UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
         For the Fiscal Year Ended February 27, 1999
                                       OR
[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
         OF 1934 For the transition period from ______ to ______

                       Commission File Number 333-44969-01

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

           Delaware                                       61-1251518
 (State or other jurisdiction                          (I.R.S. Employer
       of incorporation)                               Identification No.)

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

                                 (270) 781-9600
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:        None

        Title of Each Class                 Name of Exchange on Which Registered
          Not applicable                           Not applicable

Securities registered pursuant to Section 12(g) of the Act:

                                      None
                                (Title of Class)

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]

As of May 25,  1999,  the  aggregate  market  value of the  Common  Stock of the
registrant held by non-affiliates of the registrant was $12,856,580.

Number of shares of the registrant's Common Stock at May 25, 1999: 15,552,509

Number of shares of the  registrant's  Nonvoting  Common  Stock at May 25, 1999:
90,604
<PAGE>
<TABLE>
<CAPTION>
                                             DESA HOLDINGS CORPORATION

                                           1999 FORM 10-K ANNUAL REPORT

                                                 Table of Contents
<S>           <C>                                                                                               <C>

PART I

Item 1.        Business...........................................................................................4

Item 2.        Properties........................................................................................15

Item 3.        Legal Proceedings.................................................................................15

Item 4.        Submission of Matters to a Vote of Security Holders...............................................15

PART II

Item 5.        Market for the Registrant's Common Stock and Related Stockholder Matters..........................16

Item 6.        Selected Consolidated Financial and Operating Information.........................................16

Item 7.        Management's Discussion and Analysis of Financial Condition and
                Results of Operations............................................................................18

Item 7A.       Quantitative and Qualitative Disclosure About Market Risk.........................................23

Item 8.        Financial Statements and Supplementary Data.......................................................25

Item 9.        Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure.............................................................................25

PART III

Item 10.       Directors and Executive Officers of the Registrant................................................26

Item 11.       Executive Compensation............................................................................28

Item 12.       Security Ownership of Certain Beneficial Owners and Management....................................31

Item 13.       Certain Relationships and Related Transactions....................................................32


PART IV

Item 14.       Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................33

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT................................................................................35

SIGNATURES.......................................................................................................36

</TABLE>
                                       2
<PAGE>




                            CERTAIN IMPORTANT FACTORS

         This Annual Report on Form 10-K contains  statements  which  constitute
forward  looking  statements  within  the  meaning  of  the  Private  Securities
Litigation  Reform Act of 1995. These statements appear in a number of places in
this Annual Report on Form 10-K and include statements regarding the strategies,
beliefs  or  current   expectations  of  Desa  Holdings  Corporation  (with  its
consolidated subsidiaries,  "DESA" or the "Company") and its management. Readers
are cautioned  that any such forward  looking  statements  are not guarantees of
future performance and involve risks and uncertainties, which could cause actual
results to differ materially from those in the forward looking statements.  Such
factors  include but are not limited to the Company's  vulnerability  to adverse
general economic and industry conditions because of its leverage,  the Company's
ability to obtain future financing on acceptable terms, the Company's ability to
integrate acquired companies and to complete acquisitions on satisfactory terms,
the demand and price for the Company's  products  relative to production  costs,
the  seasonality  of the  Company's  business and  uncertainties  regarding  the
resolution of Year 2000 problems. The accompanying information contained in this
Annual  Report  on Form  10-K,  including  under  the  headings  "Business"  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations,"   identifies   other  important   factors  that  could  cause  such
differences. The Company undertakes no obligation to release publicly the result
of any revision to these forward-looking  statements that may be made to reflect
events or  circumstances  after the date hereof or to reflect the  occurrence of
unanticipated events.






<PAGE>
                                     PART I

Item 1.  Business.

         DESA is a  leading  manufacturer  and  marketer  of  zone  heating/home
comfort  products  and  specialty  products  in the United  States.  Through its
ability  to  consistently  offer  consumers  quality  products  with  innovative
features at attractive  price points,  the Company has developed  leading market
positions in (i) vent-free indoor heaters, (ii) vent-free hearth products, (iii)
outdoor heaters, (iv) consumer  powder-actuated  fastening systems, (v) electric
chain saws and (vi) motion sensor lighting. In fiscal 1999, approximately 93% of
the Company's sales were generated in the United States and 7% were generated in
international markets. Over 87% of the domestic sales were in product categories
where  DESA is the market  leader.  The  Company  has grown  rapidly  with sales
increasing  from $122.8 million in fiscal 1994 to $317.2 million in fiscal 1999,
representing a compound annual growth rate ("CAGR") of 21%. The Company's EBITDA
(as  hereinafter  defined)  increased from $18.2 million,  or 14.8% of sales, in
fiscal 1994, to $39.0 million, or 12.3% of sales, in fiscal 1999, representing a
CAGR of 21%. In addition, the Company's operating profit and cash flows provided
by (used in) operating, financing and investing activities changed from $15,450,
$11,892,  ($8,866)  and  ($1,420),  respectively,  in 1994 to  $30,366,  $2,307,
$43,012  and  ($45,233),  respectively,  in 1999.  For the twelve  months  ended
February 27, 1999,  the Company had sales of $317.2  million and EBITDA of $39.0
million.

         The Company sells its products through multiple consumer and commercial
channels of  distribution  including the leading home centers,  mass  merchants,
warehouse  clubs,   hardware   cooperatives,   specialty  heating  distributors,
construction and industrial  equipment dealers,  farm supply outlets and natural
gas utilities under brand names well recognized by its customers.  The Company's
strategy is to aggressively target the fastest growing retailers/distributors in
each  channel and service  these  customers  through a  multi-brand  approach to
capture the largest possible share of a given product market.  In addition,  the
Company  has an  established  record of success in new product  development  and
product line extensions.  Over the last five years, DESA has introduced over 100
new  products  and line  extensions  which  generated  approximately  42% of the
Company's sales growth over that time period.

Zone Heating Products (56% of Fiscal 1999 Net Sales)

         The zone heating  market is  comprised  of indoor gas  heaters,  hearth
products  (gas logs,  fireplaces  and  stoves) and  outdoor  heaters.  DESA is a
leading  manufacturer of vent-free  indoor and outdoor zone heating  products in
the United States.  DESA's domestic zone heating business has experienced a CAGR
of 16% with  gross  revenues  increasing  from $86.4  million in fiscal  1994 to
$177.8  million in fiscal 1999.  DESA markets its zone  heating  products  under
well-known brand names such as Reddy(R),  Remington(R),  Vanguard(R),  Master(R)
and Comfort  Glow(R).  The Company's zone heating business is organized into two
primary product categories:

o        Indoor vent-free heating appliances and hearth products: Indoor heating
         appliances  include  vent-free  liquid  propane  and  natural gas space
         heaters which provide  economical  supplemental heat to a specific area
         as  distinguished  from central  heating systems which are used to heat
         entire   buildings.   Vent-free  hearth  products  such  as  gas  logs,
         fireplaces  and stoves are  utilized for both  decorative  and economic
         heating.  Vent-free  products  utilize a more  efficient  burner system
         which  avoids the need for outside  venting,  whereas  vented  products
         require a discharging of emissions outside of the building.

o        Outdoor  heating  appliances:   Outdoor  heating  products  consist  of
         portable  units which  generate heat by either using a fan to discharge
         heated air to a specific  area  (forced air  heaters) or emitting  heat
         throughout  the  surrounding  area  without  the  assistance  of a  fan
         (convection  heaters).  Forced  air  heaters  are  fueled by  kerosene,
         propane or natural gas, while  convection  heaters are fueled only with
         propane or natural gas.  Outdoor  heaters are used in both  residential
         and commercial  applications.  Residential applications include heating
         otherwise  unheated  garages  and  workshops  and  outdoor  work areas.
         Commercial   applications   include  heating   factories,   warehouses,
         construction sites and agricultural areas.

                                       4
<PAGE>

Specialty Products (44% of Fiscal 1999 Net Sales)

         DESA's domestic  specialty  products business has experienced a CAGR of
31% with gross revenues  increasing  from $36.4 million in fiscal 1994 to $139.4
million in fiscal 1999.  Specialty  products include  powder-actuated  fastening
systems  (tools  and  accessories)  used to fasten  wood to  concrete  or steel,
stapling/rivet  tools  and  electrical  products  such as chain  saws,  portable
generators  and home  security  products.  These  products  are  marketed  under
well-known  brand  names  such  as  Remington(R),  Master(R),  Powerfast(R)  and
Heath/Zenith(R).

Competitive Strengths

         Leading Market Positions in High Growth Segments.  DESA is the domestic
market leader in outdoor heating appliances (77% market share), vent-free indoor
gas heating (69% market share),  vent-free  hearth  products (42% market share),
powder-actuated  fastening  systems  (85% share of the  consumer  market,  which
constitutes  40% of the total  domestic  market)  and  electric  chain saws (52%
market  share).   By  leveraging  its  strong  market   positions  and  customer
relationships  in  established  product  lines,  DESA  has  increased  sales  by
introducing  related  products or line  extensions of existing  products such as
vent-free gas logs (introduced in fiscal 1993), vent-free fireplaces (introduced
in fiscal 1995),  fireboxes  (introduced in fiscal 1997) and vent-free cast iron
stoves (introduced in fiscal 1997).

         DESA's  targeted  market  segments  in the  zone  heating  market  have
exhibited  strong  historical  growth.  Vent-free  indoor  gas heater and hearth
products,  the most  rapidly  growing  segments in the $900 million zone heating
market, have grown at a CAGR of approximately 11% over the last six years driven
primarily by the increasing  consumer trend towards heating with natural gas and
liquid  propane.  The outdoor  heater  market has achieved a CAGR of 8% over the
same period.

         Strong Relationships with a Diversified Distribution and Customer Base.
DESA has  organized  its  sales  and  marketing  organizations  by  channels  of
distribution. The Company has built strong, long-term relationships with some of
the most  rapidly  growing  retailers,  including  Home  Depot,  Lowe's,  Sears,
Wal-Mart,  W.W. Grainger,  Ace Hardware and TruServ.  The Company's products are
designed  to appeal to a  variety  of  end-users,  ranging  from  do-it-yourself
("DIY")   consumers  to   professional   home  builders.   By  building   strong
relationships  with the leading  retailers and  distributors  within each of the
Company's  channels,  DESA is  well-positioned  to  participate in the continued
growth of these key customers.

         Broad  Portfolio of Products  with  Well-Recognized  Brand Names.  DESA
provides a broad  offering of quality  products under numerous brand names which
are  well-recognized  by  its  customers.  The  Company's  key  brands  include:
Reddy(R),  Remington(R),  Vanguard(R),  Master(R)  and Comfort  Glow(R) for zone
heating  products,   Remington(R)  for  powder-actuated  fastening  systems  and
electric chain saws and Heath/Zenith(R) for motion sensor lighting.  The Company
also manufactures  products on a private label basis for W.W.  Grainger,  Sears,
John Deere and Homelite. DESA leverages its brand equity with its DIY consumers,
professionals and specialty  dealers by continually  providing its customers new
product offerings and product line extensions under its established brand names.

         New Product  Development  Process.  DESA offers consumers products with
innovative  features  at  attractive  price  points.  The quality and breadth of
DESA's customer relationships provide the Company with valuable market data that
serves as the foundation for the Company's new product  development  and product
line extension process.  For example,  the Company's line of hearth products was
initially  introduced as the result of shifting  consumer  preferences away from
(i) wood-burning  hearth products to gas technology and (ii) vented gas products
to vent-free  units.  Over the last five years,  new product  introductions  and
product line  extensions have accounted for  approximately  42% of the Company's
sales growth.

         Effective Cost Reduction Program and Strong Cash Flow. A core component
of the Company's strong financial  performance over the last five years has been
a focused program to enhance  margins  through cost  reduction.  The Company has
exceeded  its annual cost  reduction  goal of 3% of cost of sales in each of the
last three years.

         The Company has been able to achieve  its sales  growth with  efficient
use of working capital and low capital expenditures generating $163.1 million in
free cash flow (EBITDA (as hereinafter  defined) less capital  expenditures) for
the last five years.

         Strong  Management  Team.  DESA  was  founded  in  1969.  The  top  two
executives of the Company have worked  together as a team for the last 14 years.
These  individuals  have  served  as the  catalyst  for  instilling  a spirit of
"continuous

                                       5
<PAGE>

improvements" and achievement as a cultural standard within the Company.  Senior
management is well-complemented by a broad team of experienced managers who have
been with DESA since 1985.

Business Strategy

         DESA's  objective is to continue to leverage its competitive  strengths
to increase  revenues and EBITDA.  In addition,  the Company  believes there are
significant   additional   opportunities  to  enhance  its  overall  market  and
competitive position as follows:

         Continue   Aggressive   Growth  through  DESA's  Primary  Channels  and
Customers. DESA's distribution strategy is twofold: (i) establish breadth across
distribution  channels;  and (ii) achieve depth within each channel by fostering
and enhancing  relationships  with some of the most rapidly growing retailers in
such  channel  (such as Home Depot and  Lowe's in the home  center  channel  and
Wal-Mart and Sears in the mass merchant channel). While DESA has managed to gain
access to multiple channels of distribution, significant opportunities remain to
sell the Company's full product line through each of these customers.

         Penetrate New Distribution Channels.  Although DESA currently sells its
products through a broad  distribution  network,  the Company believes there are
opportunities  to  increase  the  penetration  in  some of the  Company's  newer
channels such as plumbing supply outlets, building supply distributors, building
contractors and fireplace specialty stores. Management believes that these newer
channels represent attractive markets across the United States.

         Capitalize  on  Favorable  Trends  for  Gas  Products.  Recent  housing
construction data reveals that over two-thirds of new homes today use gas as the
primary  heating  source  compared to  one-third of new homes ten years ago. The
American Gas Association estimates that approximately 60 million homes currently
use gas and the  number of homes  utilizing  gas will grow to 80  million by the
year 2010.  This growing  preference  for gas  represents a  significant  growth
opportunity for DESA as all of its indoor heating products are fueled by natural
or propane gas. Additionally,  by focusing on vent-free gas products, which have
lower  installation  costs and provide  increased  fuel  efficiency  compared to
vented  products,  the Company is well  positioned  to benefit  from the fastest
growing segments of the zone heating market.

