company announced that it had entered into a
nonbinding letter of intent to sell the assets of its Ashley solid fuel heating
division to United States Stove Company. The Company anticipates that the
transaction will close during the first or second quarter of 1999 at which time
the Company anticipates reporting a gain on the sale of approximately $625,000
to $750,000, net of tax. There can be no assurance, however, that the
transaction will be consummated or that if the transaction is consummated a gain
will be recognized. 

         Prior to 1997, the Company manufactured metal office furniture through
its Filex line. In February of 1997, the Company elected to discontinue its
metal office furniture operations. The recent consolidation in the office
furniture industry increased competition and margin pressures in this business
segment to the point of an unacceptable return to the Company.

        On February 1, 1996, the Company completed its acquisition of Hunter 
Energy and Technologies Inc. and 1061099 Ontario Inc. through the direct and
indirect purchase of all of the outstanding shares of these companies. Effective
January 1, 1997, these two corporations were amalgamated to form Hunter
Technology Inc. ("Hunter").

         In July 1995 the Company completed its initial public offering of
2,300,000 shares of Common Stock. 

         The Company is incorporated under the laws of the State of Delaware.
Its principal executive offices are located at 301 East Tennessee Street,
Florence, Alabama 35630, and its telephone number is (256) 767-0330. Unless the
context indicates otherwise, all references herein to the "Company" include
Martin Industries, Inc. and its subsidiaries.

         Net sales, gross profit, identifiable assets and other financial data
of the Company's industry segments for the three years ended December 31, 1998
are contained in Note 13 to Notes to Consolidated Financial Statements.


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PRODUCTS

         Home Heating Products. Home heating products represent the largest
segment of the Company's business, contributing $65.4 million, or 77.8%, of net
sales of continuing operations in 1998. The Company manufactures and distributes
a broad line of vented and vent-free gas heaters and furnaces under the Martin
Gas Products, Atlanta Stove, Warm Morning, Prime Heat and Hunter brand names and
a variety of models of gas logs and pre-engineered fireplaces under the Martin
Gas Products, Martin Fireplaces, Atlanta Stove, Prime Heat and Hunter brand
names. The Company also manufactures and markets several models of wood-and
coal-burning free standing heaters and fireplace inserts under the Ashley brand
name.

         The Company manufactures and distributes its fireplaces in a range of
prices for each of the common fuel categories (i.e., wood and gas logs that burn
natural gas or liquefied petroleum) and in a wide variety of designs. Gross
sales of fireplaces were $26.3 million, $24.4 million and $23.5 million in 1998,
1997 and 1996, respectively, which represented 31.3%, 26.7% and 25.0% of total
gross sales of continuing operations in those respective periods.

         In 1998 the Company produced and marketed a variety of vent-free and
vented room heaters, direct-vent wall furnaces, wall furnaces and floor
furnaces. Gross sales of vent-free room heaters were $7.4 million, $10.3 million
and $11.2 million in 1998, 1997 and 1996, respectively, which represented 8.8%,
11.3% and 11.9% of total gross sales of continuing operations in the respective
periods. Gross sales of vented heaters were $5.0 million, $8.9 million and $10.0
million in 1998, 1997 and 1996, respectively, which represented 5.9%, 9.7% and
10.7% of total gross sales of continuing operations in the respective periods.

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         Leisure and Other Products. The Company manufactures and markets a
number of models of its Broilmaster grills with premium features. Gross sales of
gas grills were $13.8 million, $11.7 million and $8.2 million in 1998, 1997 and
1996, respectively, which represented 16.4%, 12.8% and 8.7% of total gross sales
of continuing operations in the respective periods.

         The Company also produces several models of 85% preassembled and
unassembled metal trailer kits. The Company's trailers comply with Department of
Transportation requirements for highway use and can be used for a variety of
light cargo transportation purposes.

         The Company's business strategy involves commitment to the development
of new products and enhancements to the Company's existing products. The
Company's investment in research and development totaled $1.6 million in 1998
and $1.8 million in 1997.

MANUFACTURING

         Each of the Company's plants maintains a variety of metal fabrication
equipment, including extensive shearing, press and metal forming and welding
equipment, paint systems, machine shops, maintenance equipment, warehouse space,
shipping and receiving departments, and computerized materials requirements
planning, production and inventory control systems.

         The principal materials used in the production of the Company's
products include aluminized, galvanized, stainless, hot-rolled and cold-rolled
steel, cast iron, valves, controls, burners, paint and other finishing materials
and packaging. All raw materials used in finished products are obtained by the
central purchasing department. The Company is not a party to any long-term
supply contracts which are material to its business. Management believes that
the materials used in the production of the Company's products are available at
competitive prices from an adequate number of alternative suppliers and does not
believe that the loss of any single supplier would have a material adverse
effect on the Company's business. Because the Company is dependent upon outside
suppliers for all of its raw material needs, no assurance can be given that the
Company will continue to have available necessary raw materials at reasonable
prices or that any increases in raw material costs would not have a material
adverse effect on the Company's financial condition or results of operations.

         Fireplaces, gas grills and utility trailers are typically shipped from
the manufacturing plant to the Company's customers. All other home heating
products are shipped from the manufacturing plant to the Company's central
warehouse located in Sheffield, Alabama via Company trucks. Shipments to gas and
wood heating customers are made from the central warehouse and are scheduled by
the customer service department through the use of a computerized product
tracking system, allowing the Company to inform customers of product
availability and facilitating timely shipment of orders. These programs also
help reduce outbound freight costs by taking advantage of load-pooling and
combination loading.

SALES AND MARKETING

         The Company's products are marketed through several divisions, each of
which is focused on specific channels of distribution. Similar home heating
products are offered under different brand names through different divisions and
the distribution channels associated therewith.

         The Company's Martin Fireplace and Hunter (fireplace) brands are sold
throughout the United States and in Canada through building products
distributors that resell to retailers, building supply houses and lumber yards.
Often, these building products distributors sell direct to new home builders on
an "installed" basis using the distributor's own installation crews.

         Broilmaster grills are sold nationwide and in Canada, with the heaviest
distribution in the eastern United States. Broilmaster grills are primarily sold
through gas equipment distributors who provide products to specialty retailers
such as hearth and patio shops, outdoor lifestyle product retailers, pool and
spa dealers and outdoor power equipment dealers.


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         The Company's gas and solid fuel heating appliances are sold primarily
throughout the eastern United States and Canada through its Martin Gas, Atlanta
Stove, Warm Morning, Ashley and Hunter brands. Martin Gas and Warm Morning
products are sold through a two-step distribution process utilizing gas
equipment and hardware wholesalers to supply products to specialty hearth
product and home decor retailers, as well as home remodelers and HVAC
installers. Atlanta Stove products are also sold through gas equipment
wholesalers, but primarily service large retail chains, liquefied petroleum
chains and natural gas utilities.

         The Company's Prime Heat hearth and heating products and NuWay utility
trailers are sold direct through a national network of mass merchandisers,
wholesale clubs, catalog houses and farm equipment supply houses.

         The Company employs a sales staff of 56 field sales and support
personnel, including eleven full-time Company employees identified as factory
representatives who receive a base salary and commissions, and also utilizes 35
independent manufacturers' agencies, which work on a commission basis and in
many cases have several salesmen representing the Company's products. Although
most manufacturers' representatives utilized by the Company also sell products
other than those produced by the Company, none sell products in direct
competition with those of the Company. The Company's sales force covers the
United States and Canada, with field sales personnel generally living in or near
the sales territories for which they are responsible. The Company holds regular
regional and national sales meetings at which product development sessions,
performance reviews and planning workshops are conducted. All field sales
efforts for the Company are supported by three regional sales managers and a
sales and marketing staff of 42 people located at the Company's corporate
headquarters.

         The Company promotes its products principally through direct contact
with its customers, published sales programs, participation in numerous national
and regional trade shows and print advertising. A majority of the Company's
media advertising is through trade publications. The Company maintains an
in-house media buying service as well as extensive printing capabilities.

         The Company has developed its distribution channels in its gas heating
appliance business over a 50-year period and in its solid fuel heating business
over a 90-year period. To maintain its relationships with its distributors,
members of management and the Company's sales staff visit the Company's
customers on a regular basis. The Company believes that frequent personal
contact contributes significantly to its ability to attract and maintain quality
distributors. The Company also believes that customer service is integral to its
marketing efforts and has invested significant resources in overhauling its
approach to customer service over the past several years, with the objective of
responding more quickly and accurately to customer inquiries.

         The Company holds registered and unregistered trademarks including
"Martin Industries", "Martin", "Warm Morning", "Prime Heat", "Ashley", "King",
"Broilmaster" and "Hunter", among others. Several of the Company's trademarks
are registered with the United States Patent and Trademark Office.

BACKLOG

         The Company's backlog is based upon customer purchase orders that the
Company believes are firm. At December 31, 1998, the Company's backlog of orders
was approximately $10.5 million, as compared to a backlog of $8.6 million at
December 31, 1997. While backlog volume generally indicates the production
levels at which the Company will operate at any particular time, it is not
usually indicative of sales for a full year or future operating performance.
This is due primarily to the seasonal nature of the Company's business and its
use of early booking programs for its gas and solid fuel heating appliances and
premium gas barbecue grills. Orders under these programs often represent
approximately 60% of the customer's projected annual requirements and, because
of program terms, the shipping period often extends over several months. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview," at Item 7 below.

COMPETITION

         Each of the industries in which the Company manufactures and sells
products is highly competitive. Although competitive factors vary by product
line, competition in all product lines is based primarily on product quality,
product innovation, customer service and price. The Company also believes that a
manufacturer's relationship with its distributors is a key factor in the
industries in which the Company competes.


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         The Company competes with a number of manufacturers in the home heating
products industry. Within this industry, there are several large manufacturers
of gas heaters and numerous producers of gas logs, pre-engineered fireplaces and
solid fuel heaters.

         There are a number of manufacturers producing pre-engineered
fireplaces, gas logs and related accessories similar to those produced by the
Company. The pre-engineered fireplace market is the largest market in which the
Company participates and is very competitive, with six principal manufacturers
comprising a large portion of this industry. Over the last three years, a number
of additional manufacturers have joined the already highly competitive gas log
market.

         The Company believes that its premium Broilmaster grills compete
principally with products produced by three major manufacturers. Brand
recognition and product quality play essential roles in the competitive
marketing of this product. The Company's principal competitor in the
do-it-yourself utility trailer market is a Taiwanese manufacturer. Although
there are numerous manufacturers of pre-assembled utility trailers, because of
the difficulty in shipping preassembled trailers in large quantities, these
products do not tend to compete with the Company's NuWay products on a national
basis.

EMPLOYEES

         At March 24, 1999, the Company had 623 full-time and four part-time
employees. The Company also from time to time utilizes temporary employees in
its operations and in 1998 the number of temporary employees ranged from nine to
197. The hourly employees located at the Company's plant in Orillia, Ontario are
subject to a collective bargaining agreement with the Company. No other
employees of the Company are subject to a collective bargaining agreement with
the Company. The Company believes that its employee relations are good.

GOVERNMENTAL REGULATIONS

         A substantial number of the products manufactured by the Company must
comply with federal, state and local laws and regulations. In Canada, products
manufactured by the Company must comply with federal, provincial, territorial
and local laws and regulations. Domestically and in Canada, a number of the
Company's products are also subject to certain voluntary standards. These laws,
regulations and standards relate, among other things, to product safety,
construction, instruction, efficiency, packaging, installation, operation and
emissions. The Company's gas heating appliances and gas grills sold in the
United States must comply with standards established by the American National
Standards Institute ("ANSI") and the American Gas Association ("AGA")/
International Approval Service ("IAS"). All gas-fired appliances manufactured by
the Company for sale in the United States must also comply with the installation
standards of the National Fire Protection Association. All gas-fired vented
heaters and furnaces manufactured for sale in the United States further must
comply with the standards for minimum efficiency for direct heating appliances
established by the National Appliance Energy Conservation Act, and the Company's
wood-burning heaters must comply with the standards for performance for
residential wood heaters established by the United States Environmental
Protection Agency. The Company's pre-engineered fireplaces and solid fuel
heating appliances sold in the United States must meet standards established by
Underwriters' Laboratories. The Company's gas heating appliances manufactured
for sale in Canada must comply with standards developed by the Canadian
Standards Association (the "CSA"). The CSA is accredited by the Standards
Council of Canada to prepare National Standards in Canada for natural gas and
propane equipment which standards provide the basis for provincial approval
where no provincial standards exist. Certain provinces have established
certification requirements and standards. In the province of British Columbia,
gas appliances may be certified only by the provincial gas safety authority to
provincial standards for sale in British Columbia only. The Company's gas
heating appliances manufactured for sale in Europe must conform to all
applicable directives on appliances.

         The Company maintains facilities and equipment for testing the
Company's products for compliance with these and other laws, regulations and
standards applicable to the Company's products. These laws, regulations and
standards generally require that all compliance testing either be performed by
an independent testing agency at the agency's laboratories or witnessed by an
agent of the independent testing agency at the Company's facilities. The Company
utilizes both alternatives for compliance testing.

        Many state and local governments in the United States have adopted and
have in place building codes regulating the installation of certain of the
Company's home heating products. These building codes are based generally upon
one or more of the model codes drafted by three regional associations: the
Building Officials and Code Administrators International, Inc. ("BOCA"), the
International Conference of Building Officials, Inc. ("ICBO") and the Southern
Building

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Code Congress International, Inc. ("SBCCI"). The current model code produced by
ICBO, which has historically been the basis for building codes adopted in
certain states (primarily, western states) prohibits installation of vent-free
gas heaters. The model codes of BOCA and SBCCI do not contain this prohibition,
but do regulate where such heaters may be installed within a structure and
certain other aspects of the product. In 1996, the International Code Council
(the "ICC"), a body formed by BOCA, ICBO and SBCCI to produce a model building
code to be proposed for adoption by all states and localities, released its
model code. This uniform model code reflects the historical position of BOCA and
SBCCI allowing the installation of vent-free gas heaters. However, there can be
no assurance that the current version of the ICC model code regarding the
Company's products will be the position contained in the version ultimately
adopted by the ICC members, or that individual states and localities will adopt
the ICC model code.

         Provincial, territorial and local governments in Canada have adopted
and have in place building codes regulating building construction. These
building codes are based generally upon a model code, the National Building Code
of Canada. This code is produced by the Canadian Commission on Building and Fire
Codes. In the Province of Ontario, the Ministry of Municipal Affairs & Housing
and local municipalities regulate construction under the Ontario Building Code.
Vent-free gas appliances are only permitted for sale in the provinces of British
Columbia and Manitoba which have their own provincial standards for such
appliances. The sale of these appliances is restricted to a maximum gas input
and is restricted to certain rooms in a residence.

         The Company believes that the products which it currently produces and
sells are in compliance in all material respects with the laws, regulations and
standards applicable to such products. Nevertheless, no assurance can be given
as to the impact of future governmental regulations and product standards on the
Company's operations, or the future capital expenditure requirements or the
costs of compliance associated therewith, nor can any assurance be given that
future governmental regulations or product standards will not have a material
adverse effect on the Company. Further, in the event that national or regional
building codes are drafted in the future which prevent or restrict the
installation of, or require modification to, certain gas heaters or other
products manufactured by the Company, or if individual federal, state,
territorial, provincial or local governmental entities or agencies adopt their
own codes to such effect, these events could have a material adverse effect on
the financial condition or results of operations of the Company.

ENVIRONMENTAL MATTERS

         Manufacturing concerns such as the Company involve operations that are
subject to numerous federal, state, provincial and local laws, regulations and
standards relating to human health and safety and the environment. In the United
States, the Clean Air Act, the Clean Water Act, and similar state and local
counterparts of these federal laws regulate air and water emissions and
discharges into the environment. The Resource Conservation and Recovery Act and
the Comprehensive Environmental Response, Compensation and Liability Act, among
other federal, state and local laws, address the generation, storage, treatment,
handling, transportation and disposal of solid and hazardous waste and releases
of hazardous substances into the environment. In Canada, the Canadian
Environmental Protection Act and provincial environmental protection
legislation, along with local laws, regulate a similar range of environmental
issues. The Company's manufacturing operations require compliance with these
environmental laws and regulations, among others, as well as the workplace
safety and health standards established by the Occupational Safety and Health
Acts in both countries. Under these environmental laws and regulations, third
parties and governmental agencies in some cases have the power to require
remediation of environmental conditions and, in the case of governmental
agencies, to impose fines and penalties.

         Several of the facilities currently and previously owned or operated by
the Company are located in industrial areas and have historically been used for
extensive periods, in some cases dating back to the turn of the century, for
industrial operations such as dyeing, foundry, petroleum, painting, plating,
textile and manufacturing. These historic operations have used materials and
generated wastes that would be considered to be regulated substances under
current environmental laws. Prior to the enactment of modern environmental laws
and regulations, industrial operations took fewer precautions relative to the
generation, handling, storage, treatment, disposal and release of substances now
known or believed to threaten human health and safety or the environment. The
Company has implemented recordkeeping and management practices and procedures in
order to help ensure compliance with applicable environmental laws and
regulations. Each plant has personnel responsible for environmental compliance.
The Company believes that it is currently in compliance in all material respects
with these laws and regulations. Nevertheless, given the foregoing
circumstances, there can be no assurance that past operations at or near the
Company's presently or previously owned or operated facilities or the Company's
present or future operations

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will not necessitate action by the Company or give rise to actions by
governmental agencies or private parties that could cause the Company to incur
response costs, fines, penalties or other liabilities, damages or expenses, or
incur operational shut-downs, business interruptions or other similar losses
that either individually or in the aggregate would have a material adverse
effect on the Company's financial condition or results of operations.

ITEM 2.  PROPERTIES

         The Company's corporate headquarters are located in a single story
facility in Florence, Alabama, consisting of 50,000 square feet. The Company's
engineering center, also in Florence, is located in a separate facility,
consisting of 20,000 square feet. In Huntsville, Alabama, the Company has two
facilities, the Huntsville plant, a 250,000 square foot facility which produces
certain gas and solid fuel heating products, gas logs and NuWay utility trailer
kits, and the Huntsville warehouse, a 210,000 square foot facility which was
used prior to the fourth quarter of 1998 to provide warehousing space for gas
and solid fuel heating products and repair parts. The Company is currently
using the Huntsville warehouse only for repair parts. The Athens, Alabama plant
is a 300,000 square foot facility which produces certain of the Company's gas
heating products, pre-engineered fireplace products and Broilmaster gas grills.
The Company's plant in Orillia, Ontario, Canada is a 100,000 square foot
facility which produces certain of the Company's gas heating products and
pre-engineered gas fireplace products. The Company's Washington Park, Illinois
plant is a 120,000 square foot facility where the Company manufactured its
Broilmaster gas grills, gas logs and certain of the Company's gas heaters prior
to the plant's closing during the second quarter of 1998. The Company is
presently seeking to sell this property. The Company's Sheffield, Alabama plant
is a 236,000 square foot facility at which the Company manufactured its metal
office furniture prior to discontinuing this business segment. Presently, the
Sheffield facility serves as the Company's primary warehouse space for the
Company's gas and solid fuel heating products. The Company intends to transfer
the warehousing of repair parts from the Huntsville warehouse to the Sheffield
facility at which time the Company expects to offer the Huntsville warehouse
for sale. The Company currently leases its corporate headquarters and its
Athens manufacturing facility pursuant to lease agreements associated with the
industrial development financing arrangements utilized to acquire and develop
these properties. Although the debt associated with these properties has been
retired, the Company has continued to hold these facilities subject to the
lease arrangements in order to receive certain tax benefits. Each property may
be purchased at the Company's option for a nominal amount. Other than these two
properties, the Company owns all of its major facilities.