         Increase Penetration of International Markets.  Similar to the trend in
the United States,  the global DIY markets are  experiencing  attractive  growth
rates. Five of the ten largest home improvement retailers in the world are based
outside of the United States. However,  international sales comprised only 7% of
DESA's total sales in fiscal 1999.

         Make  Selected  Acquisitions.  The  Company  intends to seek  selective
acquisitions  where it can expand its existing  product  portfolio,  utilize its
diversified  distribution channels and achieve operational  synergies.  Over the
last  five  years,   57%  of  the  Company's   sales  growth  has  come  through
acquisitions.  Management  believes  that the markets in which it  operates  are
highly fragmented and there are numerous manufacturers of complementary products
which would make attractive acquisition candidates.

Products and Markets

         DESA  is  the  leader  in  a  number  of  markets   where  its  quality
manufacturing   and  innovative   product  design  have  resulted  in  a  strong
competitive  position.  The  Company's  products are sold for both  consumer and
commercial use utilizing multiple  distribution  channels and a variety of brand
names.  The Company  currently  serves  markets for zone  heating  products  and
specialty products.  Approximately 93% of the Company's 1999 sales were domestic
and 7% of sales were international.

Zone Heating Market

         Market  Overview.  The zone  heating  market  includes a broad range of
products  that are used to heat  limited  areas as  distinguished  from  central
heating systems which are used to heat entire buildings. The zone heating market
is currently  estimated to be  approximately  $900 million in size,  with hearth
products (i.e., vented gas hearth,  vent-free gas hearth, wood fireplaces,  wood
stoves/inserts,  pellet stoves/inserts)  accounting for $533 million or over 57%
of the total market; indoor gas heaters comprising $137 million; outdoor heaters
accounting for $63 million and accessories comprising $200 million.

                                       6
<PAGE>

         Market Outlook.  DESA's strong market position in the vent-free segment
provides a solid  foundation  for further  growth of the Company's  business and
expansion  into other  categories  (e.g.  vented gas  hearth) as a result of the
following factors:

         Benefits of low-cost zone heating.  Over the past decade,  zone heating
products have become increasingly  popular because:  (i) propane and natural gas
are 50% to 70%  cheaper on a BTU basis than  electricity,  (ii)  consumers  have
become aware of the cost advantage of zone heating  versus  central  heating and
(iii)  fireplaces  are being used as both heating  sources and  decorative  home
furnishing.

         This growing  preference  for gas represents a growth  opportunity  for
DESA as almost  all of its  indoor  heating  products  are  fueled by natural or
propane gas. The market is still  under-penetrated with only 4 million vent-free
indoor  heating  units having been sold over the last 10 years in North  America
compared to over 60 million homes using gas in 1996.  Gas hearth  shipments have
been  growing at a rate in excess of 30% per year for the past five years.  Over
27 million  homes have been plumbed for gas and have a  fireplace,  providing an
opportunity for gas log sales. In addition, 36 million homes are plumbed for gas
but do not have a fireplace,  representing  a  significant  opportunity  for the
installation of vent-free fireplaces and logs.

         Increased  home   center/hardware   channel   participation.   Consumer
awareness  of gas  logs  and gas  fireplaces  is  currently  only  67% and  20%,
respectively.  Awareness  of zone  heating  and hearth  products  is expected to
increase as these products gain wider  distribution in home centers and hardware
stores. The potential for home improvement sales, through retrofitting or adding
a new fireplace, represents a meaningful market opportunity for hearth products.
DESA, with its strong home center and hardware co-op channel  relationships  and
portfolio of zone heating  products,  is  well-positioned  to capitalize on this
trend.

         Favorable Regulatory Development.  A positive development for vent-free
indoor heating products  (heaters,  gas logs,  fireplaces,  stoves) involves the
easing of state restrictions regarding the sale and use of these products. As of
last year, 43 of the 50 states in the United  States  permitted the sale and use
of vent-free indoor heating products.  In the past year, California and New York
enacted  legislation  to  allow  the sale and use of  vent-free  indoor  heating
products,  subject to rules and guidelines being established by agencies in each
state.  DESA's Vice  President -- Sales and Vice President --  Engineering,  who
represent  the  industry  trade   association   (Gas  Appliance   Manufacturer's
Association,  GAMA-Vent-Free  Alliance),  have successfully  worked with the New
York state  agency on the sale of vent-free  products  and are actively  working
with state agencies in California to provide for the sale of vent-free  products
in the future.

Indoor Heating Products

         DESA's indoor zone heating products consist  primarily of three product
categories:  (i)  vent-free  natural gas and  propane-fueled  residential  space
heaters; (ii) hearth products,  including vent-free gas fireplaces and logs; and
(iii) direct vent products under the FMI (as hereinafter  defined) brand.  Sales
of these  products  have  increased  at a CAGR of 21% from fiscal 1994 to fiscal
1999.

Indoor Vent-Free Heaters

         The Company's space heaters are generally wall-mounted and provide heat
to the  surrounding  area.  Residential  space  heaters come in either vented or
vent-free versions. Vented heaters require a discharging of emissions outside of
the dwelling,  while vent-free  heaters  utilize a more efficient  burner system
which  avoids the need for outside  venting.  Vent-free  heaters  are  generally
smaller and more physically attractive than their vented counterparts.  DESA has
been the market leader in vent-free gas heaters since 1983.  Historically,  DESA
has focused on vent-free  models.  Only 1% of the Company's indoor heating sales
in fiscal 1999 are vented units.

         The Company  offers seven sizes and  forty-six  models of vent-free gas
heaters ranging in output from 5,000 to 30,000 BTU/hour for use with natural gas
or liquefied  propane.  Key applications of these products include use in family
rooms, dens,  kitchens and commercial  offices.  DESA's indoor vent-free heaters
are sold at retail prices,  ranging from $149 to $349,  which are  significantly
lower than vented gas heaters.

                                       7
<PAGE>
         Heaters are  classified  into two  different  types:  infrared and blue
flame. Infrared models employ ceramic plaque burners which glow red-orange while
in use and they  produce  radiant heat that warms people or objects in the room.
Blue flame models have a stainless  steel burner hidden behind a darkened  glass
front.  When  burning,  a line of blue flame is visible  across the width of the
heater.  These models produce convection heat that warms the air and distributes
the heat  throughout the room. Both infrared and blue flame models are available
with either manual or thermostatic control and with piezo ignition.

         The  Company  has  developed  patented   technology  for  its  line  of
thermostatic  infrared  models,  known as Infra-Stat,  which  provides  superior
features versus competitors' offerings. DESA's heaters incorporate a proprietary
feature  of two  separate  controls  to  regulate  both the heat  output and the
thermostatic operation.  Enhanced blue-flame models are available for heavy-duty
garage and workshop  applications.  Optional accessories such as floor bases and
fan accessories are also available.

Vent-Free Hearth Products

         In 1993, DESA pioneered the introduction of vent-free gas technology to
hearth products with the introduction of a heat efficient  vent-free  decorative
gas log.  Vent-free  gas logs  have  provided  DESA  with a new  product  growth
opportunity.   Vent-free   represents  an  advancement  in  decorative  gas  log
technology  and,  more  importantly,  has  allowed  the  Company to  establish a
presence in the fast-growing hearth products market.

         Vent-free gas logs,  which retail for $200 to $300,  are  aesthetically
attractive and an economical  source of heat since none of the heat generated is
lost  through  an open vent.  Historically,  decorative  gas logs have  required
venting  (i.e.,  an open chimney  damper) and were used primarily by individuals
who  enjoyed the  ambiance  of a  fireplace  but wanted to avoid the trouble and
inconvenience  associated  with burning wood.  DESA's  vent-free logs utilize an
efficient  burner  system  similar  to  vent-free  heaters,  and are  thus  less
expensive to install and operate than their vented counterparts.

         In 1994,  DESA  combined the  technology  of blue flame heaters and gas
logs to create an  aesthetically  pleasing  Mini-Hearth gas heater which retails
for $499.  The  Mini-Hearth  utilizes a blue flame heater  cabinet and burner to
which a decorative fibrous ceramic log has been added. A wooden mantle is placed
around  the  heater to create a  fireplace  effect.  While the  Mini-Hearth  was
designed to be used as a zone heater rather than as a  replacement  for a formal
fireplace,  the improved  appearance has generated  sales to customers who might
not have otherwise purchased a gas zone heater.

         In 1995, DESA introduced a vent-free  free-standing  gas fireplace with
logs and a full sized mantle which is marketed as a  traditional  fireplace at a
retail  price of  approximately  $1,000.  DESA's  vent-free  fireplace  does not
require  venting  and  may  be  placed  against  any  wall  without   structural
renovations. Traditional fireplace boxes must be mounted into an outside wall to
facilitate  venting,   requiring  significant  structural  modifications  to  an
existing home.  Furthermore,  vent-free fireplace  installation costs are highly
attractive relative to wood fireplaces (masonry and manufactured), which cost an
average  of two to three  times  the cost of a  vent-free  fireplace,  including
installation.

         The  Company's  vent-free  gas logs are  offered  in  three  sizes  and
thirty-six  models while  vent-free gas fireplaces are offered in ten models and
mini-hearth products in six models.

Direct Vent Products

         In August 1998, DESA acquired  Fireplace  Manufacturers Inc. ("FMI"), a
manufacturer of direct vent gas fireplaces and gas logs, as well as wood burning
metal fireplaces. FMI is located in Santa Ana, California.

         With the acquisition of FMI, DESA is now competing in the vented hearth
market,  which has annual sales in the United  States in excess of $500 million.
DESA  currently  intends to take advantage of its position as a market leader in
vent free products as it competes in the vented hearth market.

                                       8
<PAGE>

Outdoor Heating Products

         DESA's line of outdoor  heating  products  consists  of portable  units
which generate heat by either using a fan to discharge  heated air to a specific
area (forced air  heaters) or emitting  heat  throughout  the  surrounding  area
without the  assistance of a fan  (convection  heaters).  Forced air heaters are
fueled by either kerosene,  propane or natural gas, while convection heaters are
fueled  only with  propane  or natural  gas.  Outdoor  heaters  are used in both
residential  and  commercial  applications.   Residential  applications  include
heating  otherwise  unheated  garages  and  workshops.  Commercial  applications
include  heating  factories,  warehouses,  construction  sites and  agricultural
areas.  Sales of outdoor  heating  products have  increased at a CAGR of 8% from
fiscal 1994 to fiscal 1999.

Specialty Products

         DESA's specialty products category consists of (i) specialty  fastening
systems (i.e.,  powder-actuated tools and staple guns), (ii) electrical products
(i.e.,  chain  saws  and  electric  generators)  which  are sold to both DIY and
commercial  customers,  and (iii) home security products.  The specialty product
category  represents  44% of the Company's  sales which have grown at a 31% CAGR
from fiscal 1994 to fiscal 1999.

Specialty Fastening Systems Products

         Powder-actuated  tools  utilize  a  powder  load  to  drive  nails  for
fastening  wood to concrete or steel.  The charge is  activated  using  either a
trigger on the tool or by striking the tool with a hammer. The energy discharged
propels a piston  inside the tool which in turn drives the nail.  DESA sells two
powder-actuated  tools  targeted at the DIY market and six tools targeted at the
commercial  market.  The two consumer  models  retail for $19 to $79 and the six
commercial  models  retail  for $129 to $199.  Sales of  powder  loads  and nail
accessories account for over 50% of this product category's revenues.

         Market  Overview.  The total  domestic  powder-actuated  tool market in
which DESA competes is approximately  $80 million,  consisting of $60 million in
the commercial  market and $20 million in the DIY market.  In fiscal 1998,  DESA
had a  market  share  of 85% in the DIY  segment.  The  staple  gun and  related
accessories market size is approximately $110 million of which DESA has a modest
market share.

Electrical Products

         DESA  assembles and markets a line of electric  chain saws and electric
generators.  Electric chain saws are used primarily by homeowners for light-duty
pruning and trimming.  The Company offers models retailing from $39 to $69. DESA
also  maintains a modest  presence in the portable  electric  generator  market.
Nearly 56% of the Company's generator sales are made to W.W. Grainger who offers
this product  line to end-users  through its  equipment  catalog and  industrial
supply outlets.

         Market   Overview.   The   domestic   electric   chain  saw  market  is
approximately  $20  million in size,  and DESA is the market  leader  with a 52%
share.  The  electric  chain saw market is mature and  industry  volume has been
reasonably stable over the past five years.

Home Security

         The Company's home security  products,  marketed under the Heath/Zenith
brand,  comprises three primary product lines:  Motion Sensor Security Lighting,
Motion Sensor Decorative Lighting, and Wireless Doorbells.

         Motion Sensor  Security  Lighting.  Within its motion  sensor  security
lighting product line, which accounted for 51% of Heath/Zenith's  1999 revenues,
Heath/Zenith  offers 58 stock keeping units  ("SKUs")  representing a variety of
security  lighting  products which appeal to various segments of the DIY market.
The Heath/Zenith  standard motion sensor security  lighting products retail from
$9.95 for  promotional  items up to $34.95 for a  full-feature  security  light.
Heath/Zenith's  primary  focus is to  de-emphasize  promotional  products and to
emphasize  its high  quality,  high  margin  products  that are made with  metal
fixtures and hoods, and which contain such value-added  features as Pulse Count,
Dual BriteTM, and 270(degree) activation capability.

                                       9
<PAGE>
         Market Overview.  The $200 million North American  residential  outdoor
security lighting industry market is segmented into three categories: (i) motion
sensor security lighting, (ii) photocell (darkness activated) security lighting,
and (iii)  standard  (switch  activated)  security  lighting.  The motion sensor
security  lighting  segment has been the primary growth segment in the industry,
growing at a  compounded  annual  growth  rate that the  Company  believes to be
approximately  15% over the last five years.  Since the  introduction  of motion
sensor  security  lighting,  the  product has  established  itself as an easy to
install,  reliable,  low-cost  security  product.  As a  result,  motion  sensor
products  have  steadily  captured  market  share from  standard  and  photocell
lighting as those  traditional  products are less effective crime deterrents and
more expensive and less convenient to operate.

         Motion  Sensor  Decorative  Lighting.   With  38  SKUs,  motion  sensor
decorative lighting products represented approximately 26% of the Heath/Zenith's
1999  total  revenue.  The  Heath/Zenith's  motion  sensor  decorative  lighting
products,  which sell for retail  prices  ranging  from  $24.95 to $79.95,  were
introduced in 1992 as part of management's  strategy to move consumers to higher
price point  products.  Included in this product line are coach  lanterns,  cast
aluminum lanterns, brass lanterns and post lanterns.

         Market Overview.  The $400 million North American  residential  outdoor
decorative  lighting  industry is driven  primarily by the home  improvement and
remodeling industry. As a result, the overall retail outdoor decorative lighting
industry has benefited from the expansion in the home  improvement  industry and
DIY retail channel.  Historically,  the decorative lighting market was dominated
by standard (switch activated)  lighting products.  However, as customers become
more aware of the benefits of motion  sensor  lighting  products  such as energy
efficiency, crime deterrence, and convenience,  they are requiring motion sensor
capabilities in their outdoor lighting products.

         Wireless  Doorbells.  Wireless  doorbell  products  and other  wireless
control systems products  represented  approximately 22% of Heath/Zenith's  1999
total revenue. The Heath/Zenith's  wireless doorbell products,  which retail for
between $9.95 and $49.95,  are  positioned to take  advantage of an  underserved
market.  Heath/Zenith  has  become the market  leader in the  wireless  doorbell
industry  by offering a diverse  line of  products  and,  most  importantly,  by
differentiating its product with a proprietary sound chip.

         Market  Overview.  The wireless  control systems  industry is a diverse
industry that includes  products ranging from home automation  systems to garage
door openers to wireless doorbells. Heath/Zenith currently competes primarily in
the  wireless  doorbell  segment of the  residential  wireless  control  systems
industry,  estimated by the Company to be an industry with annual North American
sales of approximately $40 million.

International

         In  fiscal  1999,  $22.7  million  or 7% of  DESA's  gross  sales  were
generated in international markets such as Canada, Europe and the Far East. This
segment  has grown at a CAGR of 7.3%  from  fiscal  1994  through  fiscal  1999.
Although the global markets have not traditionally been an area of DESA's focus,
the Company believes that the  international  category  represents a significant
opportunity  for increased sales in the future.  International  markets have the
potential to far surpass the home improvement market in the United States.

         DESA's  strategy  for the  international  markets  has  been to  export
customized   versions  of  its   products  to   accommodate   local   electrical
requirements,  government  regulation  and  user  preferences  for its  exported
products. DESA utilizes local distributors in each country to sell its products,
typically relying on more than one distributor in each country.

         In 1990,  DESA  increased its presence in the foreign  markets with the
purchase of Jennen B.V.,  its Dutch  distributor  of outdoor forced air heaters.
Located in  Rotterdam,  it was  subsequently  renamed as DESA  Europe  B.V.  and
currently serves as the Company's European headquarters.

Sales, Marketing and Distribution

         Sales.  DESA has  organized  its  domestic  sales  force by channels of
distribution  and product  categories in order to optimize the  effectiveness of
its selling efforts. DESA management believes that such a structure enhances the
Company's

                                       10
<PAGE>

relationships with key channel  participants by: (i) enabling the sales force to
develop specific customer insights regarding specialized needs and (ii) creating
a sense of partnership through customized attention and focus.
<TABLE>
<CAPTION>
                                                                                         Approximate Number
        DESA Sales             Channel of                                                      of Sales
       Organization           Distribution                  Products Marketed               Representatives
<S>                         <C>                              <C>                                <C>

General Consumer...........  Mass Merchants                   Indoor Heating                      120
                             Hardware Co-ops                  Hearth Products
                             Home Centers                     Outdoor Heating
                             Warehouse Stores
                             Catalog Showrooms
                             Agricultural Supply
Specialty Heating..........  Utilities                        Indoor Heating                      40-50
                             Propane Marketers                Hearth Products
                             Specialty Distributors
                             Appliance Distributors
Construction...............  Equipment Distributors           Outdoor Heating                     40-50
                             Equipment Renters                Generators
Specialty Products.........  Mass Merchants                   Specialty Fastening Systems          100
                             Hardware Co-ops                  Electrical Products
                             Home Centers                     Home Security
                             Warehouse Stores
                             Catalog Showrooms
                             Agricultural Supply
</TABLE>

     The sales  representative  organizations report to DESA's regional managers
who, in turn,  report to that  channel's  Sales Director who report to the Chief
Operating Officer.

     Marketing.  The Company's marketing staff utilizes a variety of traditional
and innovative  programs to increase consumer  awareness and augment sales. DESA
uses  limited  national   advertising  and  relies  instead  on  local  customer
advertising  through  newspapers  and circular  flyers.  DESA has also created a
broad  national  network  of  independent,  factory-trained  service  centers to
provide local support to customers and end-users.

     Distribution.  The Company's significant customers include all of the major
home center  accounts.  The  Company's  consumer  channels,  which  include home
centers,  mass  merchants,  warehouse  clubs and hardware  co-ops,  are the most
important channel for DESA's products and were responsible for 78% of its fiscal
1999  domestic  sales.  Other  channels,   including  specialty  heating,  farm,
construction and industrial, contributed 22% of domestic sales in fiscal 1999.

     Key customers include Home Depot and Lowe's,  two of the major home centers
in the country; Ace and TruServ, leaders in the hardware co-op market; Sears and
Wal-Mart/Sam's,  major mass merchandisers, and W.W. Grainger, a major industrial
supply company. Consistent with industry practices, the Company does not operate
under a long-term written supply contract with any of its customers.

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,

                                       11
<PAGE>
customer  service and price.  The Company also  believes  that a  manufacturer's
relationship  with its distributors  and principal  customers is a key factor in
the industries in which the Company competes.

     The Company competes with a number of manufacturers in the heating products
industry.  Within this industry,  there are several manufacturers of gas heaters
and numerous  producers of gas logs,  pre-engineered  fireplaces  and solid fuel
heaters.  The  Company  also  competes  with a number  of  manufacturers  in the
specialty tool industry.  The Company believes that it is a market leader in the
outdoor  heating  appliance,  vent-free  indoor gas  heating  and hearth and DIY
powder-actuated  fastener and electric  chain saw markets and believes  that its
experience,  well-recognized  brand names,  comprehensive  product offerings and
strong customer  relationships  give it a competitive  advantage with respect to
these products.

     The Company's competitors offer a number of products which directly compete
with or can be utilized as  substitutes  for the  products  manufactured  by the
Company.  No assurance  can be given that the future  sales of such  competitive
products will not adversely  affect the market for the  Company's  products.  In
addition,  certain of the Company's  competitors,  particularly in the specialty
tool industry, are larger and better capitalized than the Company.

Management Information Systems

     DESA  maintains  an advanced  MIS  utilizing  customized  software  for its
manufacturing and engineering design. The Company also has established  Customer
Electronic Data  Interchange  for order entry by major  accounts.  These systems
provide  "real-time"  information  in regards to  work-in-process  inventory and
provides  detailed labor  reporting to enable the Company to identify  potential
labor cost savings. For product development and engineering, employees utilize a
state-of-the-art three dimensional CAD/CAM system.

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

     The Company has written all of its internal MIS  applications,  rather than
buying  applications from vendors,  and has chosen to modify those  applications
internally to appropriately  address the Year 2000 problem.  Management believes
that the Company's MIS staff was able to modify all such  applications  prior to
March 1, 1999 and that the  appropriate  system testing has been  performed.  No
embedded  systems used in  manufacturing  require any modification for Year 2000
compliance. Review of embedded systems used for quality control was completed in
January 1999. The expenses of the Company's  efforts to identify and address any
Year 2000  problems are not expected to exceed  $100,000,  of which  $37,000 has
already been spent, exclusive of staff time.

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

     The Company is also engaged in discussions  with certain major customers to
ensure that EDI formats function properly notwithstanding the advent of the Year
2000.  EDI is the  primary  method  by  which  customers  place  orders  for the
Company's products. Such discussions are completed, in the case of the Company's
major home center customers, and are well advanced

                                       12
<PAGE>
with other major customers using EDI, and management  believes that transmission
of orders from these major customers will not be  significantly  affected by the
advent of the Year 2000,  although  there can be no  assurances  in this regard.
Management does not, however, have sufficient information regarding the internal
systems of all of its customers to form an opinion as to whether such  customers
will be able to timely  place  such  orders or to timely pay for  products.  The
purchasing  patterns of existing and potential customers may be affected by Year
2000 problems that could cause  unexpected  fluctuations  in the Company's sales
volumes.

Manufacturing

     Indoor and Outdoor Heating Products. DESA's manufacturing processes include
metal  fabrication,  painting,  assembly and product testing.  In general,  DESA
cuts, forms and coats the product housing, assembles the various components such
as motors,  fans,  electrical parts and burners,  packages the final product and
ships it to  customers.  Punch  presses,  welding,  powder  coated  painting and
assembly  systems  are  mechanized  with  state-of-the-art  equipment  utilizing
robotics to permit high volume output with minimum labor content.

     Specialty  Fastening  Systems.  DESA  manufactures  and  packages the nails
(pins) for sale with its  powder-actuated  tool  product  line.  Powder-actuated
tools are sourced from a manufacturing  joint venture with  Continental/Midland,
Inc. and loads are purchased from a third party.  Powerfast(R) stapling products
are sourced from Asian manufacturers.

     Electrical Tools.  DESA assembles  electric chain saws from components made
to  its  specifications  by  third-party  suppliers.   Electric  generators  are
assembled on a chassis by connecting  gasoline engines  purchased from Honda and
Briggs & Stratton with an alternator purchased from a European supplier.

     Home Security.  Heath/Zenith  designs and manufactures its products through
its Hong Kong based subsidiary,  Heath Company Ltd., which provides  purchasing,
engineering,  contract manufacturing,  administration and assembly. Heath/Zenith
uses  subcontractors in China who assemble  products  according to predetermined
specifications and ship assembled  products to Heath Ltd.  Heath/Zenith owns all
the tooling  utilized in the production of its products.  Finished  products are
shipped  to the  Company's  warehouse  in  Manchester,  Tennessee  and a  public
warehouse in Reno,  Nevada and distributed  throughout North America directly to
customers.

Trademarks, Patents and Licenses

     The  success of the  Company's  various  businesses  depends in part on the
Company's ability to exploit certain proprietary  designs,  trademarks and brand
names  on an  exclusive  basis in  reliance  upon the  protections  afforded  by
applicable  copyright,  patent and trademark laws and  regulations.  The loss of
certain of the Company's  rights to such designs,  trademarks and brand names or
the inability of the Company to protect effectively or enforce such rights could
adversely affect the Company.

Backlog and Warranty

     The Company's  backlog consists of cancelable  orders and is dependent upon
trends in consumer demand throughout the year. Customer order patterns vary from
year to year,  largely  because of annual  differences  in consumer  end-product
demand,   marketing   strategies,   overall  economic   conditions  and  weather
conditions.   Orders  for  the  Company's  products  are  generally  subject  to
cancellation until shipment.  As a result,  comparison of backlog as of any date
in a given  year  with  the  backlog  at the  same  date in a prior  year is not
necessarily  indicative of sales trends.  Moreover, the Company does not believe
that  backlog is  necessarily  indicative  of the  Company's  future  results of
operations or prospects.

     The Company's warranty policy is to accept returns of products with defects
in materials or workmanship. The Company will also accept returns of incorrectly
shipped  goods  where the Company  has been  notified on a timely  basis and, in
certain  cases,  to maintain  customer good will.  During fiscal 1999,  warranty
costs amounted to approximately 2.1% of sales.

                                       13
<PAGE>

Environmental Liability

     The  Company  is  subject  to  various  evolving  federal,  state and local
environmental laws and regulations governing,  among other things,  emissions to
air, discharge to waters and the generation,  handling, storage, transportation,
treatment and disposal of hazardous  and  non-hazardous  substances  and wastes.
These laws and  regulations  provide  for  substantial  fees and  sanctions  for
violations  and, in many cases could  require the Company to remediate a site to
meet  applicable  legal  requirements.  A Phase  I  environmental  audit  of the
Company's  manufacturing  facilities was completed on August 9, 1997 and did not
identify any material matters.  The Company  believes,  although there can be no
assurance,  that liabilities  relating to environmental  matters will not have a
material  adverse  effect  on  its  future  financial  position  or  results  of
operations.

Employees

     DESA's zone heating products operation is seasonal. As a result, the number
of workers employed by the Company at any particular  point in time varies.  The
work force is  accustomed  to seasonal  layoffs of two to four months.  In 1999,
total employment  averaged 1,023 with a low of 508 employees in March and a peak
of 1,469 employees in September.

     The hourly labor force in Bowling  Green,  Kentucky is  represented  by the
Sheet Metal  Workers  International  Association  (AFL-CIO)  under a  three-year
contract  expiring  in June 2001.  The  Manchester  and  Shelbyville,  Tennessee
facilities and Santa Ana, California are non-union plants.

     The hourly labor force in Bowling  Green,  Kentucky is covered by a defined
benefit pension plan. All other employees are covered by a defined  contribution
plan (401K). All workers are covered by self-insured medical plans.

FMI/UHI

     On August 19, 1998, the Company  consummated the  acquisitions of Fireplace
Manufacturers Incorporated ("FMI") and the worldwide rights (except in China) to
distribute Universal Heating,  Inc.'s and its affiliates' ("UHI") indoor heating
products.  FMI is a Santa Ana,  California,  based  manufacturer of wood-burning
metal  fireplaces,  decorative gas appliances with  refractory-lined  fireboxes,
direct vent gas  fireplaces,  and related  chimney  flues.  UHI,  based in Yorba
Linda,  California,  is a  privately  held  manufacturer  of indoor gas  heating
products.  The aggregate  purchase price for the acquisitions was  approximately
$38,368,000 including  non-compete  payments.  These acquisitions were accounted
for under the purchase method of accounting.

     The Company financed these  acquisitions with the proceeds of a $26,292,500
advance under its senior credit  facility and  $12,075,500  of the proceeds from
the issuance of approximately 1,860,677 additional shares of the Common Stock by
the Company.  The  additional  equity was sold to existing  stockholders  of the
Company at a per share price of approximately $6.49.