ITEM 3.  LEGAL PROCEEDINGS

         On February 1, 1996, the Company's wholly owned subsidiary, 1166081
Ontario Inc., acquired all of the capital stock of Hunter
Technology Inc. for a purchase price of approximately $1,943,000 that consisted
of cash and $729,000 in promissory notes payable. An escrow fund consisting of
$364,000 of the cash purchase price was established at the closing to make funds
available to meet the sellers' indemnification obligations to the Company.
During the first quarter of 1997, the Company notified certain of the sellers
that it was withholding payment on the promissory notes held by them pending
resolution of certain issues with the holders of the notes arising out of the
purchase transaction. The Company also claimed the entire amount in escrow and
instituted litigation to recover these amounts and additional amounts from
certain sellers in the purchase transaction, and certain of the sellers sued to
enforce collection of their notes.

         During 1998, the Company effected a settlement with all but two of the
former shareholders, and a contingent settlement with these two. Pursuant to the
settlement, the Company has received approximately $315,000 (including interest)
of funds held in escrow, an additional payment of $32,000, and cancellation of
promissory notes and accrued interest totaling approximately $364,000. The
contingent settlement will result (if the contingency is satisfied and that
portion of the settlement effectuated) in receipt by the Company of an
additional $97,000, and cancellation of notes and accrued interest totaling
approximately $201,000. No further action is contemplated as to the Company's
claims against these two former shareholders, or as to their claims asserted in
Canada against the Company, until such time as it is determined that the
condition for completion of the settlement has been satisfied, which event will
likely occur during 1999.

         The Company is a party from time to time to various legal proceedings
that are incidental to its business. Certain of these cases filed against the
Company and other companies engaged in businesses similar to the Company often
allege, among other things, product liability, personal injury and breach of
contract and warranty. These types of suits sometimes seek the imposition of
large amounts of compensatory and punitive damages and trials by juries. In the
opinion of the Company's management, the ultimate liability, if any, with
respect to the proceedings in which the Company is currently involved is not
presently expected to have a material adverse effect on the Company. However,
the potential exists for unanticipated material adverse judgements against the
Company. See Note 9 to Notes to Consolidated Financial Statements.


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ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of security holders of the Company,
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year ended December 31, 1998.


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                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company declared quarterly cash dividends of $0.04 per share in
January and April 1998 and $0.042 per share in July and October 1998 for a total
of $0.164 in per share dividends declared in 1998 on the Common Stock of the
Company. The Company declared cash dividends totaling $.156 per share in 1997.
In January, 1999, the Board of Directors reduced the quarterly cash dividend to
$0.021 per share for the fourth quarter of 1998, a 50% reduction from the amount
of the dividend declared for the third quarter of 1998. Although the Company has
historically paid quarterly dividends, the future payment of dividends will be
within the discretion of the Board of Directors and depends on the Company's
profitability, capital requirements, financial condition, growth, business
opportunities and other factors which the Board of Directors may deem relevant.
In addition, the Company's credit agreement with its primary lender (the
"Amended Credit Agreement") restricts the payment of cash dividends by the
Company if such payment would cause the Company to fail to meet certain
financial covenants as stated in the Amended Credit Agreement. In particular,
one of the financial covenants in the Amended Credit Agreement requires that the
Company's net worth each year as of December 31 be at least equal to its net
worth as of December 31, 1994, plus the net proceeds received by the Company in
its initial public offering, plus fifty percent (50%) of the Company's net
income for each fiscal year after December 31, 1994. The Company currently does
not believe that these restrictions in the Amended Credit Agreement will
materially limit the Company's ability to pay currently anticipated quarterly
cash dividends.

         The Company's Common Stock began trading on The Nasdaq Stock Market's
National Market on July 13, 1995. As of March 24, 1999, the Company had 175
stockholders of record. This number excludes individual stockholders holding
stock under nominee security position listings. The closing price of the Common
Stock on The Nasdaq Stock Market's National Market on March 24, 1999 was $2.63.
The prices in the table below represent the high and low sales prices for the
Company's Common Stock as reported on The Nasdaq Stock Market's National Market.

<TABLE>
<CAPTION>
                                               Fiscal 1998                       Fiscal 1997
                                         ----------------------           ----------------------
                                           High          Low                 High          Low
                                         --------     ---------           ---------     --------
         <S>                             <C>          <C>                 <C>           <C>
         First Quarter                   $   6.06     $    4.94           $    8.00     $   5.63
         Second Quarter                  $   5.38     $    4.69           $    6.13     $   5.00
         Third Quarter                   $   5.00     $    3.06           $    7.00     $   5.50
         Fourth Quarter                  $   3.38     $    2.50           $    6.63     $   4.88
</TABLE>


                                        9

<PAGE>   11



ITEM 6.  SELECTED FINANCIAL DATA.

         The selected statements of operations data, basic and diluted per share
data and balance sheet data for the five years ended December 31, 1998 set forth
below have been derived from the consolidated financial statements of the
Company, which statements have been audited by Arthur Andersen LLP, independent
public accountants. The following data should be read in conjunction with the
consolidated financial statements of the Company and notes appearing elsewhere
in this Annual Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                            ----------------------------------------------------------------------
                                               1998          1997           1996           1995          1994
                                            ----------    -----------    -----------    -----------  -------------
                                                         (Dollars In Thousands, except per share data)
<S>                                         <C>           <C>            <C>            <C>          <C>
Net sales                                   $   84,025    $    87,351    $    90,194    $    75,905  $      85,782
Cost of sales                                   72,366         67,521         65,334         55,113         59,512
                                            ----------------------------------------------------------------------
Gross profit                                    11,659         19,830         24,860         20,792         26,270
                                            ----------------------------------------------------------------------
Operating expenses:
   Selling                                       9,047          9,914          9,055          6,671          7,301
   General and administrative                    6,908          6,599          6,733          4,887          5,253
   Non-cash ESOP compensation(1)                 1,293          1,905          2,812          2,850          1,824
   Restructure charge(2)                           615              0              0              0              0
                                            ----------------------------------------------------------------------
                                                17,863         18,418         18,600         14,408         14,378
                                            ----------------------------------------------------------------------
Operating income (loss)                         (6,204)         1,412          6,260          6,384         11,892
Interest expense (income), net                    (275)           584            473            539          1,252
                                            ----------------------------------------------------------------------
Income from continuing operations before
  income taxes                                  (5,929)           828          5,787          5,845         10,640
Provision (credit) for income taxes             (1,793)           576          2,592          2,624          4,256
                                            ----------------------------------------------------------------------

Income (loss) from continuing operations        (4,136)           252          3,195          3,221          6,384
Income (loss) from discontinued
 operations, net of tax                              0              0             62          1,349            771
Loss on disposal of discontinued
  operations, net of tax                             0           (756)        (1,430)             0              0
                                            ----------------------------------------------------------------------
Net income (loss) from discontinued
 operations                                          0           (756)        (1,368)         1,349            771
                                            ----------------------------------------------------------------------

Net income (loss)                           $   (4,136)   $      (504)   $     1,827    $     4,570  $       7,155
                                            ======================================================================

BASIC PER SHARE DATA:
Income (loss) from continuing operations    $    (0.58)   $      0.04    $      0.50    $      0.70  $        2.02
Income (loss) from discontinued operations        0.00          (0.11)         (0.21)          0.29           0.24
                                            ----------------------------------------------------------------------

Net income (loss)                           $    (0.58)   $     (0.07)   $      0.29    $      0.99  $        2.26
                                            ======================================================================

Weighted average number of common and
   common equivalent shares outstanding      7,073,430      6,787,685      6,412,222      4,622,948      3,167,955
                                             ---------------------------------------------------------------------


DILUTED PER SHARE DATA:
Income (loss) from continuing operations    $    (0.58)   $      0.04    $      0.47    $      0.62  $        1.75
Income (loss) from discontinued operations        0.00          (0.11)         (0.20)          0.26           0.21
                                            ----------------------------------------------------------------------

Net income (loss)                           $    (0.58)   $     (0.07)   $      0.27    $      0.88  $        1.96
                                            ======================================================================

Weighted average number of common and
   common equivalent shares outstanding      7,073,430      7,049,131      6,772,191      5,204,254      3,655,645
                                             ---------------------------------------------------------------------

DIVIDENDS DECLARED PER SHARE                $     0.16    $      0.16    $      0.15    $      0.39  $        0.09
                                            ======================================================================
</TABLE>


                                       10

<PAGE>   12

<TABLE>
<S>                                         <C>           <C>            <C>            <C>          <C>
OTHER DATA:
Income from continuing operations before
   non-cash ESOP compensation expense,
   depreciation and amortization, interest,
   taxes, and restructure charge(3)         $   (2,500)   $     5,214    $    10,695    $    10,254  $     14,592
Capital expenditures                             1,640          2,053          2,798          2,181         1,266
</TABLE>

<TABLE>
<CAPTION>
                                                                        AT DECEMBER 31,
                                                 1998          1997          1996           1995           1994
                                              ----------    ----------    -----------    ----------    --------
                                                                        (In thousands)
<S>                                         <C>           <C>            <C>            <C>          <C>
BALANCE SHEET DATA:
  Cash and short-term investments            $   9,818    $    15,157    $    19,326    $    20,439   $    3,630
  Working capital                               36,598         43,172         44,906         43,305       20,158
  Total assets                                  62,379         70,980         76,344         63,582       42,104
  Long-term debt, less current portion           6,864          8,599         10,263          7,228        8,456
  Stockholders' equity                          42,043         47,623         48,032         43,078       17,448

</TABLE>

---------------

(1) In 1993, in connection with the establishment of the ESOP, the Company
adopted SOP No. 93-6, which requires that the Company recognize non-cash ESOP
compensation expense in each fiscal quarter as shares of stock owned by the ESOP
are committed to be released to participants' accounts based on the average fair
value of the shares during the quarter. Shares of stock owned by the ESOP are
committed to be released to participants' accounts as payments are made on the
ESOP debt. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- ESOP Accounting" and Notes 2, 4 and 7 to Notes to
Consolidated Financial Statements.

(2)  See Note 12 to Notes to Consolidated Financial Statements.

(3) This measurement is not intended to represent income from continuing
operations, cash flow or any other measure of performance in accordance with
generally accepted accounting principles, but is included because the Company
believes certain investors find it to be useful for measuring and identifying
trends with respect to the Company's creditworthiness.


                                       11

<PAGE>   13


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements of the Company and notes thereto and the other financial
information appearing elsewhere in this Annual Report on Form 10-K.

OVERVIEW

         The Company manufactures products in two industry segments: home
heating products and leisure and other products such as do-it-yourself utility
trailer kits and premium gas barbecue grills. Each of the industry segments in
which the Company operates is cyclical in nature, with sales being affected by
general economic cycles, consumer confidence levels, inflation, employment and
income levels and the availability of credit generally. The Company's fireplace
business is also influenced by factors affecting the housing industry, such as
housing demand, the availability of financing and the level and stability of
interest rates.

         As part of the continuing effort to reduce operating costs and improve
manufacturing efficiencies, the Company initiated the closing of its Washington
Park, Illinois facility and the transfer of the gas grill, gas log and
freestanding vent-free stove production into the Athens, Alabama and Huntsville,
Alabama locations during the second quarter of 1998. The Company recorded a
non-recurring charge of $615,000, before tax, in connection with the closing.
The non-recurring charge includes plant closing costs of $590,000 (primarily
payroll, severance and payroll taxes of $234,000 and group insurance of
$255,000) and a property, plant and equipment valuation charge of $25,000. The
estimated reserve remaining as of December 31, 1998 totaled $251,000. See Note
12 to Notes to Consolidated Financial Statements.

         Prior to 1997, the Company manufactured products in the metal office
furniture segment through its Filex line acquired in 1989. In February of 1997,
the Company elected to discontinue its metal office furniture operations. The
consolidation in the office furniture industry increased competition and margin
pressures in the segment to the point of an unacceptable return to the Company.
The metal office furniture segment's operations are treated as discontinued in
the accompanying condensed consolidated financial statements. See "--Results of
Discontinued Metal Office Furniture Operations."

         On February 1, 1996, the Company's Canadian subsidiary 1166081 Ontario
Inc. acquired all of the capital stock of Hunter. See Note 10 to Notes to
Consolidated Financial Statements. The aggregate purchase price of approximately
$1,943,000 included $850,000 in cash, $729,000 in promissory notes payable and
$364,000 paid into escrow. The purpose of the escrow was to make funds available
to meet the sellers' indemnification obligations to the Company. The promissory
notes, bearing interest at a rate of 9% per annum, matured during the first
quarter of 1997. The Company withheld payment on certain of the promissory notes
pending resolution of certain issues with the holders of the notes arising out
of the purchase transaction. The Company also claimed the entire amount in
escrow and instituted litigation to recover these amounts and additional amounts
from certain sellers in the purchase transaction, and certain of the sellers
sued to enforce collection of their notes.

         During 1998, the Company effected a settlement with all but two of the
sellers, and a contingent settlement with these two. Pursuant to the settlement,
Martin has received approximately $315,000 (including interest) of funds held in
escrow, an additional payment of $32,000, and cancellation of notes and accrued
interest totaling approximately $364,000. Consequently, in 1998, the Company
recorded a gain on the settlement of litigation of $422,000. The contingent
settlement will result (if the contingency is satisfied and that portion of the
settlement effectuated) in receipt by the Company of an additional $97,000, and
cancellation of notes and accrued interest totaling approximately $201,000. No
further action is contemplated as to the Company's claims against those certain
sellers, or as to their claims asserted in Canada against the Company, until
such time as it is determined that the condition for completion of the
settlement has been satisfied, which event will likely occur during 1999.

         Sales of home heating products and, in particular, gas and solid fuel
heaters (other than fireplaces), historically have been seasonal in nature, with
sales being directly affected by weather conditions. In an effort to better
control its production schedule and inventory of finished products in light of
this seasonality, the Company utilizes early booking programs, which allow the
Company to project sales early in the year and plan production accordingly. In
general, the Company takes early booking orders for its heating products in the
first and second quarters and fills the majority of

                                       12

<PAGE>   14


these orders in the second and third quarters, with fill-in orders being shipped
in the fourth quarter and to a lesser degree in the ensuing first quarter.
Unseasonably warm weather results in higher customer inventories that in turn
result in fewer fourth quarter customer fill-in orders and lower response to the
Company's early booking programs for the following year. See " - Quarterly
Results."

         Notwithstanding the early booking programs, sales are recognized by the
Company when the product is shipped. A majority of sales of gas and solid fuel
heaters under the Company's early booking programs historically have occurred in
the second and third quarters, with products being shipped throughout this
period. Orders under the Company's early booking programs have historically
represented up to 60% of customers' projected annual requirements and, because
of program terms, the shipping period often extends over several months.
Customer orders for products other than orders placed under the early booking
programs are accepted and filled by the Company as received and shipped at the
customer's request. As used in the following discussion and elsewhere in this
Annual Report, the term "gross sales" reflects total customer invoices billed by
the Company for the applicable period, net of any customer sales credits issued.
The term "net sales" as used herein and elsewhere in this Annual Report,
reflects gross sales less deductions for cash discounts, freight and special
program credits allowed by the Company.

         In an effort to decrease the effects of seasonal sales of its home
heating products and to achieve manufacturing efficiencies through increased
capacity utilization, the Company acquired its line of NuWay utility trailer
kits in 1988 and its line of Broilmaster gas barbecue grills in 1990. The
Company's NuWay and Broilmaster products historically have been contraseasonal
to the Company's home heating products, with higher sales during warm weather
months.

ESOP ACCOUNTING

         The Company established the Martin Industries, Inc. Employee Stock
Ownership Plan and Related Trust (the "ESOP") in 1992, and in January 1993 the
Company borrowed $11.9 million from its primary lender (the "Bank Loan"), which
funds were then loaned by the Company to the ESOP (the "ESOP Loan") on terms
substantially similar to those of the Bank Loan. The ESOP Loan enabled the ESOP
to purchase approximately 51% of the Company's common stock on a fully diluted
basis from existing stockholders. The Bank Loan and the ESOP Loan are payable in
equal principal installments over 10 years. At the time of the origination of
the Bank Loan and the ESOP Loan and the consummation of the purchase by the ESOP
of the Company's shares, the Company recorded the principal amount of the Bank
Loan as long-term debt and recorded unearned compensation in an equal amount,
which is reflected as a reduction of stockholders' equity on the consolidated
balance sheet.

         Pending repayment of the ESOP Loan, shares owned by the ESOP are held
in a suspense account. Shares of common stock are committed to be released from
the ESOP's suspense account and credited to ESOP participants' accounts based on
the ratio that the principal debt repayment of the ESOP Loan bears to the
original principal debt balance (i.e., approximately 347,340 shares of common
stock per year). The Company is required to recognize compensation expense each
fiscal quarter in an amount equal to one-fourth of the number of shares of
common stock committed to be released each year multiplied by the average fair
market value of such shares during the period. The fair market value of the
shares of common stock committed to be released and charged to compensation
expense is also credited to stockholders' equity. Accordingly, if the fair
market value of the common stock increases, so will the Company's non-cash
compensation expense related to the ESOP, which in turn has a negative impact on
the Company's net income (loss) and net income (loss) per share, but does not
reduce the Company's net worth. Because the Company cannot predict the price at
which its shares will trade in the future, it cannot predict the amount of
non-cash compensation expense it will incur based upon the release of the ESOP's
shares to the participants' accounts or the resulting effect on net income
(loss) or net income (loss) per share. To the extent dividends are declared and
paid on shares allocated to participants' accounts, the ESOP allows the
Administrative Committee to use such dividends to repay the ESOP Loan. In such
event, the dividends paid with respect to allocated shares are paid to
participants in the form of released shares. The negative impact on earnings
will be partially offset by the impact of such dividends, since the Company is
not required to recognize compensation expense with respect to the release of
shares related to dividends paid on ESOP shares allocated to participants.

YEAR 2000 COMPLIANCE

         The efficient operation of the Company's business is dependent in part
on its computer software programs and operating systems (collectively, "Programs
and Systems"). These Programs and Systems are used in several key areas of the
Company's business, including inventory management, pricing, sales, and
financial reporting, as well as in various

                                       13

<PAGE>   15


administrative functions. Many of the Company's Programs and Systems, as well as
the programs and systems of third parties doing business with the Company, are
subject to the "Year 2000" issue, which is the inability of a computer to
correctly process dates after December 31, 1999. This inability could
potentially cause affected computers to shut down or perform incorrect
calculations, ultimately resulting in a system failure, disruption of
operations, and the inability to engage in normal business activities. This
issue also affects products or systems which contain embedded computer chips
with date sensitive programming, such as manufacturing equipment, security
systems, telephone equipment and office equipment ("non-IT systems"). As a
result, many companies' software and computer systems need to be upgraded or
replaced in order to address the Year 2000 issue.

         The Company has evaluated its Programs and Systems to identify and
address potential Year 2000 compliance problems. As a result, the Company has
purchased Year 2000 compliant versions of its packaged Programs and Systems and
has decided to modify its custom Programs and Systems. The Company has incurred
approximately $100,000 during 1997 and 1998 and expects to incur an additional
$50,000 during 1999 to modify or make selective improvements to its Programs and
Systems. The Company plans to complete the replacement and modification of its
IT Programs and Systems by the end of 1999. While some non-critical systems may
not be addressed until after December 1999, the Company believes such systems
will not disrupt its operations in a material manner. With respect to the
Company's non-IT systems, the Company has partially completed its evaluation,
but currently believes that its material non-IT systems are not date dependent.