     In August  1998,  the Company  became party to an agreement to negotiate in
good  faith for the  purpose of  entering  into a joint  venture to  manufacture
various  products  in China.  Pursuant to the terms of the joint  venture  under
negotiation, UHI intends to contribute manufacturing facilities located in China
in exchange for a 60% interest in the joint venture and a preferred  interest in
an additional $7 million of profits of the joint venture. The Company intends to
contribute  $3 million in cash for a 40%  interest in the joint  venture,  which
will be  subordinate  to UHI's $7 million  preferred  interest in  profits.  The
Company  intends to finance  its $3 million  contribution  to the joint  venture
through indebtedness under the Credit Facility.

                                       14

<PAGE>

Item 2.  Properties.

     The Company's  Bowling  Green,  Kentucky  facility  serves as the corporate
headquarters as well as the manufacturing site for DESA's zone heating products,
both indoor and outdoor.  The  principal  executive  offices for the Company are
located at 2701 Industrial  Drive,  Bowling Green,  Kentucky  42102,  telephone:
(270)  781-9600.  The Company  also  leases  warehouse  space in Bowling  Green,
Kentucky  and  Manchester,  Tennessee as needed.  The  facility in  Shelbyville,
Tennessee  is the  manufacturing  headquarters  for  the  production  of  hearth
products.  The  manufacturing  facility in  Manchester,  Tennessee  produces the
specialty tools sold by DESA. In addition to these manufacturing facilities, the
Company  leases  sales  offices and  warehouse  locations  in  Toronto,  Canada,
Rotterdam, Holland and Hong Kong, China.
<TABLE>
<CAPTION>
Location                                        Square Footage    Ownership                  Function
<S>                                              <C>               <C>       <C>
Bowling Green, Kentucky......................      225,000          Owned      Corporate Headquarters
                                                   28 acres                    Manufacturing, Engineering, Distribution
Shelbyville, Tennessee.......................      123,000          Leased     Manufacturing
                                                   14 acres
Manchester, Tennessee........................      107,850          Leased     Manufacturing, Distribution
                                                   7 acres
Toronto, Canada..............................       9,400           Leased     Sales offices, Distribution
Rotterdam, Holland...........................       5,200           Leased     Sales offices, Distribution
Hong Kong, China.............................       9,100           Leased     Procurement, Distribution
Santa Ana, California........................      101,125          Leased     Manufacturing, Distribution
</TABLE>

     Management  believes  its  facilities  are in good  condition  and that the
facilities  are  adequate for its  operating  needs for the  foreseeable  future
without significant modifications or capital investment.

Item 3.    Legal Proceedings.

     DESA is a party to various  litigation in the normal course of its business
activities,  none of which is expected to have a material  adverse effect on the
Company.  Although the Company has not experienced significant product liability
claims to date, the Company carries occurrence-based product liability insurance
coverage with a $101 million limit,  $250,000 self insured retention ("SIR") and
an aggregate annual capped SIR exposure to DESA of $1 million.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of fiscal 1999.

                                       16
<PAGE>

                                     PART II

Item 5.  Market  for the  Registrant's  Common  Stock  and  Related  Stockholder
Matters.

     There is no  established  public  trading  market for the Company's  Common
Stock or the Nonvoting Common Stock.

     There are 74  holders  of the  Company's  Common  Stock and 1 holder of the
Company's  Nonvoting  Common Stock as of May 25, 1999.  The Company has not paid
any  dividends  on any  class of  common  equity  in the last two  years  and is
prohibited from doing so by the terms of the senior credit facility.

     On December  31, 1998,  the Company  issued  approximately  1,140 shares of
Series  C 12%  Preferred  Stock  to  existing  stockholders,  as a  dividend  on
outstanding  shares of the same class.  Were such  issuance a sale of securities
within the meaning of the Securities Act of 1933, as amended, such sale would be
exempt from registration under the Securities Act of 1933, as amended,  pursuant
to Rule 506 thereunder.

Item 6. Selected Consolidated Financial and Operating Information.

     Set forth below are selected  historical  consolidated  financial  data and
other  historical  consolidated  operating data of DESA. The summary  historical
consolidated  financial  data as of February  27, 1999 and February 28, 1998 and
for each of the years in the three year period ended February 27, 1999 have been
derived from the audited  consolidated  financial  statements of DESA which have
been  audited  by Ernst & Young  LLP,  independent  auditors,  and are  included
elsewhere in this Annual Report. The summary historical  consolidated  financial
data as of March 2, 1996 and February 25, 1995 and for the two year period ended
March 2,  1996  have  been  derived  from  the  audited  consolidated  financial
statements  of DESA which have also been audited by Ernst & Young LLP, but which
are not included elsewhere herein. The information  presented below is qualified
in its  entirety  by,  and  should  be read in  conjunction  with  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
the Consolidated  Financial  Statements and notes thereto included  elsewhere in
this Annual Report.

                                       16
<PAGE>
<TABLE>
<CAPTION>
                                                                  Fiscal Year
                                                                  -----------

                                               1999        1998(1)(9)       1997      1996(1)(2)       1995
                                               ----        ----------       ----      ----------       ----
                                                                 (in thousands)
<S>                                         <C>           <C>          <C>            <C>           <C>
Statement of Operating Data:
Net sales(3)                                 $ 317,237     $ 224,169     $ 209,105     $ 186,324     $ 172,501
Cost of sales                                  213,828       145,486       130,890       116,217       107,484
                                             ---------     ---------     ---------     ---------     ---------
Gross profit                                   103,409        78,683        78,215        70,107        65,017
Operating costs and expenses                    73,043        50,191        45,257        37,828        35,975
                                             ---------     ---------     ---------     ---------     ---------
Operating profit                                30,366        28,492        32,958        32,279        29,042
Interest expense                                27,864        17,327        14,509         7,073         5,777
                                             ---------     ---------     ---------     ---------     ---------
Income before provision for income
 taxes                                           2,502        11,165        18,449        25,206        23,265
Income taxes                                     1,166         5,545         7,733        10,703        10,064
                                             ---------     ---------     ---------     ---------     ---------
Income before extraordinary
 item                                            1,336         5,620        10,716        14,503        13,201
Extraordinary item(4)                             --           2,308          --           2,638          --
                                             ---------     ---------     ---------     ---------     ---------
Net income                                       1,336         3,312        10,716        11,865        13,201
Less dividends and accretion on
preferred stock                                  2,480           607           716           853           900
                                             ---------     ---------     ---------     ---------     ---------
Net income (loss) available for common
  stockholders                               $  (1,144)    $   2,705     $  10,716     $  11,012     $  12,301
                                             =========     =========     =========     =========     =========
Ratio of earnings to fixed charges(5)             1.1x          1.6x          2.2x          4.0x          4.4x
Other Data:
EBITDA(6)                                    $  38,953     $  33,204        $37,49        $36,57     $  33,156
EBITDA margin(7)                                  12.3%         14.8%         17.9%         19.6%         19.2%
Capital expenditures                         $   4,462     $   5,475     $   2,770     $   2,122     $   1,499
Depreciation                                     3,589         2,456         2,432         2,332         2,148
Amortization                                     4,998         2,256         2,104         1,963         1,966
Net cash provided by (used in)
operating  activities                            2,307         1,146        18,398        19,375        18,337
Net cash provided by (used in)
investing activities                           (45,233)      (45,980)       (2,882)       (2,060)       (2,176)
Net cash provided by (used in)
financing activities                            43,012        40,590       (10,599)      (17,989)       (1,651)
Balance Sheet Data (at period end):
Cash and cash equivalents                          888           794     $   5,058     $     145     $  16,170
Working capital (deficit)(8)                    27,643        27,095        (8,566)       (1,194)        9,738
Total assets                                   203,352       155,636        91,984        85,545       107,259
Long-term debt (less current
 portion)                                      285,138       261,105       130,600       149,709        49,700
Redeemable preferred stock                      17,207        14,661          --            --            --
Stockholders' equity (deficit)                (151,938)     (162,407)      (84,754)      (95,402)       16,194

----------
<FN>
(1)  DESA was party to  recapitalizations  in November 1997 and January 1996 which impacted  interest  expense,
     stockholders' equity (deficit) and long term debt.

(2)  53-week fiscal year.

(3)  Net sales constitute gross sales net of an accrual for returns and allowances and cash discounts.

(4)  Extraordinary  items  relate to the  write-off of  unamortized  deferred  financing  costs at the time the
     Company  refinanced its existing debt obligations and other expenditures  related to the  recapitalization
     transactions in fiscal years 1998 and 1996.


                                                      17

<PAGE>


(5)  For purposes of computing this ratio,  earnings  consist of income before income taxes plus fixed charges.
     Fixed charges consist of interest expense, amortization of deferred financing cost and 33% of rent expense
     from operating  leases which the Company  believes is a reasonable  approximation  of the interest  factor
     included in the rent.

(6)  EBITDA is defined as income before taxes plus interest expense and depreciation as well as amortization of
     intangibles and deferred charges.  EBITDA is presented because it is a widely accepted financial indicator
     of a leveraged company's ability to service and/or incur indebtedness and because management believes that
     EBITDA is a relevant  measure of the Company's  ability to generate  cash without  regard to the Company's
     capital structure or working capital needs. However,  EBITDA should not be considered as an alternative to
     net income as a measure of a company's  operating results or to cash flows from operating  activities as a
     measure of liquidity. EBITDA as presented may not be comparable to similarly titled measures used by other
     companies,  depending upon the non-cash charges included.  When evaluating  EBITDA,  investors should also
     consider  other  factors  which may  influence  operating  and  investing  activities,  such as changes in
     operating assets and liabilities and purchases of property and equipment.

(7) EBITDA margin is defined as EBITDA divided by net sales.

(8)  The Company's business is subject to a pattern of seasonal  fluctuation.  As such, the Company's needs for
     working capital tend to peak in the second and third fiscal quarters.

(9)  Includes  Heath/Zenith  data for the period from  February 4, 1998 (date of  acquisition)  to February 28,
     1998.

(10) Includes FMI and UHI data for the period from August 19, 1998 (date of acquisitions)  through February 27,
     1999.
</FN>
</TABLE>


Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.

Introduction

         The following  discussion  should be read in conjunction with "Selected
Consolidated  Financial and Operating  Information" and the audited Consolidated
Financial  Statements of DESA and the notes thereto  included  elsewhere in this
Annual Report.

         The Company is organized into two primary product categories:  (a) Zone
Heating  Products  (56% of fiscal 1999 net sales),  which  includes  indoor room
heaters, hearth products and outdoor heaters, and (b) Specialty Products (44% of
fiscal 1999 net sales), which includes powder-actuated  fastening systems (tools
and accessories),  electrical  products and home security products.  The Company
records sales upon shipment of products to its customers.  Net sales  constitute
gross sales net of an accrual for returns and allowances and cash discounts.

         The Company has experienced  strong historical  growth,  with net sales
and EBITDA increasing at CAGRs of 21% and 21%, respectively, from fiscal 1994 to
fiscal 1999. In addition, the Company's operating profit and cash flows provided
by (used in) operating, financing and investing activities changed from $15,450,
$11,892,  ($8,866)  and  ($1,420),  respectively,  in 1994 to  $30,366,  $2,307,
$43,012, ($45,233),  respectively, in 1999. The Company's growth has been driven
by  strong   performance   across  all  product   categories  from  new  product
introductions,  internally  generated  growth  and the  recent  acquisitions  of
Heath/Zenith,  FMI and UHI.  The Company has made six  acquisitions  from fiscal
1993 to fiscal 1999. Since fiscal 1994, new product introductions have generated
approximately 42% of the Company's sales growth.  The Company focuses on its new
product  development  efforts  on  products  that (i) are  complementary  to its
current   product   offerings   or  that  utilize  the   Company's   established
technologies,  and  (ii)  can be sold  through  the  Company's  well-established
distribution  channels.  The  Company's  strategy is to introduce its new hearth
products in the specialty heating channel (i.e., liquid propane distributors and
natural gas utilities) and then expand the  distribution to the consumer channel
(i.e.,  home  centers and mass  merchandisers).  As part of this  strategy,  the
Company began selling its line of vent-free  fireplace  products,  introduced to
the  specialty  heating  channel in fiscal 1995, to Lowe's in fiscal 1997 and to
Home Depot in fiscal 1998.

         Zone heating  product  revenues have been driven by factors such as (i)
the effectiveness of zone heating products for area heating,  (ii) the increased
availability  of these  products  as a result of the growth in home  improvement
retailers,  (iii) the cost  efficiency  of  natural  gas and  propane as heating
fuels,  (iv) favorable  regulatory  trends and (v) seasonal weather  conditions.
Specialty  tools  revenues  have been  driven by  demand  of DIY  consumers  and
commercial contractors.


                                       18
<PAGE>

         In fiscal 1999,  approximately  $22.7 million or 7% of DESA's net sales
were  generated  outside  the U.S.  DESA  adapts its  domestic  product  line to
accommodate local requirements,  government  regulations and user preferences in
each international market.

         Principally due to sales of zone heating  products,  DESA's business is
seasonal,  as depicted by the following table which sets forth certain operating
results of DESA for each of the four consecutive  fiscal quarters in the periods
ending  February  27,  1999,  February  28,  1998 and March 1, 1997  (dollars in
thousands):

                            First     Second      Third     Fourth
                           Quarter    Quarter    Quarter    Quarter       Year
                          --------    --------   --------   --------    --------
Fiscal 1999
      Total Net Sales .   $ 40,754    $ 75,416   $134,679   $ 66,388    $317,237
      Operating Profit
         (loss) .......     (1,372)      8,746     22,580        412      30,366
Fiscal 1998
      Total Net Sales .   $ 24,754    $ 65,635   $103,015   $ 30,765    $224,169
      Operating Profit
         (loss) .......         72      12,157     20,375     (4,112)     28,492

Fiscal 1997
      Total Net Sales .   $ 24,267    $ 60,021   $ 89,299   $ 35,518    $209,105
      Operating Profit         319      12,220     18,546      1,873      32,958


     Approximately  66% of annual  sales  occur in the second  and third  fiscal
quarters  (June-November)  as the Company's zone heating  customers  place early
booking  orders for  shipment  in  anticipation  of the winter  selling  season.
Approximately  46% of the  Company's  annual  sales  volume  are  booked  in the
five-month period of March through July.

     DESA has not historically been capital  intensive.  The Company has focused
on investing in programs which either reduce  operating  costs or facilitate new
product development.  The Company has a long-standing cost reduction program and
has  exceeded its annual cost  reduction  goal of 3% of cost of sales in each of
the last three fiscal years. Historically,  the Company's cost reduction efforts
have been focused on indoor  vent-free  heaters and outdoor  heaters.  In fiscal
1999,  the  Company's  cost  reduction  efforts are focused on some of its newer
products, such as vent-free hearth products.