         The Company has also initiated communication with suppliers, and
intends to initiate communication with financial institutions and other third
parties with which it does business in the near future, to evaluate their Year
2000 compliance. The Company is currently reviewing responses from its suppliers
to identify and assess compliance issues, but has not yet completed that review.
The Company will continue to communicate with suppliers and will monitor the
responses during 1999.

         Because of the subjective nature of and inherent uncertainty in the
Year 2000 compliance issue, the actual costs to address and resolve any
non-compliance issues may differ materially from those anticipated. In
particular, this estimate assumes that the Company will not encounter material
Year 2000 compliance issues with its non-IT systems, that it has correctly
identified and assessed the material Year 2000 compliance issues associated with
its IT Programs and Systems, and that its suppliers, customers and others with
which it does business correctly communicate with the Company and do not
experience significant Year 2000 compliance issues.

         The Company could be affected if the Year 2000 issue impacts suppliers'
abilities to provide raw materials and other supplies needed in the
manufacturing process or if its customers' ability to take shipments are
affected. The Company is also dependent on third parties or government agencies
to (1) supply sufficient electrical power and other utilities, transportation
and other services to sustain the manufacturing process and other Company
operations, (2) process, pay and maintain records of certain employee benefits,
and (3) supply funds and information in a timely fashion for its distributors
and customers to purchase products. Any failure on the part of these third
parties could have a material adverse effect on the business, results of
operations and financial condition of the Company.

         If the Company's efforts to resolve the Year 2000 issue are not
adequate or implemented in a timely manner, the Company could experience a
disruption in its normal business activities. Management of the Company
currently believes that the most reasonably likely worst case scenario would be
the delay in collections from third parties which could result in liquidity
issues for the Company, the delay of financial reporting due to any accounting
processes which may need to be performed manually, a delay in purchasing
supplies and shipping products, and increased costs associated with obtaining
alternative sources of supply and other business, in each case until all Year
2000 issues are resolved. However, the potential consequences of the Year 2000
issues are inherently uncertain, and consequently, no assurance can be given
that this will be the reasonably likely worst case scenario.

         The Company has not established a contingency plan for Year 2000
issues. However, the Company intends to develop a contingency plan in
approximately mid-1999.

         The Company, in the normal course of its business, has evaluated the
need for a system-wide replacement of its Programs and Systems without regard to
the Year 2000 compliance issue. As a result of the evaluation and as part of the
Company's priority objectives, the Company made the decision to purchase fully
integrated Enterprise Resource Planning ("ERP") Programs and Systems that will
replace its current Program and Systems. Such ERP Programs and Systems are Year
2000 compliant. The Company has incurred approximately $267,000 through December
31, 1998

                                       14

<PAGE>   16


and expects to incur an additional $2.7 million during 1999 and 2000 to complete
the installation of the new Programs and Systems.

         Many of the statements in this section constitute forward-looking
statements and are subject to a number of assumptions, risks and uncertainties
that could cause actual results to differ materially from those expressed or
contemplated by these statements.

RESULTS OF CONTINUING OPERATIONS

         The following tables set forth, for the periods indicated, information
derived from the Company's consolidated financial statements expressed as a
percentage of net sales and financial information for the Company's two industry
segments.

<TABLE>
<CAPTION>

                                                                    Percentage of Net Sales
                                                                    Year Ended December 31,
                                                              1998              1997              1996
                                                          --------------------------------------------
<S>                                                       <C>               <C>               <C>
Net sales                                                    100.0%            100.0%            100.0%

Cost of sales                                                 86.1              77.3              72.4
                                                          --------------------------------------------
Gross profit                                                  13.9              22.7              27.6
                                                          --------------------------------------------
Operating expenses:
   Selling                                                    10.8              11.3              10.0
   General and administrative                                  8.2               7.6               7.5
   Non-cash ESOP compensation                                  1.6               2.2               3.1
   Restructure charge                                          0.7               0.0               0.0
                                                          --------------------------------------------
                                                              21.3              21.1              20.6
                                                          --------------------------------------------
Operating income (loss)                                       (7.4)              1.6               7.0
Interest expense (income), net                                (0.3)              0.7               0.5
                                                          --------------------------------------------
Income (loss) from continuing operations
   before income taxes                                        (7.1)              0.9               6.5
Provision (credit) for income taxes                           (2.2)              0.6               2.9
                                                          --------------------------------------------
Income (loss) from continuing operations                      (4.9)%             0.3%              3.6%
                                                          ============================================
</TABLE>

<TABLE>
<CAPTION>

                                                                        Segment Information
                                                                       Year Ended December 31,
                                                                          (In thousands)
                                                             1998               1997              1996
                                                          -----------------------------------------------
<S>                                                       <C>               <C>               <C>
Net sales:
   Home heating products                                  $    65,386       $    69,371       $    76,413
   Leisure and other products                                  18,639            17,980            13,781
                                                          -----------------------------------------------
                                                          $    84,025       $    87,351       $    90,194
                                                          ===============================================
Gross profit:
   Home heating products                                  $     7,964       $    16,135       $    22,284
   Leisure and other products                                   3,695             3,695             2,576
                                                          -----------------------------------------------
                                                          $    11,659       $    19,830       $    24,860
                                                          ===============================================
Segment contribution (1):
   Home heating products                                  $     1,463       $     8,662       $    14,804
   Leisure and other products                                   1,149             1,254             1,001
                                                          -----------------------------------------------
                                                          $     2,612       $     9,916       $    15,805
                                                          ===============================================
</TABLE>

(1) Segment contribution consists of gross profit less selling expenses.



                                       15

<PAGE>   17
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

         Net sales in 1998 were $84.0 million as compared to $87.4 in 1997, a
decrease of $3.3 million. Net sales of home heating products decreased to $65.4
million in 1998 as compared to $69.4 in 1997, a decrease of $4.0 million, or
5.7%. Net sales of leisure and other products increased $659,000, or 3.7%, in
1998 to $18.6 million as compared to $18.0 million in 1997.

         Of the decrease in net sales of home heating products, gas heating
sales decreased $7.0 million in 1998, while fireplace sales increased $3.7
million in 1998. The decrease in sales was primarily due to the weather's
influence on order rates, continued competitive pressures in the gas space
heater market from both foreign and domestic sources and a decrease in Martin's
share of the gas heater market. Statistics published by the Gas Appliance
Manufacturers Associates ("GAMA") indicate that industry sales of vented and
vent-free gas heating products in 1998 decreased 5.0% as compared with 1997.
Martin's sales of GAMA-reported products decreased 19.6% for the same period.
The increase in leisure and other sales was primarily the result of a $1.9
million, or 17.1%, increase in net sales of gas barbecue grills. Net sales of
utility trailer kits decreased $1.0 million, or 17.2%, in 1998 to $4.8 million
as compared to $5.8 million in 1997.

         Gross profit in 1998 was $11.7 million as compared to $19.8 million in
1997, a decrease of $8.2 million, or 41.2%. Gross profit on net sales of home
heating products was $8.0 million in 1998 as compared to $16.1 million in 1997,
a decrease of $8.2 million, or 50.6%. Gross profit on net sales of leisure and
other products, $3.7 million in 1998, remained relatively constant compared to
1997.

         Gross margin, defined as gross profit as a percentage of net sales,
decreased to 13.9% in 1998 from 22.7% in 1997. Gross margin on home heating
products decreased to 12.2% in 1998 from 23.3% in 1997. The significant decrease
in gross margin was primarily the result of higher factory provisions for
product liability and workers' compensation claims, reduced gas heater prices
and a shift in mix from higher margin gas heaters to fireplace products.
Additionally, gross margin on home heating products was negatively impacted as a
result of a $1.8 million fourth quarter charge to earnings for excess and
obsolete inventory. The inventory charge was primarily the result of the
discontinuance of certain low volume product lines, the elimination of certain
components resulting from the planned re-design of certain high volume products
and the write-off of certain slow moving repair parts. Gross margin on leisure
and other products decreased to 19.8% in 1998 from 20.6% in 1997. Gross margin
was negatively impacted by higher production variances associated with the
transfer of grill production from the Washington Park, Illinois facility to the
Athens, Alabama facility. See Note 12 to Notes to Consolidated Financial
Statements. In addition, gross margin on leisure and other products declined as
a result of a $200,000 charge for excess and obsolete inventory.

         Selling expenses in 1998 were $9.0 million as compared to $9.9 million
in 1997, a decrease of $867,000, or 8.7%. The decrease was primarily due to a
$183,000 decrease in co-op advertising, a $103,000 decrease in commission
expenses and a $558,000 decrease in advertising and promotion expenses. Selling
expenses as a percentage of net sales decreased to 10.8% in 1998 from 11.3% in
1997.

         Total segment contribution, defined as gross profit less selling
expenses, was $2.6 million in 1998 compared to $9.9 million in 1997. The $7.3
million decrease, or 73.7%, was primarily the result of the decrease in gross
profit offset by decreased selling expenses, as discussed above.

         General and administrative expenses increased $309,000, or 4.7%, in
1998 as compared to 1997. The increase in general and administrative expenses
was primarily due to an increase in deferred compensation expense, primarily
caused by a death benefit received during 1997, the resignation of the former
CEO and a decrease in the implicit interest rate assumed in the plan. The
increase in general and administrative expenses was partially offset by a
decrease in design and development expenses.

         Non-cash ESOP compensation expense decreased $612,000, or 32.1%, in
1998 to $1.3 million, as compared to $1.9 million in 1997. In 1998, 293,044
shares of unallocated ESOP stock were committed to be released as compensation
at an average fair value of $4.41 per share, as compared to 314,243 shares
committed to be released as compensation at an average fair value of $6.06 per
share in 1997. During 1998 and 1997, shares released as dividends on shares
allocated to participants were 55,681 and 36,404, respectively.

         As reported in the Company's Form 10-Q for the 13-week period ended
March 28, 1998, the Company made the decision to close its Washington Park,
Illinois facility. The Company initiated the closing and the transfer of the gas
grill, gas log and freestanding vent-free stove production into the Athens,
Alabama and Huntsville, Alabama locations during the second quarter of 1998. The
Company recorded a non-recurring charge of $615,000, before tax, in connection
with the closing in the second quarter of 1998. The non-recurring charge
includes plant closing costs of $590,000 (primarily payroll, severance and
payroll taxes of $234,000 and group insurance of $255,000) and a property, plant
and

                                       16

<PAGE>   18



equipment valuation charge of $25,000. The estimated reserve remaining as of
December 31, 1998 totaled $251,000. See Note 12 to Notes to Consolidated
Financial Statements.

         Interest expense decreased $481,000, or 32.4%, in 1998 to $1.0 million,
as compared to $1.5 million in 1997. The decrease was primarily attributable to
the decrease in average outstanding debt during 1998.

         Interest and other income increased $378,000, or 41.9%, in 1998 to $1.3
million, as compared to $902,000 in 1997. The increase was primarily
attributable to a gain on sale of other assets of $291,000 and a gain on the
settlement of litigation of $422,000 (see Note 10 to Notes to Consolidated
Financial Statements), partially offset by a decrease in average funds invested
during 1998.

         The credit for income taxes was $1.8 million in 1998 as compared to a
provision for income taxes of $576,000 in 1997. The effective tax rate was
(30.2)% in 1998 as compared to 69.6% in 1997. The change in the effective tax
rate was primarily the result of the establishment of a $446,000 valuation
allowance for deferred taxes.

         Loss from continuing operations in 1998 was $4.1 million as compared to
income from continuing operations of $252,000 in 1997, primarily the result of
the factors discussed above.

         Loss from continuing operations per share-basic was $0.58 in 1998 as
compared to income from continuing operations per share-basic of $0.04 in 1997.

         The loss per share on a diluted basis was the same as the loss per
share on a basic basis for 1998 as the effect of outstanding stock options was
not dilutive.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

         Net sales in 1997 decreased to $87.4 million from $90.2 million in
1996, a decrease of $2.8 million, or 3.1%. Net sales of home heating products in
1997 as compared to 1996 decreased $7.0 million, or 9.2%. This decrease was
partially offset by a $4.2 million, or 30.4%, increase in net sales of leisure
and other products.

         The decrease in net sales of home heating products was due primarily to
the decrease in the order rate for the Company's gas heater products combined
with production and design problems with certain products manufactured by Hunter
Technology Inc. ("Hunter") (see Note 10 to Notes to Consolidated Financial
Statements). The decrease in the order rate for the Company's gas heater
products was mainly the result of the weather's influence on order rates and
increased competition in the gas heater market from domestic producers as well
as from some distributors selling imported gas heating products. The Hunter
product problems, in some cases, caused the production to be suspended and,
therefore, shipments were also suspended. Corrections have been implemented and
all but one of the affected products are back in production.

         The increase in net sales of leisure and other products was the result
of a $3.5 million, or 43.2%, increase in sales of gas barbecue grills and a
$633,000, or 12.1%, increase in sales of utility trailer kits. The increase in
sales of this segment is the result of the continued acceptance of new products
introduced in the Broilmaster grill line and improved distribution of the NuWay
trailer.

         Gross profit in 1997 decreased to $19.8 million from $24.9 million in
1996, a decrease of $5.1 million, or 20.5%. Gross profit on home heating product
sales decreased $6.2 million, or 27.8%. Gross profit on leisure and other
product sales increased $1.1 million, or 43.4%. The gross profit decrease in the
sale of home heating products was the result of the 9.2% decrease in net sales
of home heating products, as discussed above, and a decrease in the gross margin
from 29.2% in 1996 to 23.3% in 1997, as discussed below. The increase in gross
profit on leisure and other products was the result of an increase in the gross
margin from 18.7% in 1996 to 20.6% in 1997, and by the 30.4% increase in net
sales discussed above.

         Gross margin decreased to 22.7% in 1997 from 27.6% in 1996. The
decrease was primarily the result of competitive pressure on pricing primarily
on infrared space heaters and gas logs, an increase in the rate of fixed
manufacturing cost and a shift in sales mix from higher margin gas heating
products to lower margin Martin fireplace

                                       17

<PAGE>   19



products and leisure and other products as a percentage of total sales. Fixed
manufacturing costs increased to 13.5% of home heating sales in 1997 from 11.7%
in 1996. Additional depreciation, insurance and shipping and receiving
expenditures primarily caused the increase. Martin fireplace product net sales
were 30.7% of net sales in 1997 as compared to 24.6% in 1996. In 1997, leisure
and other net sales were 20.6% of total net sales, as compared to 15.3% in 1996.

         Selling expenses in 1997 increased to $9.9 million from $9.1 million in
1996, an increase of $860,000 or 9.5%. Selling expenses as a percentage of net
sales increased to 11.3% in 1997 from 10.0% in 1996. Excluding Hunter,
advertising and promotion expenses increased $939,000, primarily related to the
Broilmaster grill line and the Company's initial entry into the direct retail
and international channels of trade.

         Total segment contribution decreased to $9.9 million in 1997 from $15.8
million in 1996, a decrease of $5.9 million, or 37.3%, primarily as a result of
the 20.5% decrease in gross profit and a 9.5% increase in selling expenses, as
discussed above.

         General and administrative expenses were $6.6 million in 1997, compared
to $6.7 million in 1996, a decrease of $134,000, or 2.0%. Bad debt expense
increased to $200,000 in 1997 from a credit of $117,000 in 1996. The increase
was primarily the result of a write-off of a specific Hunter account and the
maintenance of the prior year reserve level. Deferred compensation decreased
$203,000 primarily due to the receipt of a death benefit of one participant. The
provision for the SERP and post-employment/retirement benefits decreased
$184,000 as a result of prior year retirements.

         Non-cash ESOP compensation expense was $1.9 million in 1997, as
compared to $2.8 million in 1996, a decrease of $907,000, or 32.3%. During 1997,
314,243 shares of unallocated ESOP shares were released as compensation at an
average fair value of $6.06 per share, as compared to 332,078 shares released as
compensation at an average fair value of $8.47 per share in 1996. During 1997
and 1996, shares released as dividends on shares allocated to participants were
36,404 and 19,282, respectively.

         Interest expense in 1997 increased to $1.5 million from $1.4 million in
1996. The increase was primarily the result of a higher average line of credit
balance during the year. The line of credit requirement increased as a result of
the delinquency of a specific customer account in the discontinued segment.

         Interest income in 1997 decreased to $902,000 from $919,000 in 1996.

         The provision for income taxes decreased $2.0 million, or 77.8%, in
1997. The decrease was the result of a $4.9 million decrease in income from
continuing operations before income taxes together with an increase in the
effective tax rate from 44.8% in 1996 to 69.6% in 1997, primarily due to the
impact of the non-deductible portion of the non-cash ESOP compensation expense.

         Income from continuing operations in 1997 decreased $2.9 million, or
92.1%, primarily as a result of the factors discussed above.

RESULTS OF DISCONTINUED METAL OFFICE FURNITURE OPERATIONS

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

         During 1998, the Company utilized the reserve of $299,000, recorded at
December 31, 1997, for charges associated with the discontinued metal office
furniture operations incurred during the year. The reserve remaining at December
31, 1998 was $0. The Company does not expect any further expense.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

         As discussed above, the Company discontinued its metal office furniture
operation in February of 1997. At December 31, 1996, management recorded a
reserve of $1.4 million, net of tax, as the original estimate of operating
losses through final disposal, write-downs of inventory and property, plant and
equipment to net realizable value and the costs to close the plant. During 1997,
management's original estimate was exceeded by $756,000, net of tax. The
estimate was exceeded primarily as a result of greater than anticipated credits
for damaged and defective merchandise, lower than anticipated margins on sales
(due to discounted sales prices and higher than expected freight costs), group

                                       18

<PAGE>   20


insurance costs, and write-downs of inventory. The Company recorded a reserve of
$187,000, net of tax, for estimated charges to be incurred during 1998.

QUARTERLY RESULTS

         The following table sets forth certain quarterly income statement data
for each of the Company's last two fiscal years and the percentage of net sales
represented by the line items presented (except in the case of per share
amounts). The quarterly income statement data set forth below was derived from
unaudited consolidated financial statements of the Company and includes all
adjustments which the Company considers necessary for a fair presentation
thereof.

<TABLE>
<CAPTION>
                                                                       1998
                                    ----------------------------------------------------------------------------
                                         MARCH 28            JUNE 27         SEPTEMBER 26         DECEMBER 31
                                    ----------------   ----------------    -----------------   -----------------
                                                    (In Thousands, except per share amounts)
<S>                                 <C>       <C>      <C>       <C>       <C>        <C>      <C>        <C>
Net sales                           $18,908   100.0%   $ 24,233  100.0%    $ 20,102   100.0%   $20,782    100.0%
Gross profit                          3,677    19.4       5,331   22.0        2,127    10.6        524      2.5
Non-cash ESOP compensation              402     2.1         376    1.6          312     1.6        203      1.0
Operating income (loss)                (726)   (3.8)        222    0.9       (1,736)   (8.6)    (3,964)   (19.1)
Income (loss) from continuing
   operations before income taxes      (749)   (3.9)        395    1.6       (1,840)   (9.2)    (3,735)   (18.0)
Income (loss) from continuing
  operations                           (468)   (2.5)        150    0.6       (1,414)   (7.0)    (2,404)   (11.6)
                                    ---------------------------------------------------------------------------

Net income (loss)                   $  (468)   (2.5)%  $    150    0.6%    $ (1,414)   (7.0)%  $(2,404)   (11.6)%
                                    ===========================================================================

BASIC PER SHARE DATA:
Net income (loss)(1)                $ (0.07)           $   0.02            $  (0.20)           $ (0.33)
                                    ==================================================================

DILUTED PER SHARE DATA:
Net income (loss)(1)                $ (0.07)           $   0.02            $  (0.20)           $ (0.33)
                                    ==================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                                       1997
                                    -----------------------------------------------------------------------------
                                         MARCH 29            JUNE 28         SEPTEMBER 27         DECEMBER 31
                                    ----------------   ----------------    -----------------   ------------------
                                                    (In Thousands, except per share amounts)
<S>                                 <C>       <C>      <C>       <C>       <C>        <C>      <C>        <C>
Net sales                           $15,905   100.0%   $ 23,503  100.0%    $ 23,850   100.0%   $24,093    100.0%
Gross profit                          2,898    18.2       6,218   26.5        6,040    25.3      4,674     19.4
Non-cash ESOP compensation              529     3.3         433    1.8          483     2.0        460      1.9
Operating income (loss)              (1,480)   (9.3)      1,395    5.9        1,429     6.0         68      0.3
Income (loss) from continuing
   operations before income taxes    (1,508)   (9.5)      1,234    5.3        1,147     4.8        (45)    (0.2)
Income (loss) from continuing
   operations                          (868)   (5.5)        677    2.9          655     2.7       (212)    (0.9)
Loss from discontinued operations,
   net of tax                             0     0.0           0    0.0         (253)   (1.1)      (503)    (2.1)
                                    -----------------------------------------------------------------------------

Net income (loss)                   $  (868)   (5.5)%  $    677    2.9%    $    402     1.7%   $  (715)    (3.0)%
                                    ==============================================================================

</TABLE>

                                       19

<PAGE>   21


<TABLE>
<S>                                 <C>       <C>      <C>       <C>      <C>        <C>      <C>
BASIC PER SHARE DATA:
Income (loss) from continuing
  operations                        $ (0.13)           $   0.10           $   0.10            $ (0.03)
Loss from discontinued operations      0.00                0.00              (0.04)             (0.07)
                                    ------------------------------------------------------------------

Net income (loss)(1)               $ (0.13)           $   0.10           $   0.06            $ (0.10)
                                    ==================================================================

DILUTED PER SHARE DATA:
Income (loss) from continuing
  operations                        $ (0.13)           $   0.10           $   0.09            $ (0.03)
Loss from discontinued operations      0.00                0.00              (0.03)             (0.07)
                                    ------------------------------------------------------------------

Net income (loss)(1)               $ (0.13)           $   0.10           $   0.06            $ (0.10)
                                    ==================================================================
</TABLE>
---------------
(1) The sum of the quarterly per share amounts are different from the annual per
share amounts because of differences in the weighted average number of common
and common equivalent shares used in the quarterly and annual computations.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has historically financed its operations from internally
generated funds, seasonal borrowings under its bank line of credit and other
short-term borrowings. The Company's primary capital requirements are for
working capital, debt service, capital expenditures and dividends.

         The following table presents a summary of the Company's cash flows for
each of the three years in the period ended December 31.

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                                     1998               1997             1996
                                                                  ----------         ----------        -------
                                                                                   (In thousands)
<S>                                                               <C>                <C>               <C>
Net cash provided by operations                                   $       13         $      368        $  6,241
Capital expenditures                                                  (1,640)            (2,053)         (2,798)
Proceeds from sales of assets                                              2              1,023               1
Proceeds from sales of marketable securities                             894                  0               0
Purchase of subsidiary, net of cash acquired                               0                  0          (1,374)
Net repayments or short-term borrowings                                 (301)              (280)         (2,181)
Net payments on long-term debt                                        (1,743)            (1,656)           (400)
Purchase of treasury stock                                            (1,728)              (774)              0
Proceeds from exercise of stock options                                  141                 44             186
Cash dividends paid                                                     (896)              (822)           (768)
                                                                  ----------         ----------        --------
Net decrease in cash and short-term investments                   $   (5,258)        $   (4,150)       $ (1,093)
                                                                   =========         ==========        ========
</TABLE>

         During 1998, the Company utilized cash available from the initial
public offering ("IPO") in 1995 to finance capital expenditures, for debt
service and to acquire shares of its common stock in accordance with the
Company's share repurchase program. The Company's operations in 1996 and 1997
generated cash of approximately $6.6 million, which was used to eliminate
short-term debt, service long-term debt, finance capital expenditures and pay
dividends.

         As a result of its seasonal business cycle, the Company finances
interim working capital requirements with cash and an unsecured line of credit
with its principal lender. The line of credit has a current maximum of
$30,000,000 and expires on July 31, 1999. Interest on the line of credit is
payable monthly at a variable rate of 30-day LIBOR plus 1.25%. During 1998, the
Company had an average month-end balance of $1.1 million with a maximum
month-end balance of $8.0 million.

         In January 1993, the Company obtained the Bank Loan, the proceeds of
which were loaned under the ESOP Loan to enable the ESOP to purchase 3,489,115
shares of common stock from certain stockholders of the Company. The Bank Loan
is due in semi-annual principal payments of $596,700 over a ten-year period.
Interest on the Bank Loan is payable monthly at a variable rate of 79.5% of
prime plus 1.35%. Simultaneously with the origination of the Bank

                                       20

<PAGE>   22


Loan, the Company entered into a separate interest rate swap agreement that was
designed to fix the interest rate on the Bank Loan for seven years from its
origination at 8.21%.

         On July 18, 1995, the Company closed the sale of 2,300,000 shares of
common stock at a price of $9.50 per share in connection with the IPO. The
proceeds of the IPO, net of an underwriting discount of $1,530,000 and expenses
of $923,000, were $19,397,000. Through the date of this Annual Report on Form
10-K, the Company has used approximately $9.8 million of the proceeds to fund
capital expenditures, acquire Hunter, repay outstanding indebtedness, acquire
shares of its common stock in accordance with the Company's share repurchase
program, for working capital and for other general corporate purposes. During
1998, the Company used approximately $5.3 million to fund capital expenditures,
repay outstanding indebtedness, acquire shares of its common stock in accordance
with the Company's share repurchase program and for working capital and for
other general corporate purposes.

         In March 1996, the Company obtained a $5 million unsecured term loan
from its principal lender to refinance the bank debt which the Company caused to
be paid upon the closing of its acquisition of Hunter. The term loan is due in
semi-annual principal payments of $250,000 over a seven-year period with a
balloon payment of $1.5 million due at maturity. Interest on the term loan is
payable monthly at a fixed rate of 6.9%.

         The Company believes that cash flow from operations, together with the
Company's unused borrowing capacity will be sufficient to fund the Company's
operating needs for the foreseeable future. In addition, to provide any
additional funds necessary for the continued pursuit of the Company's growth
strategies, the Company may incur, from time to time, additional short- and
long-term bank indebtedness and may issue, in public or private transactions,
its equity and debt securities, the availability and terms of which will depend
upon market and other conditions. There can be no assurance that such additional
financing will be available on terms acceptable to the Company. It is
anticipated that during 1999, the Company will expend approximately $4.7 million
for capital expenditures.

CREDIT RISK

         The Company extends credit to a wide range of customers and offers
payment terms ranging from 30 days to early-booking terms which can be as long
as nine months. The Company does not believe that it has a significant
concentration of credit risk in any one geographic area or market segment. There
can be no assurance that such concentration of credit risk may not develop in
the future. Currently, the Company purchases credit insurance which provides
coverage for losses on accounts receivable with certain primary customers.

INFLATION

         The Company believes that the relatively moderate rate of inflation
experienced over the last three years has not had a material impact on its sales
or profitability. However, there can be no assurance that the Company's business
will not be adversely affected by inflation in the future.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         The Company is exposed to market risk from changes in foreign currency
exchange rates and interest rates as part of its normal operations. The Company
has estimated its market risk exposures using sensitivity analyses assuming a
10% change in market rates.

Foreign Currency Exchange Rate Risk

         Due to its Canadian operations, the Company has assets, liabilities,
operations and cash flows in the Canadian currency. Fluctuations in foreign
currency exchange rates impact the U.S. dollar value of Canadian dollar assets,
liabilities, operations and cash flows. The Company translates the Canadian
dollar income statement to U.S. dollars using the average rate of exchange and
translates the Canadian dollar balance sheet to U.S. dollars using the closing
rate of exchange. Certain accounts (e.g., capital stock) are translated using an
historical exchange rate. Consequently, unrealized foreign currency translation
adjustments are reported as a separate component of stockholders' equity. To
illustrate the potential impact of changes in foreign currency exchange rates on
the unrealized foreign currency translation adjustments, a hypothetical 10%
change (decrease) in the average and closing exchange rates for fiscal 1998
would have increased the unrealized foreign currency translation adjustment (a
loss) by $793,000.


                                       21

<PAGE>   23


Interest Rate Risk

         To manage its exposure to changes in interest rates, the Company uses
both fixed and variable rate debt. At December 31, 1998, the Company had
$4,774,000 of debt outstanding at a variable interest rate of 79.5% of prime
plus 1.35%. However, the Company is also a party to an interest rate swap which
effectively fixes the interest rate on the debt at 8.21%. The debt is scheduled
to mature in September 2002 and the interest rate swap is scheduled to expire in
January 2000. Therefore, the Company would be exposed to interest rate
fluctuations on the January 2000 debt balance once the interest rate swap
expires. A hypothetical increase of 10% in the prime lending rate would not
cause the Company's interest expense to increase significantly.

         In addition, the Company maintains an unsecured bank line of credit of
up to a maximum of $30,000,000 which is to be utilized to finance inventories,
receivables and operations on an interim basis. Interest on the line of credit
is payable monthly at a variable rate based on the 30-day London Interbank
Offered Rate ("LIBOR") plus 1.25%. A hypothetical increase of 10% in the LIBOR
Rate would not cause the Company's interest expense to increase significantly.
See Notes 4, 5 and 8 to Notes to Consolidated Financial Statements.

         Certain statements contained in this section and the estimated amounts
generated from the sensitivity analyses referred to above include
forward-looking statements of market risk which assume that certain adverse
market conditions may occur. Actual future market conditions may differ
materially from such assumptions. Accordingly, the forward-looking statements
should not be considered projections by the Company of future events or losses.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated financial statements of the Company, including the
report of independent accountants, the consolidated balance sheets as of
December 31, 1998 and 1997, the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1998, 1997
and 1996 and notes to the consolidated financial statements are set forth on
pages F-1 through F-20 of this Annual Report on Form 10-K. In addition, on page
S-2 of this Annual Report on Form 10-K, the supplemental financial statement
schedule, as required by Item 8, is provided.

ITEM 9.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.



                                       22

<PAGE>   24


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         See the "Election of Directors," "Executive Officers of the Company"
and "Section 16(a) Beneficial Ownership Reporting Compliance" sections of the
proxy statement for the 1999 Annual Meeting of Stockholders of the Company,
which sections are incorporated herein by reference.


ITEM 11.  EXECUTIVE COMPENSATION

         See the "Remuneration of Executive Officers" section of the proxy
statement for the 1999 Annual Meeting of Stockholders of the Company, which
section is incorporated herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         (a) See the "Principal Stockholders" section of the proxy statement for
the 1999 Annual Meeting of Stockholders of the Company, which section is
incorporated herein by reference.

         (b) See the "Election of Directors" and "Principal Stockholders"
sections of the proxy statement for the 1999 Annual Meeting of Stockholders of
the Company, which sections are incorporated herein by reference.

        (c) There are no arrangements known to the Company the operation of
which may at a subsequent date result in a change in control of the Company.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         No information is required to be included herein pursuant to Item 404
of Regulation S-K, which requires disclosure of certain information with respect
to certain relationships or related transactions of the directors and management
of the Company.



                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

         (a)      Certain documents filed as part of Form 10-K

                  1.       Financial Statements.
<TABLE>
<CAPTION>
Description                                                                                                    Page
-----------                                                                                                    ----
<S>                                                                                                            <C>    
Report of Independent Public Accountants...............................................................         F-1

Consolidated Balance Sheets as of December 31, 1998 and 1997...........................................         F-2

Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996.............         F-4

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and
  1996.................................................................................................         F-5
</TABLE>

                                       23

<PAGE>   25


<TABLE>
<S>                                                                                                           <C>
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and
  1996 ................................................................................................        F-6

Notes to Consolidated Financial Statements.............................................................        F-7
</TABLE>

                  2.       Financial Statement Schedule.

                           The financial statement schedule required by
                           Regulation S-X is filed as part of Exhibit S of this
                           Annual Report on Form 10-K, as listed below:

                           Schedule Supporting the Consolidated Financial
                           Statements:
                                                                           Page
                                                                           ----
                           Schedule II - Valuation and Qualifying
                           Accounts                                         S-2

                           All other schedules for which provision is made in
                           the applicable accounting regulations of the
                           Securities and Exchange Commission have been omitted
                           because they are not required under the related
                           instructions or are inapplicable, or because the
                           information has been provided in the Consolidated
                           Financial Statements or the Notes thereto.

                  3.       Exhibits required to be filed by Item 601 of
                           Regulation S-K.

                           The Exhibits filed as part of this Annual Report on
                           Form 10-K are listed in Item 14(c) of this Annual
                           Report on Form 10-K, which listing is hereby
                           incorporated herein by reference.

         (b)      Reports on Form 8-K.

                  There were no Current Reports on Form 8-K filed during the
                  last quarter of the period covered by this Annual Report on
                  Form 10-K.

         (c)      Exhibits.

                  The Exhibits required by Item 601 of Regulation S-K are set
                  forth in the following list and are filed either by
                  incorporation by reference from previous filings with the
                  Securities and Exchange Commission (the "Commission") or by
                  attachment to this Annual Report on Form 10-K as so indicated
                  in such list.


Exhibit
Number                     Description of Exhibit

*  3(a)           Form of Restated Certificate of Incorporation of Martin
                  Industries, Inc. which was filed as Exhibit 3(a) to the
                  Company's Registration Statement on Form S-1 filed with the
                  Commission on March 17, 1995 (Registration No. 33-90432).

*  3(b)           Amended and Restated Bylaws of Martin Industries, Inc. which
                  were filed as Exhibit 3(b) to the Registrant's Quarterly
                  Report on Form 10-Q for the 26-week period ended June 28, 1997
                  (Commission File No. 0-26228).

*  3(c)           Amendments to the By-laws of Martin Industries, Inc. which
                  were filed as Exhibit 99.1 to the Company's Form 8-K on
                  February 24, 1999 (Commission File No. 0-26228).

*  4(a)           Article 4 of the Restated Certificate of Incorporation of
                  Martin Industries, Inc. (included in Exhibit 3(a)).

*  4(b)           Rights Agreement, dated as of February 23, 1999, between
                  Martin Industries, Inc. and SunTrust Bank, Atlanta, Rights
                  Agent, which was filed as Exhibit 1 to the Company's
                  Registration Statement on Form 8-A (Commission File
                  No. 0-26228).

* 10(a)           Martin Industries, Inc. Employee Stock Ownership Plan, as
                  amended, which was filed as Exhibit 10(a) to the Company's
                  Registration Statement on Form S-1 filed

                                       24

<PAGE>   26

                  with the Commission on March 17, 1995 (Registration No.
                  33-90432) and, with respect to Amendment No. 7 thereto, as
                  filed as Exhibit 10(a) to the Company's Quarterly Report on
                  Form 10-Q for the 13-week period ended September 30, 1995
                  (Commission File No. 0-26228).

*  10(b)          Martin Industries, Inc. Employee Stock Ownership Trust
                  Agreement between Martin Industries, Inc., Bill G. Hughey,
                  James W. Truitt and James D. Wilson dated November 12, 1992,
                  as amended, which was filed as Exhibit 10(b) to the Company's
                  Registration Statement on Form S-1 filed with the Commission
                  on March 17, 1995 (Registration No. 33-90432).

*  10(c)          Loan Agreement by and between Martin Industries, Inc. and
                  AmSouth Bank N.A. dated January 7, 1993 in the principal
                  amount of $11,934,000, as amended, which was filed as Exhibit
                  10(c) to the Company Registration Statement on Form S-1 filed
                  with the Commission on March 17, 1995 (Registration No.
                  33-90432).

*  10(d)          Term Note by Martin Industries, Inc. in favor of AmSouth Bank,
                  N.A. dated January 7, 1993 in the principal amount of
                  $11,934,000 which was filed as Exhibit 10(d) to the Company's
                  Registration Statement on Form S-1 filed with the Commission
                  on March 17, 1995 (Registration No. 33-90432).

*  10(e)          Loan and Security Agreement by and between Bill G. Hughey,
                  James W. Truitt and James D. Wilson, as trustees of the Martin
                  Industries, Inc. Employee Stock Ownership Plan and Related
                  Trust (the "ESOP"), and Martin Industries, Inc. dated January
                  7, 1993 in the principal amount of $11,934,000 which was filed
                  as Exhibit 10(f) to the Company's Registration Statement on
                  Form S-1 filed with the Commission on March 17, 1995
                  (Registration No. 33-90432).

*  10(f)          Promissory Note by Bill G. Hughey, James W. Truitt and James
                  D. Wilson, as trustees of the ESOP, in favor of Martin
                  Industries, Inc. dated January 7, 1993, in the principal
                  amount of $11,934,000 which was filed as Exhibit 10(g) to the
                  Company's Registration Statement on Form S-1 filed with the
                  Commission on March 17, 1995 (Registration No. 33-90432).

*  10(g)          Interest Rate Swap Agreement by and between Martin Industries,
                  Inc. and AmSouth Bank, N.A. dated November 3, 1992 which was
                  filed as Exhibit 10(h) to the Company's Registration Statement
                  on Form S-1 filed with the Commission on March 17, 1995
                  (Registration No. 33-90432).

*  10(h)          Martin Industries, Inc. 1988 Nonqualified Stock Option Plan,
                  as amended, which was filed as Exhibit 10(l) to the Company's
                  Registration Statement on Form S-1 filed with the Commission
                  on March 17, 1995 (Registration No. 33-90432).

*  10(i)          Executive Supplemental Income Plan Guidelines and Form of
                  Supplemental Income Agreement which was filed as Exhibit 10(n)
                  to the Company's Registration Statement on Form S-1 filed with
                  the Commission on March 17, 1995 (Registration No. 33-90432).

*  10(j)          Supplemental Executive Retirement Plan which was filed as
                  Exhibit 10(o) to the Company's Registration Statement on Form
                  S-1 filed with the Commission on March 17, 1995 (Registration
                  No. 33-90432).

*  10(k)          Lease Agreement by and between the Industrial Development
                  Board for the City of Florence and Martin Industries, Inc.
                  dated August 1, 1978 which was filed as Exhibit 10(p) to the
                  Company's Registration Statement on Form S-1 filed with the
                  Commission on March 17, 1995 (Registration No. 33-90432).


                                       25

<PAGE>   27


*  10(l)          Lease Agreement by and between the Industrial Development
                  Board for the City of Athens and Martin Stamping & Stove
                  Company, predecessor corporation to Martin Industries, Inc.,
                  dated December 1, 1964 which was filed as Exhibit 10(q) to the
                  Company's Registration Statement on Form S-1 filed with the
                  Commission on March 17, 1995 (Registration No. 33-90432).

*  10(m)          Renewal Option Agreement between the Industrial Development
                  Board of the City of Athens and Martin Stamping & Stove
                  Company, predecessor corporation to Martin Industries, Inc.,
                  dated December 1, 1964 which was filed as Exhibit 10(r) to the
                  Company's Registration Statement on Form S-1 filed with the
                  Commission on March 17, 1995 (Registration No. 33-90432).

*  10(n)          Purchase Option Agreement between the Industrial Development
                  Board of the City of Athens and Martin Stamping & Stove
                  Company, predecessor corporation to Martin Industries, Inc.,
                  dated December 1, 1964 which was filed as Exhibit 10(s) to the
                  Company's Registration Statement on Form S-1 filed with the
                  Commission on March 17, 1995 (Registration No. 33-90432).