                         Historical Capital Expenditures
                             (dollars in thousands)

                                                 Fiscal Year
                                    -------------------------------------------
                                      1995    1996     1997     1998     1999
                                    ------   ------   ------   ------   -------
Replacement Expenditures, Cost
Reduction Programs,  New Products
and Capacity ....................   $1,499   $2,122   $2,770   $4,402   $4,226
Acquisitions/Buildings/Other ....      664     --       --      1,073      236
                                    ------   ------   ------   ------   ------
Total Capital Expenditures ......   $2,163   $2,122   $2,770   $5,475   $4,462
                                    ======   ======   ======   ======   ======



                                       19

<PAGE>

Results of Operations

     The following  table sets forth certain income  statement  information  for
DESA for the fiscal years ended  February 27, 1999,  February 28, 1998 and March
1, 1997.
<TABLE>
<CAPTION>
                                                        Fiscal Year Ended
                             --------------------------------------------------------------------------

                                        Percentage                Percentage                Percentage
                               1999    of Net Sales       1998   of Net Sales       1997   of Net Sales
                             --------------------------------------------------------------------------

<S>                          <C>          <C>           <C>          <C>           <C>          <C>
Net sales ................   $317,237     100.0%        $224,169     100.0%        $209,105     100.0%
Cost of sales ............    213,828      67.4%         145,486      64.9%         130,890      62.6%
                             --------------------------------------------------------------------------
Gross profit .............    103,409      32.6%          78,683      35.1%          78,215      37.4%
Operating costs and
     expenses ............     73,043      23.0%          50,191      22.4%          45,257      21.6%
                             --------------------------------------------------------------------------
Operating profit .........     30,366       9.6%          28,492      12.7%          32,958      15.8%
Interest expense .........     27,864       8.8%          17,327       7.7%          14,509       6.9%
                             --------------------------------------------------------------------------
Income before provision
     for income taxes ....      2,502       0.8%          11,165       5.0%          18,449       8.9%
Provision for income taxes      1,166       0.4%           5,545       2.5%           7,733       3.7%
                             --------------------------------------------------------------------------
Income before
     extraordinary item ..      1,336       0.4%           5,620       2.5%          10,716       5.2%
Extraordinary item .......       --         0.0%           2,308       1.0%            --         0.0%
                             --------------------------------------------------------------------------
Net income ...............   $  1,336       0.4%        $  3,312       1.5%        $ 10,716       5.2%
                             ==========================================================================

</TABLE>
Year Ended February 27, 1999 Compared to the Year Ended February 28, 1998

     Net Sales. Net sales increased 41.5% from $224.2 million for the year ended
February 28, 1998 to $317.2 million for the year ended  February 27, 1999.  Zone
heating  product sales increased 2.3% from $173.8 million to $177.8 million as a
result of higher hearth product sales due to increased  market  penetration  and
the introduction of new products  including the Direct Vent Fireplace,  tempered
by the extremely warm 1998/1999  winter.  Specialty product sales increased 177%
from $50.4  million to $139.4  million due primarily to the  acquisition  of the
Heath/Zenith  business  and the  continued  growth in the  consumer  channel for
powder-actuated tools and electric chain saws.

     Cost of Sales.  Cost of sales  increased 47% from $145.5  million in fiscal
year 1998 to $213.8  million  in fiscal  year  1999.  The  increase  was  driven
primarily by sales growth of 41.5% for the same period.  Gross profit margin, as
a  percentage  of sales,  declined  from  35.1% to  32.6%.  Gross  margins  were
negatively  affected by a shift in product mix,  competitive  pricing pressures,
and less favorable  manufacturing variances due to lower zone heating production
volume partially offset by cost reductions.

     Operating Costs and Expenses.  Operating costs and expenses increased 45.4%
from $50.2 million in fiscal year 1998 to $73.0 million in fiscal year 1999. The
increase is  primarily a result of sales  growth of 41.5%.  Operating  costs and
expenses  increased  modestly as a percentage of sales from 22.4% in fiscal 1998
to 22.5% in fiscal 1999.

     Operating Profit.  Operating profit increased by 6.7% from $28.5 million in
fiscal 1998 to $30.4 million in fiscal 1999 due to the factors mentioned above.

     Interest  Expense.  Interest expense  increased 60.8% from $17.3 million in
fiscal 1998 to $27.9 million in fiscal 1999. The higher interest expense relates
to the increased  borrowings  associated with the  recapitalization  in November
1997  (the  "Recapitalization")  and  the  acquisition  loan  advances  for  the
purchases of FMI, UHI and Heath/Zenith.

     Income Taxes.  Income taxes  decreased by 70.7% from $4.1 million in fiscal
1998 to $1.2 million in fiscal 1999,  primarily as the result of the increase in
interest  expense  discussed  above.  The  overall  effective  income  tax  rate
decreased from 50%

                                       20

<PAGE>

in fiscal 1998 to 47% in fiscal 1999. The effective tax rate is greater than the
statutory rate due to the non-tax deductibility of goodwill amortization.

         Net Income. Net income decreased 67.4% from $3.3 million in fiscal 1998
to $1.1 million in fiscal 1999.

Year Ended February 28, 1998 Compared to the Year Ended March 1, 1997

     Net Sales.  Net sales increased 7.2% from $209.1 million for the year ended
March 1, 1997 to $224.2  million  for the year ended  February  28,  1998.  Zone
heating  product sales increased 3.7% from $167.6 million to $173.8 million as a
result of higher hearth product sales due to increased  market  penetration  and
the introduction of new products  including the Compact  Fireplace,  Logmate and
Fireplace  Stove,  tempered by the extremely  warm 1997/1998  winter.  Specialty
product sales  increased 21.5% from $41.5 million to $50.4 million due primarily
to the acquisition of the Heath/Zenith  business and the continued growth in the
consumer channel for powder actuated tools and electric chain saws.

     Cost of Sales.  Cost of sales increased 11.2% from $130.9 million in fiscal
year 1997 to $145.5  million  in fiscal  year  1998.  The  increase  was  driven
primarily by sales growth of 7.2% for the same period. Gross profit margin, as a
percentage of sales, declined from 37.4% to 35.1%. Gross margins were negatively
affected by a shift in product  mix,  competitive  pricing  pressures,  and less
favorable manufacturing variances partially offset by cost reductions and margin
improvements resulting from sales growth.

     Operating Costs and Expenses.  Operating costs and expenses increased 10.9%
from $45.3 million in fiscal year 1997 to $50.2 million in fiscal year 1998. The
increase is  primarily  a result of sales  growth of 7.2%.  Operating  Costs and
expenses  increased as a percentage  of sales from 21.6% in fiscal 1997 to 22.4%
in fiscal 1998 due to key account volume rebates and increased  freight expenses
to improve customer services levels.

     Operating Profit. Operating profit decreased by 13.6% from $33.0 million in
fiscal 1997 to $28.5 million in fiscal 1998 due to the factors mentioned above.

     Interest  Expense.  Interest expense  increased 19.4% from $14.5 million in
fiscal 1997 to $17.3 million in fiscal 1998. The higher interest expense relates
to the increased  borrowings  associated with the  Recapitalization  in November
1997.

     Income Taxes.  Income taxes  decreased by 28.3% from $7.7 million in fiscal
1997 to $5.5 million in fiscal 1998,  primarily as the result of the decrease in
operating  profit and the  increase in interest  expense  discussed  above.  The
overall  effective  income tax rate  increased from 42% in fiscal 1997 to 50% in
fiscal 1998,  primarily due to the mix of domestic and foreign income and higher
state taxes.  The effective  tax rate is greater than the statutory  rate due to
the non-tax deductibility of goodwill amortization.

     Net Income. Net income decreased 69.1% from $10.7 million in fiscal 1997 to
$3.3 million in fiscal 1998.  The  reduction  reflects  the  extraordinary  item
associated with the Recapitalization in November 1997.

Liquidity and Capital Resources

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

     Cash  provided by  operating  activities  for fiscal 1999 was $2.3  million
compared  to $1.1  million  for  fiscal  1998,  an  increase  of  $1.2  million.
Inventories  as of February 27, 1999 were $4.9 million higher than the amount at
February 28, 1998 to support  higher  specialty  product  sales and zone heating
product carryover inventory related to the warm 1998/1999 winter.

                                       21
<PAGE>

The increase in accounts  receivable  from $20.8 million at February 28, 1998 to
$30.4 million at February 27, 1999 is  attributable  to receivables  acquired in
the FMI  acquisition  and higher fourth quarter sales than a year ago. The aging
of the Company's receivables was not materially affected by the FMI acquisition.
Net cash provided by operating  activities  was $2.3  million,  $1.1 million and
$18.4 million for fiscal years 1999, 1998 and 1997 respectively.

     Net cash used in  investing  activities  decreased  from $46.0  million for
fiscal  1998 to $45.2  million for fiscal  1999.  These  expenditures  consisted
primarily of $40.7  million for the  acquisition  of FMI and Universal in fiscal
1999 while the 1998 period reflects the  acquisition of  Heath/Zenith  for $40.3
million.

     Net cash (used in) provided by financing  activities  increased  from $40.6
million  provided  in fiscal 1998 to $43.0  million  provided in fiscal 1999 due
primarily  to the  proceeds of the  acquisition  loans  utilized for the FMI and
Universal  acquisitions while the 1998 period reflects the  Recapitalization  in
November 1997.

     Concurrently  with  the  Recapitalization  (as  hereinafter  defined),  the
Company's wholly owned subsidiary, DESA International, Inc., issued 97/8% Senior
Subordinated  Notes due 2007 ("the Old Notes"),  guaranteed by the Company,  for
$130.0  million in gross  proceeds,  and entered  into a $100.0  million  senior
secured term loan facility (the "Term Loan Facility") and a $75.0 million senior
secured revolving credit facility (the "Working Capital  Facility," and together
with  the  Term  Loan  Facility  and  certain  other  facilities,   the  "Credit
Facility").  The Term Loan  Facility is comprised of two  tranches,  each in the
aggregate  principal  amount of $50.0  million.  The  Working  Capital  Facility
provides  revolving  loans in an aggregate  amount of up to $75.0 million.  Upon
closing of the Recapitalization,  the Company borrowed the full amount available
under the Term  Loan  Facility  and $35.5  million  under  the  Working  Capital
Facility.  Borrowings  under the Working Capital Facility were used partially to
refinance  seasonal  borrowings  outstanding under the Company's existing credit
facility.  The amount remaining  available under the Working Capital Facility is
available to fund the working capital  requirements of the Company.  Proceeds to
the Company from the issuance of the Old Notes and from initial borrowings under
the Credit  Facility,  less the  repayment of the existing  credit  facility and
other indebtedness, and transaction expenses, were used to partially finance the
Recapitalization  and the fees  and  expenses  of DESA  incurred  in  connection
therewith.  To provide additional financing to fund the  Recapitalization,  DESA
raised (i) $73.8 million through the sale to J.W. Childs Equity  Partners,  L.P.
("Childs") and certain other investors, including UBS Capital LLC (together with
Childs, the "Equity  Investors") of DESA Common Stock (representing 89.6% of the
outstanding shares upon completion of the Recapitalization),  (ii) $14.6 million
through  the  issuance  to Childs  and the other  Equity  Investors  of the DESA
Preferred Stock and (iii) $3.0 million through the issuance of 463,232  warrants
to purchase DESA Nonvoting  Common Stock at an exercise price of $.01 per share.
In addition,  existing  stockholders  retained  DESA Common Stock valued at $8.6
million  (representing  10.4% of the  outstanding  shares upon completion of the
Recapitalization).   The  above  transactions  have  been  accounted  for  as  a
recapitalization (the  "Recapitalization"),  with all amounts paid to the former
shareholders recorded as a reduction in stockholders equity (deficit).

     The proceeds of the Old Notes, the DESA Preferred Stock, the DESA warrants,
the DESA Common Stock and the initial  borrowings under the Credit Facility were
used to finance the  purchase  of all  previously  outstanding  shares of DESA's
capital stock, to refinance  outstanding  indebtedness of the Company and to pay
fees and expenses incurred in connection with the Recapitalization.

     Borrowings  under the Credit  Facility  bear  interest  at a rate per annum
equal (at the  Company's  option) to a margin  over either a base rate or LIBOR.
The Working  Capital  Facility will mature six years after the closing date. The
two tranches of the Term Loan Facility  will be amortized  over a six-year and a
seven-year period, respectively.  The Credit Facility and the guarantees thereof
are secured by substantially  all assets of DESA (including the capital stock of
the Company) and its direct and indirect  domestic  subsidiaries and a pledge of
the capital stock of all the Company's direct and indirect subsidiaries, subject
to certain limitations with respect to foreign subsidiaries. The Credit Facility
contains  customary  covenants  and  events of  default,  including  substantial
restrictions  on the Company's  ability to make  dividends or  distributions  to
stockholders.  The  Company  can  utilize  letters of credit  under the  Working
Capital Facility up to $10,000,000.  As of February 27, 1999,  letters of credit
of $0.7 million are outstanding under the Working Capital Facility.

     The Company  entered into an agreement  for a $15.0  million line of credit
(the "Line of Credit") on May 25, 1999,  which matures on May 31, 2001. The Line
of Credit is unsecured and is  unconditionally  guaranteed by J.W. Childs Equity
Partners,  L.P.,  a  shareholder  of the Company.  Borrowings  under the Line of
Credit bear interest at an annual rate equal to either (at the

                                       22
<PAGE>

Company's  option) a margin over a base rate or a margin over LIBOR. The Line of
Credit contains customary covenants and events of default.

     The DESA Preferred Stock bears cumulative  dividends at the rate of 12% per
annum (payable  semi-annually).  Dividends will compound to the extent not paid.
Subject to  restrictions  imposed by the Indenture  dated November 26, 1997 (the
"Indenture"),  the Credit Facility and other documents relating to the Company's
indebtedness, DESA may exchange the DESA Preferred Stock for junior subordinated
notes (the  "Exchange  Notes") having  substantially  the same terms as the DESA
Preferred Stock. The Indenture  permits DESA,  under certain  circumstances,  to
exchange all outstanding DESA Preferred Stock for Exchange Notes in an aggregate
principal  amount  equal to the  aggregate  liquidation  preference  of the DESA
Preferred  Stock so  exchanged.  The  Exchange  Notes will  require DESA to make
semi-annual  interest  payments  thereon at a rate of 12% per annum.  Subject to
compliance  with the debt  agreements  of the Company,  such payments must be in
cash. The Indenture  restricts,  but does not prohibit,  the Company from making
such cash  interest  payments.  Under  the  Exchange  Notes,  DESA may defer the
payment  of  interest  payable on or before  November  30,  2001,  with any such
deferred interest bearing interest at 12% per annum,  compounded  semi-annually.
DESA will be required to make a catch-up payment  immediately prior to the first
interest payment date after the fifth anniversary of the date of issuance to the
extent the aggregate amount of such deferred interest exceeds an amount equal to
one year's  interest on the  originally  issued  Exchange  Notes.  The Indenture
restricts,  but does not  prohibit,  the  ability of DESA to make such  catch-up
payment.

     The acquisition of Heath/Zenith, consummated in February 1998, was financed
with the proceeds of the $20 million Acquisition Facility included in the Credit
Facility and with $7.0 million in additional  equity  contributed to the Company
by DESA. On May 13, 1998, the Company entered into an agreement to acquire 92.1%
of the issued and  outstanding  common  stock of FMI for an  aggregate  purchase
price of  approximately  $25.7 million.  As of such date, DESA already owned the
remaining 7.9% of FMI's issued and outstanding  common stock. In connection with
the  acquisition  of FMI, DESA entered into  non-compete  agreements  with three
officers of FMI,  each with a term of three  years.  DESA paid such  officers an
aggregate of $3.05 million,  included in the aggregate  purchase price. Also, in
April 1998, the Company  entered into a letter of intent with UHI to acquire the
worldwide rights (except in China) to distribute  Universal's indoor and outdoor
heating products and to form a joint venture to manufacture  various products in
China that will be  marketed by the  Company.  Such  worldwide  rights have been
acquired for approximately $13 million. The Company expects to pay approximately
$3 million  dollars in connection  with the formation of the joint venture.  The
Company  financed  these  acquisitions  with  the  proceeds  of the $30  million
Acquisition B Facility which has been added to the Credit Facility.

     Management  believes that cash flow from operations and availability  under
the Working Capital  Facility and Line of Credit will provide adequate funds for
the Company's  foreseeable working capital needs,  planned capital  expenditures
and debt service  obligations.  The Company's ability to fund its operations and
make planned capital expenditures, to make scheduled debt payments, to refinance
indebtedness  and to remain in compliance  with all of the  financial  covenants
under its debt agreements  depends on its future operating  performance and cash
flow,  which in turn,  are  subject to  prevailing  economic  conditions  and to
financial, business and other factors, some of which are beyond its control.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk.

     Market risks  relating to the Company's  operations  result  primarily from
changes in interest rates.  The Company also has limited  foreign  currency risk
associated with its Canadian,  European, and Hong Kong operations.  A portion of
the Company's  operations consists of purchasing and sales activities in foreign
jurisdictions.  The Company  manufactures  it's  products in the United  States,
purchases products in Europe,  China, and Japan and sells the products primarily
in the United States,  Canada, and Europe. As a result, the Company's  financial
results  could be  affected  by factors  such as  changes  in  foreign  currency
exchange rates or weak economic  conditions in the foreign  markets in which the
Company  operates.  The Company employs  established  policies and procedures to
manage its  exposure  to  fluctuations  in  interest  rates and the value of the
foreign  currencies.  Interest rate and foreign  currency  transactions are used
only to the extent considered  necessary to meet the Company's  objectives.  The
Company does not utilize derivative  financial  instruments for trading or other
speculative purposes.

                                       23

<PAGE>

Interest Rate Risk

     The  Company's  interest  rate risk  management  objective  is to limit the
impact of interest  rate  changes on its earnings and cash flow and to lower its
overall  borrowing  cost.  To achieve  its  objectives,  the  Company  regularly
evaluates  the amount of its variable rate debt as a percentage of its aggregate
debt.  The Company  manages its exposure to interest  rate  fluctuations  in its
variable  rate debt through  interest  rate swap  agreements.  These  agreements
effectively convert interest rate exposure from variable rates to fixed rates of
interest  without the exchange of the underlying  principal  amounts.  In fiscal
1999, the Company  entered into interest rate swap  agreements with Nations Bank
to manage its exposure to interest  rate  fluctuations.  The interest  rate swap
agreements  provide for payment by the Company of fixed rates of interest  based
on three month LIBOR (4.75% at February 27, 1999). Notional principal amounts of
these agreements total $125 million, of which $75 million terminates in November
1999 and $50 million  terminates in August 2001. The  agreements  terminating in
August 2001 may be canceled at the option of Nations Bank in February  2000. The
notional  amounts are used to measure the interest to be paid or received and do
not represent the amount of exposure to credit loss. Net proceeds to the Company
of $100,000 were recorded as adjustments to interest expense in fiscal 1999.

     The following  table  summarizes  the carrying  amounts and estimated  fair
values the Company's  remaining  financial  instruments at February 27, 1999 and
February 28, 1998 (bracketed amount represents an asset):

                                   February 27, 1999       February 28, 1998
                                ----------------------   ---------------------
                                 Carrying      Fair      Carrying      Fair
                                  Amount       Value      Amount       Value
                                  ------       -----      ------       -----
                                                  (in thousands)

Bank debt                       $ 166,307   $ 166,307    $ 134,355   $ 134,355
Senior subordinated notes         130,000     102,700      130,000     135,525
Note payable                        2,138       2,138        2,000       2,000
Interest rate swap agreements        --          (438)        --          --


     Based on the average  outstanding  amount of variable rate  indebtedness of
the Company in FY 1999 a one  percentage  point change in the interest rates for
the  Company's  variable  rate debt would have  impacted  the  Company's FY 1999
interest  expense by an aggregate of  approximately  $1.6 million,  after giving
effect to the Company's interest rate swap agreements.

Foreign Currency Exchange Rate Risk

     The Company does not conduct a significant  portion of its manufacturing or
sales activity in foreign  markets.  The Company's  reported  financial  results
could be  affected,  however,  by factors  such as  changes in foreign  currency
exchange  rates  in  the  markets  where  it  operates.  When  the  U.S.  dollar
strengthens against such foreign  currencies,  the reported U.S. dollar value of
local currency  operating  profits  generally  decreases;  when the U.S.  dollar
weakens against such foreign currencies, the reported U.S. dollar value of local
currency  operating  profits generally  increases.  The Company utilizes foreign
exchange  forward  contracts to mitigate the  short-term  effect of movements in
currency  exchange  rates on the  Company's  foreign  currency  based  inventory
purchases.  The Company  regularly  hedges by  entering  into  foreign  exchange
forward contracts, approximately 85% to 95% of its budgeted (future) net foreign
currency  purchase  transactions  over a period of 4 quarters.  Gains and losses
related to qualifying hedges of foreign currency risk exposure are recorded when
the  related  inventory  is  purchased.   Because  the  Company  does  not  have
significant foreign operations,  the Company does not believe it is necessary to
enter into any other derivative financial  instruments to reduce its exposure to
foreign currency exchange rate risk.

                                       24

<PAGE>





Item 8.  Financial Statements and Supplementary Data.

         Reference  is  made  to  the  Consolidated   Financial  Statements  and
Supplementary Schedules contained in Part IV hereof.


Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.

         None.











                                       25



<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.


         The  following  table sets forth the name,  age and position of each of
the  Company's  directors,  directors  designate,  executive  officers and other
significant  employees.  All of the Company's  officers are elected annually and
serve at the discretion of the Board of Directors.

Name                        Age     Positions
----                        ---     ---------
Raymond B. Rudy...........   68   Chairman and Director
Terry G. Scariot..........   50   Chief Executive Officer, President, Director
John M. Kelly.............   49   Chief Operating Officer
John W. Childs............   57   Director
Adam L. Suttin............   31   Director
Michael Greene............   37   Director
Joseph J. Incandela.......   52   Director
Edward G. Patrick.........   52   Vice President of Finance, Treasurer
Scott M. Nehm.............   49   Vice President, Controller

         Raymond B. Rudy was appointed the Company's Chairman in April 1999. Mr.
Rudy has been a Managing  Director of JWCA since July 1995.  Prior to that time,
he was Deputy Chairman and Director of Snapple  Beverage  Corporation  from 1992
until the company was sold in 1994. From 1987 to 1989, Mr. Rudy was President of
Best Foods  Subsidiaries of CPC  International.  From 1984 to 1986, Mr. Rudy was
Chairman,  President  and CEO of Arnold  Foods  Company,  Inc. He is Chairman of
Beltone  Electronics  Corp., Vice Chairman of Empire Kosher Poultry,  Inc. and a
director of International  DiverseFoods,  Inc.,  Widmer Brothers Brewing Company
and American Safety Razor Company.

          Terry G.  Scariot  joined AMCA  International  ("AMCA")  Consumer  and
Automotive  Products  Division  as Vice  President  -- Finance in early 1984 and
became Chief Financial Officer of DESA International, Inc. in March 1985. He was
appointed  President  of DESA  International,  Inc. in March 1996 and joined the
Board of Directors in December  1996.  Mr.  Scariot was  appointed the Company's
Chief Executive  Officer in April 1999.  Prior to joining AMCA, Mr. Scariot held
positions of increasing responsibility in financial and manufacturing management
at Monsanto Industrial Chemicals Company,  Rockwell  International's  Automotive
Products Group, and Gulf and Western's  Bonney Forge Division.  In October 1979,
Mr.  Scariot  served as a member of the Board of Directors  and Chief  Financial
Officer for The  Massillon  Steel  Casting  Company.  Mr.  Scariot  received his
Bachelor of Science degree in finance and MBA from the University of Missouri.

         John  M.  Kelly  joined  DESA  Industries  in  Canada  in  1972.  After
successful  management  assignments  in  sales,   manufacturing   services,  and
administration,  he was  appointed  General  Sales  Manager in 1976 and  General
Manager in 1977.  In 1983,  Mr.  Kelly was  promoted to Vice  President -- North
American   Sales  for  AMCA's   Consumer   Products   Division.   In  1984,  his
responsibilities  were  expanded to include the entire  marketing  function.  He
became  DESA's  senior sales and  marketing  Executive  Vice  President in North
America in March 1985. Mr. Kelly assumed the role of Executive Vice President in
March 1996,  responsible for worldwide sales and marketing and engineering.  Mr.
Kelly was  appointed  Chief  Operating  Officer  in April  1999.  He  majored in
Economics at the University of Toronto.

         John W.  Childs has been  President  of JWCA since July 1995.  Prior to
that time,  he was an  executive  at Thomas H. Lee Company  from May 1987,  most
recently holding the position of Senior Managing Director. Prior to

                                       26
<PAGE>


that, Mr. Childs was with the Prudential  Insurance  Company of America where he
held various  executive  positions in the investment area ultimately  serving as
Senior  Managing  Director  in  charge of the  Capital  Markets  Group.  He is a
director of Big V Supermarkets,  Inc.,  Quality Stores,  Inc.,  Chevys Holdings,
Inc., Beltone  Electronics Corp., Pan Am International  Academy,  Inc., American
Safety Razor Company and The Edison Project, Inc.

         Adam L. Suttin has been a Managing Director of JWCA since January 1998,
and has been with JWCA since July 1995.  Prior to that time, he was an executive
at Thomas H. Lee Company from August 1989, most recently holding the position of
Associate.  He is a director of Quality  Stores,  Inc.,  American  Safety  Razor
Company and Empire Kosher Poultry, Inc.

         Michael  Greene is a Managing  Director  of UBS  Capital,  which is the
private  equity  subsidiary  of the Union Bank of  Switzerland.  Mr.  Greene has
worked in Union  Bank of  Switzerland's  private  equity and  leveraged  finance
business since he joined Union Bank of Switzerland in 1990. Mr. Greene serves on
the board of directors of CBP Resources, Inc. and Metrocall, Inc.

         Joseph J.  Incandela,  elected a Director of the Company in April 1999,
served as a Managing  Director  of the  Thomas H. Lee  Company,  a Boston  based
private  equity  investment  company from  1992-1998.  Mr.  Incandela was CEO of
Darling International Corp., Chairman and CEO of Amerace Corp. and President and
CEO of Conductron  Corp.  during the period of 1983 through 1991.  Prior to 1983
Mr.  Incandela  served as a General Manager of the Thomas & Betts  Corporation's
Electronic  Connector  Products  Division.  Mr. Incandela serves on the Board of
Directors of Morgan Grenfell  Smallcap Fund Inc. and Southern Energy Homes Corp.
Mr. Incandela has a Bachelor of Arts in Economics from Wagner College.

         Edward G. Patrick has been associated with DESA International, Inc. and
its predecessor  company since January 1985,  joining the company as Director of
Credit and Accounts  Receivable.  In May of 1991, he was appointed Treasurer and
in January 1995 appointed Vice President of Finance.  Prior to joining DESA, Mr.
Patrick held financial  positions  with Benchmark Tool Company,  a Subsidiary of
Shopsmith  Inc.  (1981-1985),  McGraw Edison  Company  (1975-1981),  and General
Motors  Corp.  (1972-1975).  Mr.  Patrick  received his  Bachelor's  Degree from
Northeast Missouri State University.

         Scott M. Nehm has been with DESA and the  predecessor  operation  since
1982. In January 1995, he was appointed  Vice  President,  Controller.  Prior to
DESA,  Mr. Nehm has held  positions of  increasing  responsibility  in financial
management  at  Modine  Manufacturing  Company  (1971-1973),   Koehring  Company
(1974-1979),   and  Allied  Products  Inc.  (1980-1981).  Mr.  Nehm  has  a  CPA
Certificate, BBA and MBA degrees from the University of Wisconsin in Accounting,
Finance and Marketing.

                                       27
<PAGE>

Item 11. Executive Compensation.