*  10(o)          First Amendment to Loan Agreement and Other Loan Documents by
                  and between Martin Industries, Inc. and AmSouth Bank of
                  Alabama dated as of March 15, 1995 which was filed as Exhibit
                  10(u) to the Company's Registration Statement on Form S-1
                  filed with the Commission on March 17, 1995 (Registration No.
                  33-90432).

*  10(p)          Second Amendment to Loan Agreements and Other Loan Documents
                  dated as of March 28, 1996, by and between Martin Industries,
                  Inc. and AmSouth Bank of Alabama which was filed as Exhibit
                  10(y) to the Company's Annual Report on Form 10-K as filed
                  with the Commission on March 30, 1996 (Commission File No.
                  0-26228).

*  10(q)          Term Note by Martin Industries, Inc. in favor of AmSouth Bank
                  of Alabama dated March 28, 1996, in the principal amount of
                  $5,000,000 which was filed as Exhibit 10(z) to the Company's
                  Annual Report on Form 10-K as filed with the Commission on
                  March 30, 1996 (Commission File No. 0-26228).

*  10(r)          Martin Industries, Inc. 1996 Non-Employee Directors' Stock
                  Option and Deferred Compensation Plan which was filed as
                  Exhibit 10(x) to the Company's Annual Report on Form 10-K as
                  filed with the Commission on March 31, 1997 (Commission File
                  No. 0-26228).

*  10(s)          Amendment No. 6 to Martin Industries, Inc. 1988 Nonqualified
                  Stock Option Plan which was filed as Exhibit 10(y) to the
                  Company's Annual Report on Form 10-K as filed with the
                  Commission on March 31, 1997 (Commission File No. 0-26228).

*  10(t)          Martin Industries, Inc. Amended and Restated 1994 Nonqualified
                  Stock Option Plan which was filed as Exhibit 10(b) to the
                  Company's Quarterly Report on Form 10-Q for the 26-week period
                  ended June 27, 1998 (Commission File No. 0-26228).

*  10(u)          Amendment No. 8 to Martin Industries, Inc. Employee Stock
                  Ownership Plan which was filed as Exhibit 10(a) to the
                  Company's Quarterly Report on Form 10-Q for the 39-week period
                  ended September 27, 1997 (Commission File No. 0-26228).

*  10(v)          Third Amendment to Loan Agreement and Other Loan Documents
                  dated as of August 28, 1997 by and between Martin Industries,
                  Inc. and AmSouth Bank filed as Exhibit 10(b) to the Company's
                  Quarterly Report on Form 10-Q for the 39-week period ended
                  September 27, 1997 (Commission File No. 0-26228).


                                       26

<PAGE>   28



*  10(w)          Modified, Amended and Restated Line of Credit Note dated as of
                  August 28, 1997 by and between Martin Industries, Inc. and
                  AmSouth Bank filed as Exhibit 10(c) to the Company's Quarterly
                  Report on Form 10-Q for the 39-week period ended September 27,
                  1997 (Commission File No. 02-26228).

*  10(x)          Amendment No. 9 to Martin Industries, Inc. Employee Stock 
                  Ownership Plan which was filed as Exhibit 10(a) to the
                  Company's Quarterly Report on Form 10-Q for the 26-week period
                  ended June 27, 1998 (Commission File No. 0-26228).

   10(y)          Amendment No. 10 to Martin Industries, Inc. Employee Stock 
                  Ownership Plan.

   10(z)          Salary Continuation Letter Agreement dated July 15, 1998
                  between Martin Industries, Inc. and Martin D. Husted.

   10(aa)         Salary Continuation Letter Agreement dated October 23, 1998
                  between Martin Industries, Inc. and Louis J. Martin, II.

   10(bb)         Salary Continuation Letter Agreement dated October 23, 1998
                  between Martin Industries, Inc. and J. Reid Roney.

   10(cc)         Salary Continuation Letter Agreement dated October 23, 1998
                  between Martin Industries, Inc. and Roderick V. Schlosser.

   10(dd)         Salary Continuation Letter Agreement dated November 2, 1998
                  between Martin Industries, Inc. and Robert L. Goucher.

   10(ee)         Salary Continuation Letter Agreement dated January 25, 1999
                  between Martin Industries, Inc. and Troy K. Hoskins.

   10(ff)         Salary Continuation Letter Agreement dated January 11, 1999
                  between Martin Industries, Inc. and William F. Roberts.

   10(gg)         Employment Agreement with Robert L. Goucher dated as of 
                  November 2, 1998.

    21            Subsidiaries of the Company.

    23            Consent of Arthur Andersen LLP.

    24            Powers of Attorney.

    27            Financial Data Schedule (Electronic Submission only).

---------------
*  Incorporated by reference.




                                       27

<PAGE>   29



"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:

         With the exception of historical information, the matters and
statements discussed, made or incorporated by reference in this Annual Report on
Form 10-K, including those regarding the expected sale of the Company's Ashley
solid fuel heating division and the gain anticipated on such sale, the Company's
expectations regarding the possible exposure as a result of Hunter Technology
Inc.'s design and production problems, the Company's plans and expectations
regarding its Year 2000 issues, and the Company's expectations and estimates
regarding its foreign currency exchange rate and interest rate risk, constitute
forward-looking statements and are discussed, made or incorporated by reference,
as the case may be, pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Wherever possible, the Company has
identified these "forward-looking" statements (as defined in Section 21E of the
Securities Exchange Act of 1934) by words such as "anticipates," "may,"
"believes," "estimates," "projects," "expects," "intends," and words of similar
import. In addition, the Company and its representatives may from time to time
make other oral or written statements that are also forward-looking statements.
Such forward-looking statements involve certain assumptions, risks and
uncertainties that could cause actual results to differ materially from those
included in or contemplated by the statements. In particular, there can be no
assurance that the Company will consummate the sale of its Ashley solid fuel
heating division or that if the sale is consummated the Company will realize the
currently anticipated gain on the sale or that the Company will not incur costs
related to products of Hunter Technology, Inc. in excess of those currently
expected. These assumptions, risks and uncertainties include, but are not
limited to, those associated with general economic cycles; the cyclical nature
of the industries in which the Company operates and the factors related thereto,
including consumer confidence levels, inflation, employment and income levels,
the availability of credit, and factors affecting the housing industry; the
potential in the Company's business to experience significant fluctuations in
quarterly earnings; the Company's business strategy, including its strategy of
pursuing acquisitions and new product development; potential losses from product
liability and personal injury lawsuits; the effects of seasonality and weather
conditions on the Company's home heating product sales and other sales;
fluctuations in quarterly earnings due to ESOP accounting; the effect of
existing and new governmental and environmental regulations applicable to the
Company; the dependence of the Company on key personnel; the highly competitive
nature of each of the industries in which the Company operates; the volatility
of the stock price at which outstanding shares of the Company may trade from
time to time, the ability of the Company and third parties with which it does
business to identify correctly, with respect to the Year 2000 issue, all
relevant computer codes and imbedded chips, unanticipated delays or difficulties
in the implementation of the Company's Year 2000 project plans and the ability
of third parties to redress their respective computer systems as they relate to
the Year 2000 issue; and the other risks and uncertainties discussed or
indicated in all documents filed by the Company with the Commission. The Company
expressly disclaims any obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.

                                       28

<PAGE>   30



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Martin Industries, Inc.:

We have audited the accompanying consolidated balance sheets of MARTIN 
INDUSTRIES, INC. (a Delaware corporation) AND SUBSIDIARY as of December 31, 
1998 and 1997 and the related consolidated statements of operations, 
stockholders' equity, and cash flows for each of the three years in the period 
ended December 31, 1998. These financial statements are the responsibility of 
the Company's management. Our responsibility is to express an opinion on these 
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of 
material misstatement. An audit includes examining, on a test basis, evidence 
supporting the amounts and disclosures in the financial statements. An audit 
also includes assessing the accounting principles used and significant 
estimates made by management, as well as evaluating the overall financial 
statement presentation. We believe that our audits provide a reasonable basis 
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Martin Industries, Inc. and
subsidiary as of December 31, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.


                                                 /s/ ARTHUR ANDERSEN LLP


Birmingham, Alabama
February 12, 1999 (except with respect to
the matter discussed in Note 6, as to which
the date is February 22, 1999)


                                       F-1

<PAGE>   31



                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                         1998                  1997
                                                                --------------------    --------------------
<S>                                                             <C>                     <C>
CURRENT ASSETS:
   Cash and short-term investments                              $          9,818,000    $         15,157,000
   Accounts and notes receivable, less allowance for
      doubtful accounts of $627,000 and $432,000, respectively            10,712,000              10,106,000
   Inventories                                                            20,323,000              24,884,000
   Refundable income taxes                                                 1,712,000                 269,000
   Deferred tax benefits                                                   3,924,000               3,488,000
   Prepaid expenses and other assets                                       1,277,000               1,811,000
                                                                --------------------------------------------

                                                                         47,766,000               55,715,000
                                                                --------------------------------------------

PROPERTY, PLANT AND EQUIPMENT:
   Land and improvements                                                   1,248,000               1,289,000
   Construction in progress                                                  123,000                   2,000
   Buildings                                                               8,275,000               8,276,000
   Machinery and equipment                                                13,385,000              13,337,000
                                                                --------------------------------------------

                                                                          23,031,000              22,904,000
   Less accumulated depreciation and amortization                         13,027,000              12,587,000
                                                                --------------------------------------------

                                                                          10,004,000              10,317,000
                                                                --------------------------------------------

OTHER NONCURRENT ASSETS:
   Deferred tax benefits                                                     622,000                 581,000
   Goodwill, net of accumulated amortization of
      $546,000 and $477,000, respectively                                  1,746,000               1,947,000
   Other                                                                   2,241,000               2,420,000
                                                                --------------------------------------------

                                                                           4,609,000               4,948,000
                                                                --------------------------------------------

                                                                $         62,379,000    $         70,980,000
                                                                ============================================
</TABLE>

                 The accompanying notes are an integral part of these
                          consolidated balance sheets.



                                       F-2

<PAGE>   32



                           CONSOLIDATED BALANCE SHEETS

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                DECEMBER 31,
                                                                         1998                   1997
                                                                --------------------    -------------------
<S>                                                             <C>                     <C>
CURRENT LIABILITIES:
   Notes payable                                                $            159,000    $            481,000
   Current portion of long-term debt                                       1,741,000               1,750,000
   Accounts payable                                                        3,139,000               3,496,000
   Accrued liabilities:
      Payroll and employee benefits                                        2,348,000               2,699,000
      Product liability                                                      961,000                 651,000
      Warranty                                                             1,126,000               1,535,000
      Workers' compensation                                                  709,000                 572,000
      Other                                                                  985,000               1,359,000
                                                                --------------------------------------------

                                                                          11,168,000              12,543,000
                                                                --------------------------------------------
NONCURRENT LIABILITIES:
   Long-term debt                                                          6,864,000               8,599,000
   Deferred compensation                                                   2,304,000               2,197,000
   Other                                                                           0                  18,000
                                                                --------------------------------------------

                                                                           9,168,000              10,814,000
                                                                --------------------------------------------

COMMITMENTS AND CONTINGENCIES (NOTE 9)

STOCKHOLDERS' EQUITY:
   Preferred stock, $.01 par value; 1,000,000 shares
      authorized; no shares issued and outstanding                                 0                       0
   Common stock, $.01 par value; 20,000,000 shares
      authorized; 9,752,053 shares issued at December 31,
      1998 and 9,748,746 at December 31, 1997                                 98,000                  97,000
   Paid-in capital                                                        27,397,000              26,863,000
   Retained earnings                                                      24,229,000              29,501,000
   Accumulated other comprehensive loss                                     (996,000)               (372,000)
                                                                ---------------------------------------------

                                                                          50,728,000              56,089,000
   Less:
   Treasury stock at cost (1,325,170 shares at
      December 31, 1998 and 1,104,105 shares at
      December 31, 1997)                                                   4,008,000               2,590,000
   Unearned compensation                                                   4,677,000               5,876,000
                                                                --------------------------------------------

                                                                          42,043,000              47,623,000
                                                                --------------------------------------------

                                                                $         62,379,000    $         70,980,000
                                                                ============================================
</TABLE>

              The accompanying notes are an integral part of these
                          consolidated balance sheets.



                                       F-3

<PAGE>   33



                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                             1998                1997              1996
                                                       ----------------    ---------------    ---------------
<S>                                                    <C>                 <C>                <C>
NET SALES                                              $    84,025,000     $   87,351,000     $   90,194,000
Cost of sales                                               72,366,000         67,521,000         65,334,000
                                                       ------------------------------------------------------

GROSS PROFIT                                                11,659,000         19,830,000         24,860,000
                                                       ------------------------------------------------------

Operating expenses:
   Selling                                                   9,047,000          9,914,000          9,055,000
   General and administrative                                6,908,000          6,599,000          6,733,000
   Non-cash ESOP compensation                                1,293,000          1,905,000          2,812,000
   Restructure charge                                          615,000                  0                  0
                                                       ------------------------------------------------------

                                                            17,863,000         18,418,000         18,600,000
                                                       ------------------------------------------------------

OPERATING INCOME (LOSS)                                     (6,204,000)         1,412,000          6,260,000
Interest expense                                             1,005,000          1,486,000          1,392,000
Interest and other income                                   (1,280,000)          (902,000)          (919,000)
                                                       ------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS
 BEFORE INCOME TAXES                                        (5,929,000)           828,000          5,787,000
Provision (credit) for income taxes                         (1,793,000)           576,000          2,592,000
                                                       ------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS                    (4,136,000)           252,000          3,195,000

Income from discontinued operations, net of tax                      0                  0             62,000
Loss on disposal of discontinued operations,
 net of tax                                                          0           (756,000)        (1,430,000)
                                                       ------------------------------------------------------

NET LOSS FROM DISCONTINUED OPERATIONS                                0           (756,000)        (1,368,000)
                                                       ------------------------------------------------------

NET INCOME (LOSS)                                      $    (4,136,000)    $     (504,000)    $    1,827,000
                                                       ======================================================

BASIC PER SHARE DATA:

Income (loss) from continuing operations               $         (0.58)    $         0.04     $         0.50
Loss from discontinued operations                                 0.00              (0.11)             (0.21)
                                                       ------------------------------------------------------

Net income (loss)                                      $         (0.58)    $        (0.07)    $         0.29
                                                       ======================================================

Weighted average number of common and common
   equivalent shares outstanding                             7,073,430          6,787,685          6,412,222
                                                       ======================================================

DILUTED PER SHARE DATA:

Income (loss) from continuing operations               $         (0.58)    $         0.04     $         0.47
Loss from discontinued operations                                 0.00              (0.11)             (0.20)
                                                       ------------------------------------------------------

Net income (loss)                                      $         (0.58)    $        (0.07)    $         0.27
                                                       =====================================================

Weighted average number of common and common
   equivalent shares outstanding                             7,073,430          7,049,131          6,772,191
                                                       =====================================================

DIVIDENDS DECLARED PER SHARE                           $         0.164     $        0.156     $        0.148
                                                       =====================================================
</TABLE>


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


                                       F-4

<PAGE>   34


                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                        For the Years Ended December 31, 1996, 1997, and 1998
                               --------------------------------------------------------------------------


                                   Common Stock       Paid-in     Retained       Treasury Stock
                                Shares     Amount     Capital     Earnings     Shares      Amount
                                ------     ------     -------     --------     ------       ------
<S>                           <C>        <C>       <C>          <C>           <C>         <C>
BALANCE,
   DECEMBER 31, 1995          9,748,000  $ 97,000  $23,457,000  $30,130,000   1,269,715   $2,319,000

Comprehensive income:
  Net income                          0         0            0    1,827,000           0            0
  Unrealized gain on foreign
    currency translation              0         0            0            0           0            0

  Total comprehensive income


Dividends ($.148 per share)           0         0            0     (922,000)          0            0
Exercise of stock options             0         0      650,000            0    (247,790)    (408,000)
Fair value of stock
   released to ESOP, net of
   tax                                0         0    1,759,000            0           0            0
                              ----------------------------------------------------------------------
BALANCE,
   DECEMBER 31, 1996          9,748,000    97,000   25,866,000   31,035,000   1,021,925    1,911,000

Comprehensive loss:
  Net loss                            0         0            0     (504,000)          0            0
 Unrealized loss on foreign
    currency translation              0         0            0            0           0            0
  Total comprehensive loss

Dividends ($.156 per share)           0         0            0   (1,030,000)          0            0
Issuance of stock under
  dividend reinvestment plan        746         0        4,000            0           0            0
Purchase of treasury stock            0         0            0            0     140,000      774,000
Exercise of stock options             0         0       89,000            0     (57,820)     (95,000)
Fair value of stock
   released to ESOP, net of
   tax                                0         0      904,000            0           0            0
                              ----------------------------------------------------------------------
BALANCE,
   DECEMBER 31, 1997          9,748,746    97,000   26,863,000   29,501,000   1,104,105    2,590,000

Comprehensive loss:
  Net loss                            0         0            0   (4,136,000)          0            0
  Unrealized loss on foreign
    currency translation              0         0            0            0           0            0
  Total comprehensive loss

Dividends ($.164 per share)           0         0            0   (1,136,000)          0            0
Issuance of stock under
  dividend reinvestment plan      3,307     1,000       13,000            0           0            0
Purchase of treasury stock            0         0            0            0     410,000    1,728,000
Exercise of stock options             0         0      187,000            0    (188,935)    (310,000)
Fair value of stock
   released to ESOP, net of
   tax                                0         0      334,000            0           0            0
                              ----------------------------------------------------------------------
BALANCE,
   DECEMBER 31, 1998          9,752,053   $98,000  $27,397,000  $24,229,000   1,325,170   $4,008,000
                              ======================================================================

<CAPTION>
                               For the Years Ended December 31, 1996,
                                          1997, and 1998
                               ----------------------------------------
                                              Accumulated
                                                  Other
                                 Unearned     Comprehensive
                               Compensation   Income (Loss)   Total
                               ------------   -------------   -----
<S>                            <C>            <C>           <C>
BALANCE,
   DECEMBER 31, 1995           $ 8,287,000    $        0    $43,078,000

Comprehensive income:
  Net income                             0             0      1,827,000
  Unrealized gain on foreign
    currency translation                 0        25,000         25,000
                                                            -----------
  Total comprehensive income                                  1,852,000
                                                            -----------

Dividends ($.148 per share)              0             0       (922,000)
Exercise of stock options                0             0      1,058,000
Fair value of stock
   released to ESOP, net of
   tax                          (1,207,000)            0      2,966,000
                               ----------------------------------------
BALANCE,
   DECEMBER 31, 1996             7,080,000        25,000     48,032,000

Comprehensive loss:
  Net loss                               0             0       (504,000)
 Unrealized loss on foreign
    currency translation                 0      (397,000)      (397,000)
                                                            -----------
  Total comprehensive loss                                     (901,000)
                                                            -----------
Dividends ($.156 per share)              0             0     (1,030,000)
Issuance of stock under
  dividend reinvestment plan             0             0          4,000
Purchase of treasury stock               0             0       (774,000)
Exercise of stock options                0             0        184,000
Fair value of stock
   released to ESOP, net of
   tax                          (1,204,000)            0      2,108,000
                               ----------------------------------------
BALANCE,
   DECEMBER 31, 1997             5,876,000      (372,000)    47,623,000

Comprehensive loss:
  Net loss                                0            0     (4,136,000)
  Unrealized loss on foreign
    currency translation                  0     (624,000)      (624,000)
                                                            -----------
  Total comprehensive loss                                   (4,760,000)
                                                            -----------
Dividends ($.164 per share)               0            0     (1,136,000)
Issuance of stock under
  dividend reinvestment plan              0            0         14,000
Purchase of treasury stock                0            0     (1,728,000)
Exercise of stock options                 0            0        497,000
Fair value of stock
   released to ESOP, net of
   tax                           (1,199,000)           0      1,533,000
                               ----------------------------------------
BALANCE,
   DECEMBER 31, 1998           $  4,677,000   $  (996,00)   $42,043,000
                               ========================================