         The  following  table sets forth  compensation  earned for all services
rendered  to the  Company  during  fiscal  1997,  fiscal 1998 and fiscal 1999 as
applicable,  by the  Company's  chief  executive  officers  and the most  highly
compensated  executive officer other than the Company's chief executive officers
(collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
                                                               Annual Compensation                            Long-Term
                                                                                                             Compensation
                                                                                                                Awards
                                                                                                             ------------

                                                                                                              Number of
                                                                                           Other Annual       Securities
                                               Fiscal          Salary         Bonus(1)     Compensation       Underlying
                                                Year             ($)            ($)           ($)               Options
                                               ------          -------        --------     ------------      ------------
<S>                                            <C>            <C>            <C>          <C>                <C>
Robert H. Elman............................     1999           600,961           --        128,327(4)         614,133(11)
  Chairman, Chief Executive Officer (2)         1998           612,115        630,000      106,808(4)            --
                                                1997           565,385        820,000      112,233(4)            --
Terry G. Scariot...........................     1999           297,391           --         26,719(5)         277,822
  Chief Executive Officer, President (2)        1998           274,946        240,000       26,856(6)            --
                                                1997           249,400        120,000       16,203(7)            --
John M. Kelly..............................     1999           297,391           --         47,224(8)         277,822
  Chief Operating Officer(3)                    1998           274,946        240,000       37,788(9)            --
                                                1997           249,400        120,000      29,203(10)            --
----------
<FN>
(1)  Annual  bonuses are  indicated  for the year in which they were earned and accrued.  Annual  bonuses for any year are
     generally paid in the following fiscal year.

(2)  Mr. Elman retired as of April 5, 1999 and Mr. Scariot was elected Chief Executive Officer on that date.

(3)  Mr. Kelly was elected Chief Operating Officer on April 5, 1999. Previously, he was Executive Vice President.

(4)  Includes $52,761 for life insurance.

(5)  Includes $7,034 for tax planning.

(6)  Includes $7,370 for country club memberships.

(7)  Includes $4,796 for tax planning.

(8)  Includes $27,714 for medical expenses.

(9)  Includes $22,378 for medical expenses.

(10) Includes $16,739 for medical expenses.

(11) Mr. Elman's options were cancelled on April 5, 1999.
</FN>
</TABLE>

                                       28
<PAGE>

     The Company  granted the options set forth and  described in the  following
table to the Named Executive Officers in fiscal 1999:
<TABLE>
<CAPTION>
                                              OPTION/SAR GRANTS IN LAST FISCAL YEAR
                                                                                                        Potential Realizable
                                                                                                          Value at Assumed
                                                                                                        Annual Rates of Stock
                           Number of          % of Total                                               Price Appreciation for
                          Securities         Options/SARs                                                    Option Term
                          Underlying          Granted to        Exercise of                            ----------------------
                          Option/SARs        Employees in       Base Price         Expiration
        Name              Granted (#)        Fiscal Year          ($/Sh)              Date             5% ($)         10% ($)
        ----              -----------       -------------       -----------        ----------        ---------       ---------
<S>                      <C>                    <C>               <C>              <C>              <C>             <C>

Robert H. Elman           614,133                44.9              6.49                (1)              --              --
Terry G. Scariot          277,822(2)             20.3              6.49             8/31/2009        1,133,983       2,873,735
John M. Kelly             277,833(2)             20.3              6.49             8/31/2009        1.133,983       2,873,735

<FN>
(1)  Mr. Elman's options were cancelled on April 5, 1999.

(2)  The vesting and  execisability  of Mr. Scariot's and Mr. Kelly's options are subject to certain  performance  conditions
     relating to the Company's EBITDA in the period from fiscal years 1999 to 2003.
</FN>
</TABLE>

         The following table sets forth the number of securities  underlying the
options held by the Named Executive Officers at the end of fiscal 1999:
<TABLE>
<CAPTION>
                     Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values

                                                                                                          (e) Value of
                                                                                                      Unexercised in-the-
                                                                        (d) Number of Securities             Money
                                                                         Underlying Unexercised         Options/SARs at
                                                                         Options/SARs at Fiscal       Fiscal Year-End ($)
                        (b) Shares Acquired          (c) Value                Year-End (#)                Exercisable
     (a) Names            on Exercise (#)          Realized ($)        Exercisable/Unexercisable         /Unexercisable
     ---------          -------------------        ------------        -------------------------         --------------
<S>                            <C>                    <C>                    <C>                             <C>

Robert H. Elman                 --                      --                     0/614,133(1)                   --
Terry G. Scariot                --                      --                     0/277,822                      --
John M. Kelly                   --                      --                     0/277,822                      --

<FN>
(1)  Mr. Elman's options were cancelled on April 5, 1999.
</FN>
</TABLE>

Employment Arrangements with Executive Officers

         Mr. Scariot is currently  employed pursuant to an employment  agreement
which carries a three-year  term.  Under this agreement,  Mr. Scariot  currently
receives a salary of $315,360.  Mr. Kelly is currently  employed  pursuant to an
employment agreement which carries a three-year term. Under this agreement,  Mr.
Kelly  currently  receives a salary of  $315,360.  Pursuant to these  employment
agreements,  the salary of each of Messrs.  Scariot and Kelly will be subject to
annual  increases  at the  discretion  of the Board of Directors of the Company.
Messrs. Scariot and Kelly are eligible to participate in an executive bonus plan
which was instituted for fiscal 1999, 2000, 2001, 2002 and 2003. Messrs. Scariot
and Kelly also participate in an option plan which will allow management to earn
up  to  12.5%  of  the  fully  diluted  equity  of  DESA  upon   achievement  of
pre-determined performance targets.

                                       29
<PAGE>

Director Compensation

         No director  received any  compensation for his services as director in
fiscal year 1999.  Mr.  Incandela  receives a director's fee of $10,000 per year
plus a $1,000 per  meeting  attended  and has been  granted  options to purchase
10,000  shares of the  Company's  Common Stock at $6.49 per share.  Said options
vest annually in equal installments over three years.

Change of Control Arrangement

          In the event of a change of control  of the  Company  after  which the
employment  of  Messrs.  Scariot  and Kelly with the  Company is not  continued,
Messrs.  Scariot and Kelly will be entitled to change of control benefits unless
the equity  investment  of each of Messrs.  Scariot and Kelly in DESA shall have
tripled in value.  Such  benefits  comprise  twelve  months of salary and fringe
benefits  and a  pro-rated  portion of any bonus for which the  executive  would
otherwise be eligible.

Compensation Committee Interlocks and Insider Participation

         The  Compensation  Committee  of the Board of  Directors of the Company
comprises Messrs. Rudy, Scariot and Greene.  Prior to his retirement,  Mr. Elman
served on the  Committee as well.  Mr.  Scariot is an  executive  officer of the
Company.  Mr. Rudy is a Managing  Director of JWCA and Mr.  Greene is a Managing
Director of UBS Capital.

Board Compensation Committee Report on Executive Compensation

         It is the Compensation Committee's  responsibility to review, recommend
and approve the  Company's  compensation  policies and  programs,  including all
compensation for the Chief Executive Officer and the other executive officers of
the Company.  The  Compensation  Committee  administers the Company's 1998 Stock
Option Plan. The Chief Executive  Officer of the Company does not participate in
Committee decisions regarding his compensation.

         The  purpose  of  the  1998  Stock  Option  Plan  is to  encourage  key
employees,  officers and directors of the Company who render services of special
importance to, and who have contributed or are expected to contribute materially
to the success of, the Company to continue their association with the Company by
providing  favorable  opportunities  for them to participate in the ownership of
the Company and in its future  growth.  The  Compensation  Committee  made stock
option grants to Messrs. Elman, Scariot and Kelly in fiscal 1999.

         The  Compensation   Committee  determined  the  salary  levels  of  the
Company's executive officers,  including the Chief Executive Officer, for fiscal
1999, as well as the amounts of bonuses paid in fiscal 1999 for  performance  in
fiscal  1998.  The  compensation   policies   implemented  by  the  Compensation
Committee,  which combine base salary and incentive  compensation in the form of
cash bonuses and long-term stock options,  are designed to achieve the operating
and  acquisition  strategies  and  goals  of  the  Company.  In  particular,  in
determining bonuses paid in 1999 in respect of 1998 and salary levels for fiscal
1999, the  Compensation  Committee took into account the past or expected future
contributions  of each  executive  officer  to the  Company's  strategic  goals,
especially the efforts of each such officer in connection with Recapitalization,
and the acquisitions of Heath/Zenith and FMI/UHI.

                                             COMPENSATION COMMITTEE

                                             RAYMOND B. RUDY, Chairman
                                             TERRY G. SCARIOT
                                             MICHAEL GREENE

                                       30

<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management.

         The following  table sets forth  information  regarding the  beneficial
ownership  of the Common Stock of DESA by each person known to the Company to be
the beneficial owner of more than five percent of the common stock of DESA, each
director of the  Company,  each Named  Executive  Office and all  directors  and
executive officers of the Company as a group. Except as otherwise indicated, the
beneficial  owners  of the  voting  stock  listed  below,  based on  information
furnished by such owners,  have sole investment and voting power with respect to
such shares.  The business address for each executive  officer of the Company is
in care of the Company.
<TABLE>
<CAPTION>
                                                                                    Shares
                                                                                 Beneficially
              Name and Address                                                       Owned            Percent
              ----------------                                                   ------------         -------
<S>                                                                               <C>                 <C>

J.W. Childs Equity Partners, L.P.(1)
  One Federal Street
  Boston, Massachusetts.......................................................      9,971,929           63.1%
UBS Capital LLC(2)
  299 Park Avenue
  New York, New York..........................................................      2,923,718           18.6
John W. Childs(1)(3)(4)
  One Federal Street
  Boston, Massachusetts.......................................................     10,373,889           65.7
Raymond B. Rudy(1)(3)(5)
  One Federal Street
  Boston, Massachusetts.......................................................      9,999,549           63.3
Adam L. Suttin(1)(3)(6)
  One Federal Street
  Boston, Massachusetts.......................................................     10,011,771           63.4
Michael Greene(7)
  299 Park Avenue
  New York, New York..........................................................      2,923,718           18.6
Terry G. Scariot..............................................................        109,450              *
John M. Kelly.................................................................        109,450              *
Robert H. Elman(8)............................................................        377,602            2.4
All Directors and executive officers as a group (8
  persons)(1)(2)(3)(4)(5)(6)(7)...............................................     13,652,088           86.2
----------
<FN>
 *  Less than 1.0%

(1)  Includes 148,572 shares deemed beneficially owned by Childs pursuant to warrants.
(2)  Includes 43,504 shares deemed beneficially owned by UBS Capital pursuant to warrants.
(3)  Includes shares  beneficially owned by Childs, as to which Messrs.  Childs, Rudy and Suttin may be deemed
     also to be beneficial owners.
(4)  Includes 6,501 shares deemed beneficially owned by Mr. Childs pursuant to warrants.
(5)  Includes 336 shares deemed beneficially owned by Mr. Rudy pursuant to warrants.
(6)  Includes 585 shares deemed beneficially owned by Mr. Suttin pursuant to warrants.
(7)  Includes  shares  beneficially  owned by UBS Capital,  as to which Mr.  Greene may also be deemed to be a
     beneficial owner.
(8)  Includes 177,494 shares owned by Mr. Elman's family.
</FN>
</TABLE>

                                                      31

<PAGE>

Item 13. Certain Relationships and Related Transactions

     At  the  closing  of  the  Recapitalization,  the  Company  entered  into a
management  agreement  with JWCA providing for payment by the Company to JWCA of
(i) a $2.55  million  advisory  and  financing  fee in  consideration  of JWCA's
services   regarding  the  planning,   structuring   and   negotiation   of  the
Recapitalization  and related  financing  and (ii) an annual  management  fee of
$189,000 in consideration of JWCA's ongoing provision of certain  consulting and
management  advisory services.  Payments under this management  agreement may be
made only to the extent permitted by the Credit Facility and the Indenture.  The
management  agreement  is for a  five-year  term,  automatically  renewable  for
successive  extension  terms of one year,  unless JWCA or the Company shall give
notice of termination.

     At  the  closing  of  the  Recapitalization,  the  Company  entered  into a
management  agreement  with UBS Capital  providing for payment by the Company to
UBS Capital of (i) a $0.7 million advisory and financing fee in consideration of
UBS Capital's  services  regarding the planning,  structuring and negotiation of
the  Recapitalization and related financing and (ii) an annual management fee of
$51,000  in  consideration  of  UBS  Capital's   ongoing  provision  of  certain
consulting  and management  advisory  services.  Payments under this  management
agreement  may be made only to the extent  permitted by the Credit  Facility and
the Indenture.  The management agreement is for a five-year term,  automatically
renewable for successive  extension terms of one year, unless UBS Capital or the
Company shall give notice of termination.

     Pursuant to the Recapitalization  Agreement,  concurrently with the closing
of the  Recapitalization,  the Company,  the Equity  Investors  and the Existing
Stockholders  (the  "Stockholders")  entered into a Stockholders  Agreement (the
"Stockholders  Agreement").  Subject to  certain  exceptions,  the  Stockholders
Agreement  restricts the right of the  Stockholders  to transfer any DESA Common
Stock  or  Warrants  or  other  vested  rights  to  acquire  DESA  Common  Stock
(collectively, the "Subject Securities") without the consent of the holders of a
majority of the Subject Securities at the time held by Childs and its affiliates
and associates (the "JWC Holders"). DESA and the JWC Holders have certain rights
of  first  refusal  with  respect  to  Subject  Securities.   In  addition,  the
Stockholder Agreement provides for certain so-called  "tag-along,"  "drag-along"
and "piggyback  registration"  rights.  In addition,  the Stockholder  Agreement
provides  each  Stockholder  with certain  preemptive  rights.  The  Stockholder
Agreement also obligates DESA and the Stockholders to take all necessary actions
to include certain  nominees of the JWC Holders (who could constitute a majority
of the board of  directors)  and one nominee of UBS Capital LLP on the Company's
board of  directors  and to ensure  that  certain  representatives  of the other
Stockholders may attend meetings.  The Stockholders Agreement also restricts the
Company's right to enter into agreements with JWC Holders without the consent of
the other Stockholders.

     DESA and its  subsidiaries  expect to enter  into a tax  sharing  agreement
providing (among other things) that each of the subsidiaries will reimburse DESA
for its share of income taxes determined as if such subsidiary had filed its tax
returns separately from DESA.



                                       32
<PAGE>


                                     PART IV

Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.