</TABLE>


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


                                       F-5

<PAGE>   35

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                                    1998              1997             1996
                                                              ---------------    --------------   ------------
<S>                                                           <C>                <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                          $   (4,136,000)    $    (504,000)   $  1,827,000
   Adjustments to reconcile net income (loss) to net cash
   provided by operating activities:
      Non-cash loss on disposal of discontinued operations                 0           187,000       1,430,000
      Depreciation and amortization                                1,796,000         1,897,000       1,623,000
      Net loss on sales of assets                                          0            34,000          39,000
      Gain on sale of other assets                                  (291,000)                0               0
      Provision (credit) for doubtful accounts
         and notes receivable                                        195,000           200,000        (117,000)
      Provision (credit) to value inventories at LIFO cost          (115,000)            9,000        (349,000)
      Provision (credit) for deferred income taxes                  (552,000)          113,000        (146,000)
      Non-cash ESOP compensation                                   1,293,000         1,905,000       2,812,000
      Provision for deferred compensation                            444,000           251,000         371,000
      (Increase) decrease in operating assets:
         Accounts and notes receivable                              (837,000)        7,442,000      (1,988,000)
         Inventories                                               4,487,000        (6,585,000)        539,000
         Refundable income taxes                                  (1,228,000)         (269,000)        512,000
         Prepaid expenses and other assets                           510,000           (44,000)       (573,000)
         Other noncurrent assets                                    (423,000)         (463,000)       (557,000)
      Increase (decrease) in operating liabilities:
         Accounts payable                                           (339,000)         (956,000)     (1,443,000)
         Accrued income taxes payable                                      0          (492,000)      1,404,000
         Accrued liabilities                                        (453,000)       (2,120,000)        960,000
         Other noncurrent liabilities                               (338,000)         (237,000)       (103,000)
                                                              -------------------------------------------------
            Net cash provided by operating activities                 13,000           368,000       6,241,000

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                           (1,640,000)       (2,053,000)     (2,798,000)
   Proceeds from sales of assets                                       2,000         1,023,000           1,000
   Proceeds from sale of other assets                                894,000                 0               0
   Purchase of subsidiary, net of cash acquired                            0                 0      (1,374,000)
                                                              -------------------------------------------------
      Net cash used in investing activities                         (744,000)       (1,030,000)     (4,171,000)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net repayments on notes payable                                  (301,000)         (280,000)     (2,181,000)
   Principal payments on long-term debt                           (1,743,000)       (1,656,000)     (5,400,000)
   Proceeds from the issuance of long-term debt                            0                 0       5,000,000
   Purchase of treasury stock                                     (1,728,000)         (774,000)              0
   Exercise of stock options                                         141,000            44,000         186,000
   Cash dividends paid                                              (896,000)         (822,000)       (768,000)
                                                              -------------------------------------------------
      Net cash used in financing activities                       (4,527,000)       (3,488,000)     (3,163,000)
                                                              -------------------------------------------------
NET DECREASE IN CASH AND SHORT-TERM INVESTMENTS                   (5,258,000)       (4,150,000)     (1,093,000)
EFFECT OF EXCHANGE RATE CHANGES ON CASH                              (81,000)          (19,000)        (20,000)
CASH AND SHORT-TERM INVESTMENTS AT THE BEGINNING
 OF THE YEAR                                                      15,157,000        19,326,000      20,439,000
                                                              -------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS AT THE END OF THE YEAR        $    9,818,000     $  15,157,000    $ 19,326,000
                                                              =================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION:
 Cash paid during the period for:
    Interest, net                                             $      885,000     $   1,358,000    $  1,298,000
    Income taxes, net                                         $       28,000     $     877,000    $  1,196,000

</TABLE>


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


                                       F-6

<PAGE>   36



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       BUSINESS AND ORGANIZATION

         Martin Industries, Inc. (the "Company") is a manufacturer of products
in two operating segments (see Note 13), which include home heating products and
leisure and other products. On February 24, 1997, the Company elected to
discontinue its operations in the metal office furniture segment. Home heating
products are sold primarily to distributors and dealers in the United States and
Canada. The Company's leisure products, primarily barbecue gas grills and
utility trailers, are sold to distributors, dealers and mass merchandisers in
the United States and Canada.

         The Company's business is seasonal and cyclical with the potential for
significant fluctuations in earnings. These fluctuations may be affected by
weather conditions, general economic conditions, inflation, employment, the
level of consumer confidence, and factors impacting the housing industry.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

         The consolidated financial statements include the accounts and
transactions of the Company and its wholly owned Canadian subsidiary, 1166081
Ontario Inc. All significant intercompany accounts and transactions have been
eliminated in consolidation (see Note 10).

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

         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,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CASH AND SHORT-TERM INVESTMENTS

         All short-term investments of the Company, which include commercial
paper, money market funds and other low risk investments, are considered cash
equivalents in the consolidated statements of cash flows as they are highly
liquid and have original maturities of three (3) months or less.

INVENTORIES

         The Company's inventories are primarily valued at last-in, first-out
("LIFO") cost, which is not in excess of market. Inventory costs include
material, labor and overhead. The Company evaluates raw materials, purchase
parts, work-in-process and finished goods to ensure that inventory is valued at
the estimated net realizable value. Inherent in the estimates of net realizable
value are management's estimates related to the Company's future customer
demand, product mix and salvage value. During 1998, the Company recorded a
reserve for excess and obsolete inventory of $1,716,000. An analysis of
inventories at December 31, 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                                                           1998                1997
                                                                     ------------------------------------
<S>                                                                  <C>                    <C>
Inventories valued at first-in, first-out ("FIFO") cost:
      Raw material and purchased parts                               $  10,644,000          $  12,467,000
      Work-in-process                                                    4,797,000              5,194,000
      Finished goods                                                    10,347,000             12,803,000
                                                                     ------------------------------------
                                                                        25,788,000             30,464,000

      Less excess of FIFO over LIFO cost                                 5,465,000              5,580,000
                                                                     ------------------------------------

                                                                     $  20,323,000          $  24,884,000
                                                                     ====================================
</TABLE>

                                       F-7

<PAGE>   37



PROPERTY PLANT AND EQUIPMENT

         Property, plant and equipment are recorded at cost. Depreciation is
computed on the straight-line, declining balance and sum-of-the-years-digits
methods over the estimated service lives of the depreciable assets (10-33 years
for buildings and 3-10 years for machinery and equipment).

         Maintenance and repairs are charged to expense as incurred. Cost of
renewals and betterments are capitalized by charges to property accounts and
depreciated at applicable annual rates. The cost and accumulated depreciation of
assets sold, retired, or otherwise disposed of are removed from the accounts,
and the related gain or loss is credited or charged to income.

REVENUE RECOGNITION

         Revenue is recognized upon the shipment of the Company's products to
its customers.

DESIGN AND DEVELOPMENT

         Design and development expenses are charged against income in the
period in which the expenses are incurred.

INSURANCE ARRANGEMENTS

         The Company is partially self-insured for worker's compensation,
product liability, and employee medical/dental claims. The Company purchases
insurance coverage for all worker's compensation claims in excess of $250,000
per occurrence, for all product liability claims in excess of $75,000 per
occurrence, and for all medical claims in excess of $200,000 per occurrence.

         Worker's compensation claims are accrued currently for management's
estimated cost of claims incurred, including related expenses, based upon
independent actuarial reports and historical claims experience. Product
liability and employee medical/dental claims are also accrued currently based on
management's estimated cost of claims incurred as determined by reference to
historical experience and current claim trends. Management considers the accrued
liabilities for unsettled claims to be adequate; however, there is no assurance
that the estimates accrued will not vary from the ultimate amounts incurred upon
final disposition of all outstanding claims. As a result, periodic adjustments
to the reserves will be made as events occur which indicate changes are
necessary.

PRODUCT WARRANTIES

         The Company warrants its products against manufacturing defects
generally for a period of three years commencing at the time of sale. The
estimated cost of such warranties is accrued at the time of sale based upon
historical experience and current claim trends. Periodic adjustments to the
accrual will be made as events occur which indicate changes are necessary.

EMPLOYEE STOCK OWNERSHIP PLAN

         The Company recognizes non-cash Employee Stock Ownership Plan ("ESOP")
compensation expense as shares of stock owned by the ESOP are committed to be
released to participant accounts based on the average fair value of the shares
during the year. Shares of stock owned by the ESOP are committed to be released
to participant accounts based on scheduled principal payments to be made on the
ESOP debt. The difference in the average fair value of the committed shares and
the original cost of those shares, net of income taxes, if applicable, is
charged or credited to paid-in capital (see Notes 4 and 7).

POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

         The Company currently maintains a plan whereby the Company pays
supplemental Medicare insurance premiums on behalf of certain retired officers,
directors and their spouses. The plan will also provide these benefits to
certain current officers and directors who meet the stated service requirements
upon their retirement. The Company accounts for these benefits in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 106, Employers'
Accounting

                                       F-8

<PAGE>   38


for Postretirement Benefits Other Than Pensions, which requires the accrual of
postretirement benefits as they are earned by employees.

         The Company also maintains a plan whereby the Company provides medical
insurance coverage through its self-insured medical/dental plan to certain
former officers and directors who have terminated their employment and have not
reached retirement age. The Company accounts for these benefits in accordance
with SFAS No. 112, Employer's Accounting for Postemployment Benefits, which
requires the accrual of postemployment benefits as they are earned by employees.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

         The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining balance of its long-lived assets and
intangibles may be impaired and not be recoverable. In performing this
evaluation, the Company uses an estimate of the related cash flows expected to
result from the use of the asset and its eventual disposition. When this
evaluation indicates the asset has been impaired, the Company will measure such
impairment based on the asset's fair value.

ACCOUNTING FOR STOCK-BASED COMPENSATION

         The Company accounts for its stock options under the intrinsic value
method and, accordingly, no compensation cost is recognized. The Company also
values all stock transactions with employees and non-employees at the fair value
of the equity instrument and discloses the required pro forma information (see
Note 7).

EARNINGS PER SHARE

         Basic earnings per share ("EPS") excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company. Diluted EPS has
been computed based on the weighted average number of shares outstanding,
including the effect of outstanding stock options, if dilutive, in each
respective year.

         A reconciliation of shares as the denominator of the basic EPS
computation to the diluted EPS computation is as follows:

<TABLE>
<CAPTION>
                                                                  1998              1997             1996
                                                              ------------       -----------      ----------
<S>                                                              <C>               <C>             <C>
Weighted average shares, excluding ESOP
  and stock option effects-basic                                 5,279,713         5,245,114       5,172,386

Weighted average effect of ESOP shares
  committed to be released                                       1,793,717         1,542,571       1,239,836

Dilutive effect of stock options                                         0           261,446         359,969
                                                              ----------------------------------------------

Weighted average number of common and common
  equivalent shares outstanding-diluted                          7,073,430         7,049,131       6,772,191
                                                              ==============================================
</TABLE>

         Options outstanding of 765,973, 526,867 and 318,281 for the years 
ended December 31, 1998, 1997 and 1996, respectively, were not included in the 
table above as they were anti-dilutive.

NEW ACCOUNTING STANDARDS

         In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, Reporting Comprehensive Income, which establishes standards for
reporting and display of "comprehensive income" which is the total net income
and all other non-owner changes in stockholders' equity. The Company adopted the
new rules in 1998 and has provided the required presentation of comprehensive
income in the Consolidated Statements of Stockholders' Equity.


                                       F-9

<PAGE>   39


         In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131, which supersedes SFAS
Nos. 14, 18, 24, and 30, establishes new standards for segment reporting using
the "management approach" in which reportable segments are based on the same
criteria on which management disaggregates a business for making operating
decisions and assessing performance. The Company adopted the new rules in 1998
(see Note 13).

         In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS No. 132, which supersedes
SFAS Nos. 87, 88, and 106, standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer useful as they were when SFAS Nos. 87, 88, and 106, were issued.
The Company adopted the new rules in 1998 with no significant impact on
financial reporting.

         In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This statement is
effective for fiscal years beginning after June 15, 1999. This statement is not
expected to have a material effect on the Company's financial statements.

         In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. This statement
requires capitalization of certain costs of internal-use software. The Company
will adopt this statement in 1999 and does not anticipate a significant impact
on the financial statements.

         The AICPA has issued SOP 98-5, Reporting on the Costs of Start-up
Activities. This statement provides guidance on the financial reporting of
start-up costs and organization costs, and requires these costs to be expensed
as incurred. The new rules are not expected to have a significant impact on the
Company's financial statements.

FOREIGN CURRENCY TRANSLATION

         The Company has determined that the local currency of its Canadian
subsidiary is the functional currency. In accordance with SFAS No. 52, Foreign
Currency Translation, the assets and liabilities denominated in foreign currency
are translated into U.S. dollars at the current rate of exchange existing at
year-end and revenues and expenses for the year are translated at average
monthly exchange rates. Related translation adjustments are reported as a
separate component of stockholders' equity, whereas gains or losses resulting
from foreign currency transactions are included in results of operations.

PRIOR YEAR RECLASSIFICATION

         Certain prior year amounts have been reclassified to conform with the
current year's presentation.

3.       INCOME TAXES

         An analysis of the provision (credit) for income taxes from continuing
operations for the years ended December 31, 1998, 1997, and 1996 follows:

<TABLE>
<CAPTION>
                                                                    1998              1997             1996
                                                              ---------------    --------------   -------------
<S>                                                           <C>                <C>              <C>
Federal:
   Current                                                    $   (1,141,000)    $   1,103,000    $  2,460,000
   Deferred                                                         (509,000)         (385,000)        (95,000)
                                                              -------------------------------------------------
                                                                  (1,650,000)          718,000       2,365,000
State/Provincial:
   Current                                                          (100,000)           76,000         278,000
   Deferred                                                          (43,000)         (218,000)        (51,000)
                                                              -------------------------------------------------
                                                                    (143,000)         (142,000)        227,000
                                                              ------------------------------------------------
                                                              $   (1,793,000)    $     576,000    $  2,592,000
                                                              ================================================
</TABLE>


                                      F-10

<PAGE>   40


         The provision (credit) for income taxes from continuing operations
differs from the amounts computed by applying the federal statutory rate due to
the following:

<TABLE>
<CAPTION>
                                                                    1998              1997             1996
                                                              ---------------    --------------   ------------
<S>                                                           <C>                <C>              <C>
Tax provision at the federal statutory rate                   $   (2,016,000)    $     282,000    $  1,968,000
State income taxes, net of federal income tax benefit                (94,000)          (94,000)        150,000
Non-cash ESOP compensation                                            32,000           238,000         546,000
Establishment of deferred tax valuation allowance                    446,000                 0               0
Other                                                               (161,000)          150,000         (72,000)
                                                              ------------------------------------------------
                                                              $   (1,793,000)    $     576,000    $  2,592,000
                                                              ================================================
</TABLE>

Temporary differences which create net deferred tax benefits at December 31, 
1998  and 1997 are as follows:

<TABLE>
<CAPTION>

                                                                                      1998             1997
                                                                                 --------------   ------------
<S>                                                                              <C>              <C>
   Canadian net operating loss carryforward                                      $   1,778,000    $  1,713,000
   Restructure charge                                                                   95,000               0
   Accrued loss on disposal of discontinued operations                                       0         114,000
   Valuation allowance                                                                (446,000)              0
   Deferred compensation                                                               866,000         826,000
   Allowance for doubtful accounts                                                     211,000         153,000
   Accrued performance compensation                                                    152,000         279,000
   Accrued product liability                                                           361,000         245,000
   Accrued workers' compensation                                                       263,000         215,000
   Reserve for excess and obsolete inventory                                           603,000               0
   Inventory - basis difference                                                        384,000         498,000
   Accrued warranty                                                                    306,000         295,000
   Depreciation                                                                       (578,000)       (787,000)
   Accrued vacation                                                                    203,000         225,000
   Accrued medical claims                                                              285,000         271,000
   Other                                                                                63,000          22,000
                                                                                 -----------------------------
                                                                                 $   4,546,000    $  4,069,000
                                                                                 =============================
</TABLE>

         The Company has recorded a valuation allowance for deferred tax
benefits in the amount of $446,000 representing certain deferred taxes that may
not be realizable in future periods. No valuation allowance has been recorded on
the remainder of deferred tax benefits as realization is considered more likely
than not due to income taxes paid by the Company in prior years, the
consideration of certain tax planning strategies and expected future taxable
income.

4.       LONG-TERM DEBT

         The Company's long-term debt as of December 31, 1998 and 1997 is as
follows:

<TABLE>
<CAPTION>
                                                                               1998               1997
                                                                          ------------        ------------
<S>                                                                       <C>                 <C>
Bank term loan (ESOP), variable rate, 7.51% and 8.11% at December 31,
  1998 and 1997, respectively, secured by fixed assets of the Company     $  4,774,000        $  5,967,000
Bank term loan, fixed rate of 6.90%, unsecured                               3,750,000           4,250,000
Capitalized lease obligations, interest rates ranging from 5.90% to
  7.46% at December 31, 1998 and 1997,secured by automotive and
  computer equipment                                                            75,000             116,000
Other                                                                            6,000              16,000
                                                                           -------------------------------
                                                                             8,605,000          10,349,000
Less current maturities                                                      1,741,000           1,750,000
                                                                           -------------------------------
                                                                           $ 6,864,000        $  8,599,000
                                                                           ===============================

</TABLE>

                                      F-11

<PAGE>   41



         In connection with the establishment of the ESOP, on January 7, 1993,
the Company obtained a bank term loan amounting to $11,934,000 due over a
ten-year period at a rate of 79.5% of prime plus 1.35%. Simultaneously, the
Company entered into a separate interest rate swap agreement with the bank which
carried a notional principal amount of $11,934,000 (which notional amount
amortizes corresponding with the loan balance), on which the Company receives
payments based on a variable rate (6.16% and 6.76% at December 31, 1998 and 1997
respectively) and makes payments based on a fixed rate of 6.86%. This agreement
is designed to fix the interest rate on the debt for seven years at 8.21%. The
bank term loan proceeds were loaned by the Company to the ESOP (see Notes 2 and
7), which utilized the funds together with a $54,000 cash contribution from the
Company to purchase 3,489,115 shares of common stock from existing stockholders.
The terms of the Company loan to the ESOP are substantially similar to the terms
under the bank term loan. The Company is obligated to repay the bank term loan
in semi-annual principal payments of $596,700 each and has pledged the fixed
assets of the Company as collateral on the loan. The bank term loan also
requires the Company to meet certain defined covenants and ratios (i.e., debt
service coverage, working capital, and net worth) common to such agreements. The
Company has complied or obtained a waiver with all debt compliance covenants in
effect at December 31, 1998.

         During 1996, in connection with the acquisition of the Canadian
subsidiary, the Company obtained a $5,000,000 bank term loan which was utilized
to refinance the subsidiary's debt. The bank term loan requires semi-annual
principal payments in the amount of $250,000 and matures on March 15, 2003.

The total debt maturing in each of the next five years at December 31, 1998 is
as follows:

<TABLE>


                           <S>                              <C>
                           1999                             $ 1,741,000
                           2000                               1,708,000
                           2001                               1,707,000
                           2002                               1,699,000
                           2003                               1,750,000
                                                            -----------
                                                            $ 8,605,000
                                                            ===========
</TABLE>


5.       BANK LINE OF CREDIT

         At December 31, 1998, the Company maintained an unsecured bank line of
credit of up to a maximum of $30,000,000 which is to be utilized to finance
inventories, receivables and operations on an interim basis. Interest on the
line of credit is payable monthly at a variable rate based on the 30-day London
Interbank Offered Rate ("LIBOR") plus 1.25%. The existing line agreement expires
on July 31, 1999. There were no amounts outstanding on the line at December 31,
1998 and 1997. The maximum and average amounts of borrowings outstanding under
the line of credit were $8,010,000 and $1,093,000, and $19,791,000 and
$6,404,000 during 1998 and 1997, respectively. The weighted average interest
rate on these borrowings was 6.9% during 1998 and 1997.

6.       STOCKHOLDER RIGHTS PLAN AND PREFERRED SHARE PURCHASE RIGHTS

         On February 22, 1999, the Board of Directors adopted a Stockholder
Rights Plan and declared a dividend distribution of one Preferred Share Purchase
Right on each outstanding share of common stock. The dividend distribution date
is March 8, 1999 payable to stockholders of record on that date. The Rights will
expire on March 8, 2009 and the Rights distribution is not taxable to
stockholders.

         The Rights will be exercisable only if a person or a group acquires
15% or more of the Company's common stock or announces a tender offer the
consummation of which would result in ownership by a person or group of 15% or
more of the common stock. The Board of Directors is authorized to reduce the
15% thresholds referred to above to not less than 10%. Each Right will entitle
stockholders to buy one one-hundredth of a share of a new series of junior
participating preferred stock at an exercise price of $10.

         If a person or group acquires 15% or more of the Company's outstanding
common stock, each Right will entitle its holder (other than such person or
members of such group) to purchase, at the Right's then-current exercise price,
a number of the Company's common shares having a market value of twice such
exercise price. In addition, if the Company is acquired in a merger or other
business combination transaction after a person or group has acquired 15% or
more of the Company's outstanding common stock, each Right will entitle its
holder (other than such person or members of such


                                      F-12

<PAGE>   42


group) to purchase, at the Right's then-current exercise price, a number of the
acquiring company's common shares having a market value of twice such exercise
price.

         Following the acquisition by a person or a group of beneficial
ownership of 15% or more of the Company's common stock and prior to an
acquisition of 50% or more of the common stock, the Board of Directors may
exchange the Rights (other than Rights owned by such person or group), in whole
or in part, at an exchange ratio of one share of common stock (or one
one-hundredth of a share of the new series of junior participating preferred
stock or equivalent preferred stock) per Right. Prior to the acquisition by a
person or group of beneficial ownership of 15% or more of the Company's common
stock, the Rights are redeemable by the Company for one cent per Right at the
option of the Board of Directors.

7.       EMPLOYEE BENEFIT AND COMPENSATION PLANS

         EMPLOYEE AND DIRECTOR STOCK OPTION PLANS

         In 1988, the Company adopted the 1988 Stock Option Plan for certain key
management personnel. Options granted under the 1988 plan were issued at a total
purchase price determined by the Board of Directors, to be satisfied 50% in cash
upon exercise of the options and 50% in previously earned but unpaid
compensation accrued. The previously earned but unpaid compensation accrued
represents compensation utilized to reduce the cash exercise price of the option
at the date of grant. The difference in the total purchase price of the options
and the estimated fair value of the common stock at the date of grant was not
material to the Company's consolidated financial statements. Options granted
under the 1988 plan are exercisable over a ten-year period beginning one year
after the date of grant. At December 31, 1998, there were no options available
for grant under this plan.

         In 1994, the Company adopted the 1994 Stock Option Plan for certain
officers, directors, and key management employees of the Company. Options
granted under the 1994 plan were issued at prices which approximated the fair
value of the Common Stock and are exercisable over a ten-year period beginning
one year after the date of grant, with the exception of one grant during 1998 of
50,000 options which are exercisable two years after the date of grant. Total
options issuable under this plan amount to 525,000, of which 168,830, 124,000
and 159,800 were granted in 1998, 1997 and 1996, respectively. At December 31,
1998, there were 34,120 options available for grant under this plan.

         During 1994, the Company adopted a stock option agreement with a former
director and consultant whereby options for 7,000 shares were granted at prices
which approximated the fair value of the Common Stock. These options are
exercisable over a ten-year period beginning one year after the date of grant.

         During 1996, the Company adopted the 1996 Non-Employee Directors' Stock
Option and Deferred Compensation Plan whereby directors may elect to receive
stock options in lieu of directors' fees. Further, directors may elect to defer
all or any portion of the directors' fees in accordance with the terms of the
1996 plan. Options granted under the 1996 plan were issued at prices which
approximated the fair value of the Common Stock and are exercisable over a
ten-year period beginning one year after the date of grant. Total options
issuable under this plan amount to 100,000, of which 40,765, 43,809 and 11,574
were granted in 1998, 1997 and 1996, respectively. At December 31, 1998, there
were 3,852 options available for grant under this plan.

         The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for these
plans been determined consistent with SFAS No. 123, the Company's income from
continuing operations and income continuing operations per share would have been
reduced to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                                    1998              1997             1996
                                                              ---------------    --------------   -------------
<S>                                                           <C>                <C>              <C>
Income (loss) from continuing operations:
   As reported                                                $    (4,136,000)   $      252,000   $   3,195,000
   Pro Forma                                                  $    (4,394,000)   $      142,000   $   2,960,000

Income (loss) from continuing operations per share:
   As Reported - diluted                                      $         (0.58)   $         0.04   $        0.47
   Pro Forma - diluted                                        $         (0.62)   $         0.02   $        0.44
</TABLE>

         Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.


                                      F-13

<PAGE>   43


         Information with respect to stock options is summarized as follows:

<TABLE>
<CAPTION>
                                                  1998                         1997                          1996
                                      -------------------------  ------------------------------  ------------------------
                                         Shares       Wtd. Avg.      Shares         Wtd. Avg.       Shares      Wtd. Avg.
                                         (000)        Ex Price        (000)         Ex Price         (000)      Ex Price
                                      -----------   -----------  -------------    -------------  ------------   ---------
<S>                                   <C>           <C>          <C>              <C>            <C>            <C>
Outstanding at beginning of year          788         $  4.31          678          $   3.68           755         $ 2.02
Granted                                   210            4.85          168              5.92           171           7.84
Exercised                                (189)           1.50          (58)             1.52          (248)          1.50
Forfeited                                 (43)           6.73            0              0.00             0           0.00
                                      -----------------------------------------------------------------------------------
Outstanding at end of year                766         $  5.00          788          $   4.31           678         $ 3.68
                                      -----------------------------------------------------------------------------------
Exercisable at end of year                556         $  5.05          620          $   3.88           507         $ 2.26
                                      -----------------------------------------------------------------------------------
Weighted average fair value of
  option granted                        $1.76                        $2.59                           $3.62
</TABLE>


         The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.02, 6.10 and 6.03 percent; expected dividend yields of 1.8,
2.7 and 1.9 percent; expected lives of six years; expected volatility of 49
percent, 50 percent and 48 percent.

         Of the 765,973 options outstanding at December 31, 1998, 178,945 have a
range of exercise prices between $1.38 and $1.73 with a weighted average
exercise price of $1.58 and a weighted average remaining contractual life of
four years. All of these options are exercisable. Of the options outstanding at
December 31, 1998, 513,228 have a range of exercise prices between $4.00 and
$8.00 with a weighted average exercise price of $5.56 and a weighted average
remaining contractual life of nine years. Of these options, 303,603 are
exercisable. The remaining 73,800 options outstanding at December 31, 1998 have
a range of exercise prices from $9.13 to $9.50 with a weighted average exercise
price of $9.41 and a weighted average remaining contractual life of eight years.
All of these options are exercisable.

         During 1998, 1997 and 1996, the Company recognized tax benefits related
to the exercise of stock options in the amount of $215,000, $97,000, and
$694,000, respectively. The tax benefits were credited to paid-in capital in the
respective years.

         EMPLOYEE STOCK OWNERSHIP PLAN

         The Company maintains an ESOP which is available to substantially all
employees who meet certain age and service requirements. The Company's Board of
Directors serves as the ESOP's Administrative Committee and thereby directs the
actions of the trustees of the ESOP, who are executive officers of the Company.

         On January 7, 1993, the ESOP received a loan from the Company in the
amount of $11,934,000 under substantially similar terms as the Company's bank
term loan discussed in Note 4. The ESOP utilized the funds together with a
$54,000 initial cash contribution from the Company to purchase 3,489,115 shares
of Company common stock from existing stockholders. The ESOP has pledged the
common stock purchased as security on the loan from the Company. The outstanding
balance due on the loan, which is reflected as unearned compensation in the
accompanying consolidated balance sheets, as of December 31, 1998, and 1997 was
$4,677,000 and $5,876,000, respectively. Company contributions are made to the
ESOP in such amounts as determined by the Company's Board of Directors; however,
the Company's contributions must be sufficient to cover principal and interest
on the loan to the ESOP.

         During the years ended December 31, 1998, 1997 and 1996, the Company
recognized interest expense related to the ESOP debt of $484,000, $585,000 and
$688,000, respectively. Non-cash ESOP compensation expense recognized by the
Company during the years ended December 31, 1998, 1997 and 1996, which was based
on the average fair value of the shares committed to be released as
compensation, amounted to $1,293,000, $1,905,000 and $2,812,000, respectively.
Additionally, the fair value of shares released in payment of dividends on
allocated shares amounted to $240,000, $208,000 and $154,000 in 1998, 1997 and
1996, respectively.

         The difference in the average fair value and the original cost of
shares committed to be released as compensation or dividends on allocated
shares, net of income taxes, if applicable, was credited to paid-in capital
during the years ended December 31, 1998, 1997 and 1996 and amounted to
$334,000, $904,000 and $1,759,000, respectively.


                                      F-14

<PAGE>   44



         SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP")

         The SERP was adopted by the Company to provide retirement benefits for
certain key management personnel who are not eligible to participate in the
ESOP. Awards under the plan are granted annually to participants in the form of
phantom shares of Company common stock equal to the number of shares the
participant would have received under the ESOP.

         During 1998, 1997 and 1996, phantom shares of the Company's common
stock totaling 7,213, 11,924 and 12,571, respectively, were allocated to
participant accounts. Compensation expense equal to the fair value of phantom
shares granted is accrued annually together with any change in the fair value of
shares previously allocated and resulted in charges (credits) to the
consolidated statements of operations in 1998, 1997 and 1996 in the amount of
($197,000), ($85,000) and ($2,000), respectively.

         PROFIT-SHARING PLAN

         The Company maintains a profit-sharing plan covering substantially all
employees. Contributions to the plan are at the discretion of the Board of
Directors. As a result of the adoption of the ESOP in 1993, no contributions
have been made to the plan since 1992.

         As part of the profit-sharing plan, the Company offers a savings
retirement provision under Section 401(k) of the Internal Revenue Code to
substantially all of its employees. Under these provisions, employees may
contribute up to 8% of their total compensation to the plan. The Company makes
matching contributions up to a maximum of 1% of the employee's compensation, as
defined, which amounted to $75,000, $80,000 and $87,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.

         DEFERRED COMPENSATION PLAN

         The Company maintains a supplemental income plan for certain current or
retired employees. The Plan provides for 120 monthly payments starting at age 65
equal to 40% of the employee's regular compensation, as defined. The Company is
accruing the net present value of the estimated benefits from the dates of the
agreements to the estimated retirement dates. As part of this program, the
Company purchased life insurance on the participants to utilize in funding these
obligations. Deferred compensation expense recognized by the Company in the
years ended December 31, 1998, 1997 and 1996 amounted to $444,000, $251,000 and
$371,000, respectively.

         SALARY CONTINUATION (TERMINATION) BENEFITS

         In 1998, the Company entered into certain salary continuation
agreements with certain key employees which provide for termination benefits to
be paid to these employees. The termination benefits are payable only in the
event employment with the Company is terminated for any reason other than death,
permanent disability, voluntary termination or for cause. The period covered by
the agreements extends through December 31, 1999, with the exception of one
agreement which extends through December 31, 2000. Compensation which might
become payable under these agreements has not been accrued in the consolidated
financial statements as a termination has not occurred.

         DIVIDEND REINVESTMENT PLAN ("DRIP")

         The DRIP was adopted by the Company in 1997 to provide holders of
common stock with an opportunity to invest cash dividends on shares of common
stock and optional cash payments for additional shares of common stock without
payment of any brokerage, commission or service charge. During 1998 and 1997,
3,307 shares and 746 shares, respectively, of common stock were issued in
connection with this plan.

8.       FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL
         INSTRUMENTS

         SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
requires all businesses to disclose the fair value of financial instruments,
both assets and liabilities recognized and not recognized on the balance sheet,
for which it is practicable to estimate fair value. Based upon their remaining
term to maturity and the current interest environment, the estimated fair values
of the Company's financial instruments at December 31, 1998 and 1997 approximate
their carrying values at those dates.

         As of December 31, 1998 and as discussed in Note 4, the Company is a
party to an interest rate swap, an off-balance-sheet, derivative financial
instrument. The interest rate swap carries a current notional amount of
$4,774,000 and is accounted for as a 7-year hedge on the bank term loan
originated in 1993. The counter-party to the interest rate swap is the Company's
primary

                                      F-15

<PAGE>   45
bank. The Company believes the credit and liquidity risk of the counter-party
failing to meet its obligation is remote as the Company settles its interest
position with the bank on a quarterly basis. The amount of loss in the interest
rate swap currently deferred is its estimated termination cost of $34,000 as of
December 31, 1998.

9.       COMMITMENTS AND CONTINGENCIES

         PRODUCT CONTINGENCY

         The Company has experienced production and design problems with certain
products manufactured by Hunter Technology Inc. (see Note 10). These product
problems, in some cases, caused the production to be suspended and, therefore,
shipments were also suspended. Corrections have been implemented, and all but
one of the affected products are back in production. The Company has completed
its evaluation of the potential exposure to deal with problems related to
products shipped prior to these corrections, and it currently believes that the
ultimate liability will not have a material adverse effect on the Company.

         LEGAL

         The Company is a party to various legal proceedings that are incidental
to its business. Certain of these cases filed against the Company and other
companies engaged in businesses similar to the Company often allege, among other
things, product liability, personal injury and breach of contract and warranty.
These kinds of suits sometimes seek the imposition of large amounts of
compensatory and punitive damages and trials by jury. In the opinion of
management, after consultation with legal counsel responsible for these matters,
the ultimate liability, if any, with respect to the proceedings in which the
Company is currently involved is not presently expected to have a material
adverse affect on the Company. However, the potential exists for unanticipated
material adverse judgments against the Company.


         PENDING SALE OF CERTAIN ASSETS

         In February 1999, the Company announced that it had entered into a
nonbinding letter of intent to sell the assets of its Ashley solid fuel heating
division. The Company anticipates that the transaction will close during the
first or second quarter of 1999 at which time the Company anticipates reporting
a gain on the sale. There can be no assurance, however, that the transaction
will be consummated or that if the transaction is consummated a gain will be
recognized.

         LEASES

         The Company had financing lease obligations for a portion of its
manufacturing facilities and its central office building. These obligations were
classified as financing leases as they contained bargain purchase options which
the Company intends to exercise. Although the Company satisfied the financing
lease obligations in a prior year, the bargain purchase options had not been
exercised as of December 31, 1998. A summary of the asset balances of the leased
facilities follows:

<TABLE>
<CAPTION>
                                                        1998                1997
                                                   -----------          -----------
<S>                                                <C>                  <C>
Class of property:
      Land                                         $   192,000          $   192,000
      Buildings and machinery                        2,223,000            2,223,000
                                                   --------------------------------
                                                     2,415,000            2,415,000
      Less accumulated depreciation                  1,608,000            1,561,000
                                                   --------------------------------
                                                   $   807,000          $   854,000
                                                   ================================
</TABLE>

         In addition, the Company has various items of machinery and equipment
under operating leases that expire during the next one to five years or are on
month-to-month rental terms. Rent expense under all operating leases amounted to
$376,000, $524,000 and $463,000 in the years ended December 31, 1998, 1997 and
1996, respectively.

         The following is a schedule of future minimum rental payments by year
under operating leases having initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1998:

<TABLE>
                           <S>                                 <C>
                           1999                                $251,000
                           2000                                 156,000
                           2001                                  60,000
                           2002                                  22,000
                           2003                                  16,000
                           Thereafter                            24,000
                                                               --------
                                                               $529,000
                                                               ========
</TABLE>


                                      F-16

<PAGE>   46



10.      BUSINESS COMBINATION

         On February 1, 1996, the Company's Canadian subsidiary, 1166081 Ontario
Inc., acquired all of the capital stock of Hunter Energy and Technologies Inc.
and 1061099 Ontario Inc., a sister company which owned the land and building
leased by Hunter Energy and Technologies, Inc. for its manufacturing operation.
This transaction was accounted for under the purchase method of accounting. The
aggregate purchase price of approximately $1,943,000 included $850,000 in cash,
$729,000 in promissory notes payable and $364,000 paid into escrow. Transaction
expenses of $160,000 were incurred. The total purchase price exceeded the fair
value of net assets acquired by approximately $2,089,000, which amount was
recorded as goodwill and is being amortized over 40 years.

         The purpose of the escrow was to make funds available to meet the
sellers' indemnification obligations to the Company. The promissory notes,
bearing interest at a rate of 9% per annum, matured during the first quarter of
1997. The Company withheld payment on certain of the promissory notes pending
resolution of certain issues with the holders of the notes arising out of the
purchase transaction. The Company also claimed the entire amount in escrow and
instituted litigation to recover these amounts and additional amounts from
certain sellers in the purchase transaction and certain of the sellers sued to
enforce collection of their notes. During 1998, the Company effected a
settlement with all but two of the sellers, and a contingent settlement with
these two. Pursuant to the settlement, the Company has received approximately
$315,000 (including interest) of funds held in escrow, an additional payment of
$32,000, and cancellation of notes and accrued interest totaling approximately
$364,000. Consequently, in 1998, the Company recorded a gain on the settlement
of litigation of $422,000. The contingent settlement will result (if the
contingency is satisfied and that portion of the settlement effectuated) in
receipt by the Company of an additional $97,000, and cancellation of notes and
accrued interest totaling approximately $201,000. No further action is
contemplated as to the Company's claims against those certain sellers, or as to
their claims asserted in Canada against the Company, until such time as it is
determined that the condition for completion of the settlement has been
satisfied, which event will likely occur during 1999.

         The consolidated results of operations for the year ended December 31,
1996 reflect the operations of the acquisition beginning February 1, 1996.
Effective January 1, 1997, Hunter Energy and Technologies, Inc. and 1061099
Ontario Inc. were amalgamated to form Hunter Technology Inc.

         The following unaudited pro forma summary presents the consolidated
results of continuing operations of the Company as if the business combination
had occurred on January 1, 1996:

<TABLE>
<CAPTION>
                                                                       1996
                                                                   ------------
<S>                                                                <C>
    Net sales from continuing operations                           $ 90,842,000
    Income from continuing operations                              $  2,677,000
    Income from continuing operations per share - diluted          $        .40
</TABLE>


11.      DISCONTINUED OPERATIONS

         On February 24, 1997, the Company announced that it had elected to
discontinue its operations in the metal office furniture segment. The segment's
operations have been treated as a discontinued operation for accounting purposes
for all years presented. The Company established a reserve at December 31, 1996
of $1,430,000, net of taxes of $861,000, for estimated operating losses through
the date of discontinuance (April, 1997), write-downs of inventory ($100,000)
and property, plant and equipment ($510,000) to estimated net realizable value,
and estimated costs to discontinue these operations ($245,000). During 1997, the
Company exceeded the original estimated reserve by $756,000, net of taxes of
$457,000, which is reflected as a loss on disposal of discontinued operations in
the 1997 Consolidated Statement of Operations. The estimated reserve was
exceeded primarily as a result of greater than anticipated credits for damaged
and defective merchandise, lower than anticipated margins on sales (due to
discounted sales prices and higher than expected freight costs), group insurance
costs and write-downs of inventory. At December 31, 1997, the Company maintained
a reserve of $299,000 for charges to be incurred during 1998. The reserve
remaining at December 31, 1998 was $0. The Company does not expect any future
expense.


                                      F-17

<PAGE>   47



12.      RESTRUCTURE CHARGE

         As part of the continuing effort to reduce operating costs and improve
manufacturing efficiencies, the Company made the decision to close its
Washington Park, Illinois facility. The Company initiated the closing and the
transfer of the gas grill, gas log and freestanding vent-free stove production
into the Athens, Alabama and Huntsville, Alabama locations during the second
quarter of 1998. The Company recorded a non-recurring charge of $615,000, before
tax, in connection with the closing. The non-recurring charge includes plant
closing costs of $590,000 (primarily payroll, severance and payroll taxes of
$234,000 and group insurance of $255,000) and a property, plant and equipment
valuation charge of $25,000. The estimated reserve remaining as of December 31,
1998 totaled $251,000.

13.      INDUSTRY SEGMENT INFORMATION

         Under SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, certain information is disclosed for the two reportable
operating segments of the Company. The reportable segments were determined using
the internal management reporting system. They are composed of the Company's
significant sales segments. The home heating segment products include vented and
vent-free gas heaters and furnaces, wood- and coal-burning free standing heaters
and fireplace inserts, pre-engineered gas- and wood-burning fireplaces and gas
logs. The leisure and other segment products include premium gas barbecue grills
and utility trailer kits. The accounting policies for each segment are the same
as those used by the Company as described in Note 2 -- Summary of Significant
Accounting Policies. The Company evaluates performance based on net sales, gross
profit and segment contribution, defined as gross profit less selling expenses.
As such, the Company does not allocate general and administrative expense,
non-cash ESOP compensation expense, restructure charge, interest expense,
interest and other income or income taxes to the reportable operating segments.
The segment results include certain overhead allocations, primarily related to
fixed manufacturing and selling expenses. The results for the two reportable
segments of the Company are included in the following table.

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                               1998              1997            1996
                                         --------------     -------------    ------------
<S>                                      <C>                <C>              <C>
CONTINUING OPERATIONS:
Net sales:
   Home heating products                 $   65,386,000     $  69,371,000    $ 76,413,000
   Leisure and other products                18,639,000        17,980,000      13,781,000
                                         ------------------------------------------------
                                         $   84,025,000     $  87,351,000    $ 90,194,000
                                         ================================================
Gross profit:
   Home heating products                 $    7,964,000     $  16,135,000    $ 22,284,000
   Leisure and other products                 3,695,000         3,695,000       2,576,000
                                         ------------------------------------------------
                                         $   11,659,000     $  19,830,000    $ 24,860,000
                                         ================================================
Segment contribution(1):
   Home heating products                 $    1,463,000     $   8,662,000    $ 14,804,000
   Leisure and other products                 1,149,000         1,254,000       1,001,000
                                         ------------------------------------------------
                                         $    2,612,000     $   9,916,000    $ 15,805,000
                                         ================================================
Identifiable net assets(2):
   Home heating products                 $   31,363,000     $  34,657,000    $ 31,097,000
   Leisure and other products                 7,995,000         7,180,000       4,724,000
   Other(3)                                   1,681,000         3,470,000      11,088,000
                                         ------------------------------------------------
                                         $   41,039,000     $  45,307,000    $ 46,909,000
                                         ================================================
Depreciation and amortization:
   Home heating products                 $    1,190,000     $   1,234,000    $  1,016,000
   Leisure and other products                   259,000           212,000         113,000
   Other(3)                                     347,000           451,000         494,000
                                         ------------------------------------------------
                                         $    1,796,000     $   1,897,000    $  1,623,000
                                         ================================================
Capital expenditures:
   Home heating products                 $    1,033,000     $   1,507,000    $  1,726,000
   Leisure and other products                   117,000           268,000         148,000
   Other(3)                                     490,000           278,000         924,000
                                         ------------------------------------------------
                                         $    1,640,000     $   2,053,000    $  2,798,000
                                         ================================================
</TABLE>

                                      F-18

<PAGE>   48

<TABLE>
<S>                                       <C>                <C>              <C>
Discontinued Operations:(5)
Net sales                                 $            0     $   5,498,000    $ 16,516,000
Gross profit                              $            0     $  (1,822,000)   $  1,851,000
Segment contribution (loss)(1)            $            0     $  (2,371,000)   $     99,000
Identifiable net assets                   $            0     $   1,969,000(4) $  9,346,000

</TABLE>

---------------

(1) Segment contribution (loss) consists of gross profit less selling expenses.
(2)  Represents Property, Plant and Equipment, Accounts Receivable and Inventory
     (each net of respective reserves).
(3)  Represents amounts attributable to the Company's corporate administration
     and discontinued operations.
(4)  Represents Property, Plant and Equipment-$978,000, Accounts Receivable
     -$739,000, and Inventory-$252,000 (each net of respective reserves).
(5)  See Note 11.

                                      F-19

<PAGE>   49



The Company also reports revenues from customers and holds assets in different
geographic areas as illustrated in the following table.

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                             1998                1997               1996
                                                       ----------------    ---------------    ---------------
<S>                                                    <C>                 <C>                <C>
NET SALES FROM CONTINUING OPERATIONS (1):
   United States                                       $     79,072,000    $    82,839,000    $    83,888,000
   Canada                                                     7,212,000          6,514,000          8,502,000
   Elimination of intersegment net sales                     (2,259,000)        (2,002,000)        (2,196,000)
                                                       ----------------    ---------------    ---------------
                                                       $     84,025,000    $    87,351,000    $    90,194,000
                                                       ================    ===============    ===============

LONG-LIVED ASSETS:
   United States                                       $      7,322,000    $     7,200,000    $     7,743,000
   Canada                                                     4,428,000          5,064,000          5,083,000
                                                       ----------------    ---------------    ---------------
                                                       $     11,750,000    $    12,264,000    $    12,826,000
                                                       ================    ===============    ===============
</TABLE>

---------------
(1) Net sales are attributed to countries based primarily on the location of the
    external customers.


                                      F-20

<PAGE>   50


                                                                       EXHIBIT S
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS






To Martin Industries, Inc.:


         We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of MARTIN INDUSTRIES, INC.
included in this Form 10-K and have issued our report thereon dated February 12,
1999 (except with respect, to the matter discussed in Note 6, as to which the
date is February 22, 1999). Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the accompanying index is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

                                            ARTHUR ANDERSEN LLP




Birmingham, Alabama
February 12, 1999



<PAGE>   51



                                                                    SCHEDULE II



                             MARTIN INDUSTRIES, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998


<TABLE>
<CAPTION>
                                                                     Charged/
                                                Balance at          (Credited)        (Deductions)/
                                                 Beginning           to Costs          Recoveries         Balance at
                                                  of Year          and Expenses            Net            End of Year
                                                  -------          ------------        ----------         -----------
<S>                                             <C>               <C>                 <C>                <C>
FOR THE YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful accounts                 $    594,000      $    (117,000)      $   (58,000)       $    419,000

FOR THE YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts                 $    419,000      $      200,000      $   (187,000)      $    432,000

FOR THE YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts                 $    432,000      $      195,000    $          -0-       $    627,000

</TABLE>


                                      S-2


<PAGE>   52


                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                            MARTIN INDUSTRIES, INC.

                                By:       /s/ ROBERT L. GOUCHER
                                   ------------------------------------------
                                              Robert L. Goucher
                                     President and Chief Executive Officer

Date:  March 30, 1999


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.

<TABLE>
<CAPTION>
               Signature                                            Title                             Date
               ---------                                            -----                             ----
<S>                                                    <C>                                       <C>
           /s/ ROBERT L. GOUCHER                         President, Chief Executive              March 30, 1999
--------------------------------------------                Officer and Director
              Robert L. Goucher                        (Principal Executive Officer)


          /s/ RODERICK V. SCHLOSSER              Vice President and Chief Financial Officer      March 30, 1999
--------------------------------------------     and Secretary (Principal Financial Officer 
            Roderick V. Schlosser                     and Principal Accounting Officer)
                                                                                       


         /s/ WILLIAM H. MARTIN, III*                             Director
--------------------------------------------
           William H. Martin, III


            /s/ WILLIAM D. BIGGS*                                Director
--------------------------------------------
              William D. Biggs


           /s/ JIM D. CAUDLE, SR.*                               Director
--------------------------------------------
             Jim D. Caudle, Sr.


           /s/ HERBERT J. DICKSON*                               Director
--------------------------------------------
             Herbert J. Dickson


             /s/ BILL G. HUGHEY*                                 Director
--------------------------------------------
               Bill G. Hughey


                                                                 Director
--------------------------------------------
              Charles R. Martin


          /s/ LOUIS J. MARTIN, II*                               Director
--------------------------------------------
             Louis J. Martin, II


            /s/ JAMES J. TANOUS*                                 Director
--------------------------------------------
               James J. Tanous


        *By /s/ RODERICK V. SCHLOSSER                                                           March 30, 1999
--------------------------------------------
            Roderick V. Schlosser
              Attorney-In-Fact
</TABLE>


<PAGE>   53


                                INDEX TO EXHIBITS
<TABLE>
<CAPTION>
                                                                                                          Sequential
Exhibit                                                                                                      Page
Number                                      Description of Exhibits                                         Number
------                                      -----------------------                                         ------
<S>          <C>                                                                                          <C>
*  3(a)      Form of Restated Certificate of Incorporation of Martin Industries, Inc. which was
             filed as Exhibit 3(a) to the Company's Registration Statement on Form S-1 filed with
             the Commission on March 17, 1995 (Registration No. 33-90432).

*  3(b)      Amended and Restated Bylaws of Martin Industries, Inc. which were filed as Exhibit
             3(b) to the Registrant's Quarterly Report on Form 10-Q for the 26-week period ended
             June 28, 1997 (Commission File No. 0-26228).

*  3(c)      Amendments to the By-laws of Martin Industries, Inc. which were filed as Exhibit
             99.1 to the Company's Form 8-K on February 24, 1999 (Commission File No.
             0-26228).

*  4(a)      Article 4 of the Restated Certificate of Incorporation of Martin Industries, Inc.
             (included in Exhibit 3(a)).

*  4(b)      Rights Agreement, dated as of February 23, 1999, between Martin Industries, Inc. 
             and SunTrust Bank, Atlanta, Rights Agent, which was filed as Exhibit 1 to the 
             Company's Registration Statement on Form 8-A (Commission File No. 0-26228).

*  10(a)     Martin Industries, Inc. Employee Stock Ownership Plan, as amended, which was
             filed as Exhibit 10(a) to the Company's Registration Statement on Form S-1 filed
             with the Commission on March 17, 1995 (Registration No. 33-90432) and, with
             respect to Amendment No. 7 thereto, as filed as Exhibit 10(a) to the Company's
             Quarterly Report on Form 10-Q for the 13-week period ended September 30, 1995
             (Commission File No. 0-26228).

*  10(b)     Martin Industries, Inc. Employee Stock Ownership Trust Agreement between Martin
             Industries, Inc., Bill G. Hughey, James W. Truitt and James D. Wilson dated
             November 12, 1992, as amended, which was filed as Exhibit 10(b) to the Company's
             Registration Statement on Form S-1 filed with the Commission on March 17, 1995
             (Registration No. 33-90432).

*  10(c)     Loan Agreement by and between Martin Industries, Inc. and AmSouth Bank N.A.
             dated January 7, 1993 in the principal amount of $11,934,000, as amended, which
             was filed as Exhibit 10(c) to the Company Registration Statement on Form S-1 filed
             with the Commission on March 17, 1995 (Registration No. 33-90432).

*  10(d)     Term Note by Martin Industries, Inc. in favor of AmSouth Bank, N.A. dated January
             7, 1993 in the principal amount of $11,934,000 which was filed as Exhibit 10(d)
             to the Company's Registration Statement on Form S-1 filed with the Commission
             on March 17, 1995 (Registration No. 33-90432).

*  10(e)     Loan and Security Agreement by and between Bill G. Hughey, James W. Truitt and
             James D. Wilson, as trustees of the Martin Industries, Inc. Employee Stock
             Ownership Plan and Related Trust (the "ESOP"), and Martin Industries, Inc. dated
             January 7, 1993 in the principal amount of $11,934,000 which was filed as Exhibit
             10(f) to the Company's Registration Statement on Form S-1 filed with the
             Commission on March 17, 1995 (Registration No. 33-90432).

*  10(f)     Promissory Note by Bill G. Hughey, James W. Truitt and James D. Wilson, as
             trustees of the ESOP, in favor of Martin Industries, Inc. dated January 7, 1993, in
             the principal amount of $11,934,000 which was filed as Exhibit 10(g) to the
             Company's Registration Statement on Form S-1 filed with the Commission on March
             17, 1995 (Registration No. 33-90432).

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<PAGE>   54

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<S>            <C>
*   10(g)      Interest Rate Swap Agreement by and between Martin Industries, Inc. and AmSouth
               Bank, N.A. dated November 3, 1992 which was filed as Exhibit 10(h) to the
               Company's Registration Statement on Form S-1 filed with the Commission on March
               17, 1995 (Registration No. 33-90432).

*   10(h)      Martin Industries, Inc. 1988 Nonqualified Stock Option Plan, as amended, which
               was filed as Exhibit 10(l) to the Company's Registration Statement on Form S-1 filed
               with the Commission on March 17, 1995 (Registration No. 33-90432).

*   10(i)      Executive Supplemental Income Plan Guidelines and Form of Supplemental Income
               Agreement which was filed as Exhibit 10(n) to the Company's Registration
               Statement on Form S-1 filed with the Commission on March 17, 1995 (Registration
               No. 33-90432).

*   10(j)      Supplemental Executive Retirement Plan which was filed as Exhibit 10(o) to the
               Company's Registration Statement on Form S-1 filed with the Commission on March
               17, 1995 (Registration No. 33-90432).

*   10(k)      Lease Agreement by and between the Industrial Development Board for the City
               of Florence and Martin Industries, Inc. dated August 1, 1978 which was filed as
               Exhibit 10(p) to the Company's Registration Statement on Form S-1 filed with the
               Commission on March 17, 1995 (Registration No. 33-90432).

*   10(l)      Lease Agreement by and between the Industrial Development Board for the City
               of Athens and Martin Stamping & Stove Company, predecessor corporation to
               Martin Industries, Inc., dated December 1, 1964 which was filed as Exhibit 10(q)
               to the Company's Registration Statement on Form S-1 filed with the Commission
               on March 17, 1995 (Registration No. 33-90432).

*   10(m)      Renewal Option Agreement between the Industrial Development Board of the City
               of Athens and Martin Stamping & Stove Company, predecessor corporation to
               Martin Industries, Inc., dated December 1, 1964 which was filed as Exhibit 10(r)
               to the Company's Registration Statement on Form S-1 filed with the Commission
               on March 17, 1995 (Registration No. 33-90432).

*   10(n)      Purchase Option Agreement between the Industrial Development Board of the City
               of Athens and Martin Stamping & Stove Company, predecessor corporation to
               Martin Industries, Inc., dated December 1, 1964 which was filed as Exhibit 10(s)
               to the Company's Registration Statement on Form S-1 filed with the Commission
               on March 17, 1995 (Registration No. 33-90432).

*   10(o)      First Amendment to Loan Agreement and Other Loan Documents by and between
               Martin Industries, Inc. and AmSouth Bank of Alabama dated as of March 15, 1995
               which was filed as Exhibit 10(u) to the Company's Registration Statement on Form
               S-1 filed with the Commission on March 17, 1995 (Registration No. 33-90432).

*   10(p)      Second Amendment to Loan Agreements and Other Loan Documents dated as of
               March 28, 1996, by and between Martin Industries, Inc. and AmSouth Bank of
               Alabama which was filed as Exhibit 10(y) to the Company's Annual Report on Form
               10-K as filed with the Commission on March 30, 1996 (Commission File No. 0-
               26228).

*   10(q)      Term Note by Martin Industries, Inc. in favor of AmSouth Bank of Alabama dated
               March 28, 1996, in the principal amount of $5,000,000 which was filed as Exhibit
               10(z) to the Company's Annual Report on Form 10-K as filed with the Commission
               on March 30, 1996 (Commission File No. 0-26228).

*   10(r)      Martin Industries, Inc. 1996 Non-Employee Directors' Stock Option and Deferred
               Compensation Plan which was filed as Exhibit 10(x) to the Company's Annual

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<PAGE>   55


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<S>            <C>
               Report on Form 10-K as filed with the Commission on March 31, 1997 (Commission
               File No. 0-26228).

* 10(s)        Amendment No. 6 to Martin Industries, Inc. 1988 Nonqualified Stock Option Plan
               which was filed as Exhibit 10(y) to the Company's Annual Report on Form 10-K
               as filed with the Commission on March 31, 1997 (Commission File No. 0-26228).

* 10(t)        Martin Industries, Inc. Amended and Restated 1994 Nonqualified Stock Option Plan
               which was filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q
               for the 26-week period ended June 27, 1998 (Commission File No. 0-26228).

* 10(u)        Amendment No. 8 to Martin Industries, Inc. Employee Stock Ownership Plan which
               was filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for
               the 39-week period ended September 27, 1997 (Commission File No. 0-26228).

* 10(v)        Third Amendment to Loan Agreement and Other Loan Documents dated as of
               August 28, 1997 by and between Martin Industries, Inc. and AmSouth Bank filed
               as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the 39-week
               period ended September 27, 1997 (Commission File No. 0-26228).

* 10(w)        Modified, Amended and Restated Line of Credit Note dated as of August 28, 1997
               by and between Martin Industries, Inc. and AmSouth Bank filed as Exhibit 10(c)
               to the Company's Quarterly Report on Form 10-Q for the 39-week period ended
               September 27, 1997 (Commission File No. 02-26228).

* 10(x)        Amendment No. 9 to Martin Industries, Inc. Employee Stock Ownership Plan which
               was filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for
               the 26-week period ended June 27, 1998 (Commission File No. 0-26228).

  10(y)        Amendment No. 10 to Martin Industries, Inc. Employee Stock Ownership Plan.

  10(z)        Salary Continuation Letter Agreement dated July 15, 1998 between Martin
               Industries, Inc. and Martin D. Husted.

  10(aa)       Salary Continuation Letter Agreement dated October 23, 1998 between Martin
               Industries, Inc. and Louis J. Martin, II.

  10(bb)       Salary Continuation Letter Agreement dated October 23, 1998 between Martin
               Industries, Inc. and J. Reid Roney.

  10(cc)       Salary Continuation Letter Agreement dated October 23, 1998 between Martin
               Industries, Inc. and Roderick V. Schlosser.

  10(dd)       Salary Continuation Letter Agreement dated November 2, 1998 between Martin
               Industries, Inc. and Robert L. Goucher.

  10(ee)       Salary Continuation Letter Agreement dated January 25, 1999 between Martin
               Industries, Inc. and Troy K. Hoskins.

  10(ff)       Salary Continuation Letter Agreement dated January 11, 1999 between Martin
               Industries, Inc. and William F. Roberts.

  10(gg)       Employment Agreement with Robert L. Goucher dated as of November 2, 1998.

  21           Subsidiaries of the Company.

  23           Consent of Arthur Andersen LLP.

  24           Powers of Attorney.

  27           Financial Data Schedule (Electronic Submission only).

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*  Incorporated by reference.