                  (a)      Exhibits
<TABLE>
<CAPTION>

  Exhibit No.                              Description of Document
  -----------                              -----------------------
<S>           <C>                                                                                 <C>

      2.1       Recapitalization Agreement, dated as of October 8, 1997, among J.W. Childs          *
                Equity Partners, L.P., Desa Holdings Corporation and each Stockholder of  Desa
                Holdings Corporation named therein
      2.2       Stock Purchase  Agreement,  dated as of January 12, 1998, by and among Heath        *
                Holding Corp., its Shareholders and  Optionholders and the Company
      2.3       Agreement and Plan of Reorganization, dated May 13, 1998 by and among  the          **
                Company, FMI Acquisition, Inc.,  Fireplace Manufactuers, Inc et al.
       3.1      Articles of Incorporation of the DESA International, Inc.                           *
      3.1A      Articles of Incorporation of the Company                                            *
      3.2       By-laws of the DESA International, Inc.                                             *
      3.2A      By-laws of the Company                                                              *
       4.1      Indenture, dated as of  November 26, 1997, by and among the Company, DESA           *
                International, Inc., and Marine Midland Bank relating to  $130,000,000  of
                the Company's  9 7/8% Senior Subordinated Notes Due 2007
      4.2       Registration Rights Agreement, dated as of November 26, 1997 by and among           *
                the Company, DESA International, Inc., NationsBanc Montgomery Securities,
                Inc. and UBS Securities LLC
      4.3       Purchase Agreement, dated as of November 21, 1997, by and among the                 *
                Company,DESA International, Inc., NationsBanc Montgomery Securities, Inc.
                and UBS Securities LLC
      4.4       Global Note Payable to CEDE & Co.                                                   *
      4.5       Company Guarantee                                                                 *
      10.1      Credit Agreement, dated as of November 26, 1997 by and among the Company,           *
                DESA International,  Inc., NationsBank, N.A., UBS Securities LLC
                and NationsBanc Montgomery Securities, Inc.
      10.2      Management Incentive Plans of the Company, dated March 1, 1997                      *
      10.3      Sales Compensation and Incentive Plan of the Company for FY 1998                    *
      10.4      Services Agreement between the Company and Hamilton Ryker Company                   *
      10.5      Services Agreement between the Company and Manpower Services                        *
      10.6      Representative Manufacturer's Representative Agreement

                                                  33

<PAGE>
<CAPTION>

  Exhibit No.                              Description of Document
  -----------                              -----------------------
<S>           <C>                                                                                 <C>

     10.15      Intellectual Property Agreement between the Company and Worgas Bruciatori           *
                SRL dated December 1, 1996
     10.16      Intellectual Property Agreement between the Company and Valor Limited dated         *
                May 21, 1996
     10.17      Intellectual Property Agreement between the Company and Remington Arms              *
                Company dated August 29, 1969
     10.18      Intellectual Property Agreement between the Company and Remington Arms              *
                Company dated January 29, 1988
     10.19      Lease Agreement between the Company and Shelbyville Industrial Spec.                *
                Building - WRS Partnership
     10.20      Agreement to produce and sell finished goods between the Company and                *
                Tangible/Shinn Fu
     10.21      Agreement to produce and sell finished goods between the Company and BYSE           *
     10.22      Agreement to produce and sell finished goods between the Company and NU-            *
                TEC
     10.23      Agreement to produce and sell finished goods between the Company and                *
                International Pin
     10.24      Agreement to produce and sell finished goods between the Company and                *
                Kingsman Industries
     10.25      Agreement to produce and sell finished goods between the Company and Sealey         *
     10.26      Agreement to produce and sell finished goods between the Company and                *
                Hudson Manufacturing
     10.27      Agreement to produce and sell finished goods between the Company and                *
                Sengoka Works, Ltd
     10.28      Employment Agreement, dated as of November 26, 1997, between the Company            *
                and Robert H. Elman
     10.29      Employment Agreement, dated as of November 26, 1997, between the Company            *
                and John M. Kelly
     10.30      Employment Agreement, dated as of November 26, 1997, between the Company            *
                and Terry G. Scariot
     10.31      The Company's 1998 Stock Option Plan                                                ***
     10.32      The Company's Stockholders Agreement dated as of November 26, 1997 among            ***
                the Company and the persons named therein
     10.33      The Company's Amended and Restated Stockholders Agreement dated as of               ****
                October 9, 1998 among the Company and the persons named therein
     10.34      The Company's Purchase Agreement dated as of October 9, 1998 among the              ****
                Company and the persons named therein
     10.35      Preferred Stock Tagalong Agreement dated as of October 9, 1998 among the            ****
                Company and the persons named therein
     10.36      Form of Warrant                                                                     ****


                                                  34

<PAGE>
<CAPTION>

  Exhibit No.                              Description of Document
  -----------                              -----------------------
<S>           <C>                                                                                 <C>

     10.37      Amendment and Waiver No. 4 to the Loan Documents dated as of May 25, 1999          Filed
                by and among the Company, DESA International, Inc., NationsBank, N.A., UBS         herewith
                Securities LLC, Banc of America Securities LLC et al.

       27       Financial Data Schedule                                                            Filed
                                                                                                   herewith
----------
<FN>
*    Incorporated  by reference to the  Company's  Registration  Statement on Form S-4 filed on August 5,
     1998 (File No. 333-44969)
**   Incorporated by reference to the Company's  Statement on Schedule 13D in respect of the common stock
     of Fireplace Manufacturers, Inc. filed on June 5, 1998
***  Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended August
     29, 1998
**** Incorporated  by  reference  to the  Company's  Quarterly  Report on Form 10-Q for the period  ended
     November 28, 1998
</FN>
</TABLE>
   (b)    Financial Statements

          DESA HOLDINGS, INC. AND SUBSIDIARIES

          Report of Independent Auditors.....................................F-1
          Consolidated Balance Sheets at February 27, 1999 and
          February 28, 1998..................................................F-2
          Consolidated Statements of Income for the fiscal years ended
          February 27,1999, February 28, 1998 and March 1, 1997..............F-4
          Consolidated Statements of Stockholders' Equity (Deficit) for the
          fiscal years ended February 27, 1999, February 28, 1998 and
          March 1, 1997......................................................F-5
          Consolidated Statements of Cash Flows for the fiscal years ended
          February 27, 1999, February 28, 1998 and March 1, 1997.............F-7

   (c)    Financial Statement Schedules

          SCHEDULE II - Valuation and Qualifying Accounts

   (d)    Reports on Form 8-K

          The Company filed a report on Form 8-K on April 1, 1999 announcing the
retirement of its Chairman and Chief Executive Officer.

      SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
      TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
                  SECURITIES PURSUANT TO SECTION 12 OF THE ACT

No annual report or proxy materials have been sent to security holders.


                                       35

<PAGE>
                                   SIGNATURES

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

                                           DESA Holdings Corporation

                                           By:    /s/ Terry G. Scariot
                                           Name:  Terry G. Scariot
                                           Title: Chief Executive Officer and
                                                  President

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


Signature                               Title                            Date


/s/ Terry G. Scariot            Chief Executive Officer,            May 28, 1999
Terry G. Scariot                President and Director
                                (Principal Executive Officer)

/s/ Raymond B. Rudy             Chairman                            May 28, 1999
Raymond B. Rudy


/s/ John M. Kelly               Chief Operating Officer             May 28, 1999
John M. Kelly


/s/ John W. Childs              Director                            May 28, 1999
John W. Childs


/s/ Adam L. Suttin              Director                            May 28, 1999
Adam L. Suttin

______________________          Director                            May __, 1999
Michael Greene


/s/ Joseph J. Incandela         Director                            May 28, 1999
Joseph J. Incandela


/s/ Edward G. Patrick           Vice President of Finance and       May 28, 1999
Edward G. Patrick               Treasurer (Principal Financial
                                Officer)


/s/ Scott M. Nehm               Vice President and Controller       May 28, 1999
Scott M. Nehm                   (Principal Accounting Officer)


                                       36
<PAGE>
<TABLE>
<CAPTION>
Financial Statements:
<S>                                                                                    <C>

Report of Independent Auditors.......................................................    F-1

Consolidated Balance Sheets at February 27, 1999 and February 28, 1998...............    F-2

Consolidated  Statements of Income for the fiscal years ended February 27,
         1999, February 28, 1998 and March 1, 1997...................................    F-4

Consolidated Statements of  Stockholders'  Equity (Deficit) for the fiscal years
         ended February 27, 1999, February 28, 1998 and March 1, 1997................    F-5

Consolidated Statements of Cash Flows for the fiscal years ended February
         27, 1999, February 28, 1998 and March 1, 1997...............................    F-7
</TABLE>

<PAGE>

                        Consolidated Financial Statements

                            DESA Holdings Corporation

                      Fiscal years ended February 27, 1999,
                       February 28, 1998 and March 1, 1997
                       with Report of Independent Auditors

<PAGE>


                         Report of Independent Auditors

Board of Directors and Stockholders
DESA Holdings Corporation

We have audited the accompanying  consolidated financial statements and schedule
of  DESA  Holdings  Corporation  as  listed  in the  accompanying  index  to the
financial  statements (Item 14(a)).  These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule 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 listed in the accompanying index to the
financial statements (Item 14(a)) present fairly, in all material respects,  the
consolidated  financial  position of DESA Holdings  Corporation  at February 27,
1999 and February 28, 1998, and the  consolidated  results of its operations and
cash flows for each of the three years in the period ended February 27, 1999, in
conformity with generally accepted accounting principles.  Also, in our opinion,
the related  financial  statement  schedule  when  considered in relation to the
basic financial  statements taken as a whole,  presents fairly,  in all material
respects the information set forth therein.



New York, New York
May 25, 1999


                                      F-1

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

                                  Consolidated Balance Sheets

                                                          February 27,           February 28,
                                                             1999                    1998
                                                         ------------------------------------
                                                                 (In Thousands, Except
                                                                   Number of Shares)
<S>                                                      <C>                       <C>
Assets
Current assets:
   Cash and cash equivalents                              $     888                 $     794
   Accounts receivable, net                                  30,390                    20,838
   Inventories:
     Raw materials                                              986                     1,257
     Work-in-process                                          6,376                     8,908
     Finished goods                                          37,891                    30,191
                                                          -----------------------------------
                                                             45,253                    40,356
   Deferred tax assets                                        2,137                     3,730
   Other current assets                                       1,321                     1,440
                                                          -----------------------------------
Total current assets                                         79,989                    67,158


Property, plant and equipment:
   Land                                                         390                       390
   Buildings and improvements                                 6,173                     5,241
   Machinery and equipment                                   34,527                    29,891
   Furniture and fixtures                                       725                       630
                                                          -----------------------------------
                                                             41,815                    36,152
   Less accumulated depreciation                             26,182                    22,593
                                                          -----------------------------------
                                                             15,633                    13,559

Goodwill, net                                                81,882                    63,430

Deferred tax assets                                             598                        --

Other assets, net                                            25,250                    11,489






                                                          -----------------------------------
Total assets                                              $ 203,352                 $ 155,636
                                                          ===================================



                                              F-2
<PAGE>
<CAPTION>


                                                          February 27,           February 28,
                                                             1999                    1998
                                                         ------------------------------------
                                                                 (In Thousands, Except
                                                                   Number of Shares)
<S>                                                      <C>                       <C>


Liabilities and stockholders' equity (deficit)
Current liabilities:
   Accounts payable                                       $  25,232                 $  15,035
   Accrued interest                                           3,075                     5,725
   Other accrued liabilities                                 10,732                    14,004
   Income taxes payable                                          --                        49
   Current portion of long-term debt                         13,307                     5,250
                                                          -----------------------------------
Total current liabilities                                    52,346                    40,063

Long-term debt                                              285,138                   261,105
Deferred tax liabilities                                         --                     1,781
Other liabilities                                               599                       433
                                                          -----------------------------------
Total liabilities                                           338,083                   303,382

Commitments

Series C redeemable preferred stock, $.01 par value;
  authorized--40,000 shares at February 27, 1999 and
  February  28, 1998; issued and outstanding--19,990
  shares at February 27, 1999 and 17,600 shares at
  February  28, 1998 (liquidation  preference--
  $20,371,000 at February 27, 1999 and $18,144,000 at
  February 28, 1998)
                                                             17,207                    14,661

Stockholders' equity (deficit):
  Common stock, $.01 par value; authorized--
    50,000,000 shares at February 27, 1999 and February
    28, 1998; issued and outstanding--15,548,692 shares
    at February 27, 1999 and 13,688,015 shares at
    February 28, 1998
                                                                155                       137
  Nonvoting common stock, $.01 par value; authorized--
    3,000,000 shares at February 27, 1999 and
    February 28, 1998; issued and outstanding--90,604
    shares at February 27, 1999 and February 28, 1998             1                         1
  Capital in excess of par value                             97,984                    85,926
  Carryover predecessor basis adjustment                    (32,309)                  (32,309)
  Retained earnings (deficit)                              (216,742)                 (215,598)
  Accumulated other comprehensive loss                       (1,027)                     (564)
                                                          -----------------------------------
Total stockholders' equity (deficit)                       (151,938)                 (162,407)
                                                          -----------------------------------
Total liabilities and stockholders' equity (deficit)      $ 203,352                 $ 155,636
                                                          ===================================


See accompanying notes
</TABLE>

                                              F-3
<PAGE>
<TABLE>
<CAPTION>
                                      DESA Holdings Corporation

                                  Consolidated Statements of Income


                                                                    Fiscal year ended
                                                      February 27,     February 28,      March 1,
                                                         1999              1998            1997
                                                      -------------------------------------------
                                                                     (In Thousands)

<S>                                                   <C>              <C>              <C>
Net sales                                             $ 317,237        $ 224,169        $ 209,105
Cost of sales                                           213,828          145,486          130,890
                                                      -------------------------------------------
Gross profit                                            103,409           78,683           78,215

Operating costs and expenses:
   Selling                                               54,084           36,081           31,353
   General and administrative                            13,597           11,199           11,303
   Other                                                  5,362            2,911            2,601
                                                      -------------------------------------------
                                                         73,043           50,191           45,257
                                                      -------------------------------------------
Operating profit                                         30,366           28,492           32,958

Interest expense                                         27,864           17,327           14,509
                                                      -------------------------------------------
Income before provision for income taxes                  2,502           11,165           18,449

Provision for income taxes                                1,166            5,545            7,733
                                                      -------------------------------------------
Income before extraordinary item                          1,336            5,620           10,716
Extraordinary loss, net of income tax benefit                --           (2,308)              --
                                                      -------------------------------------------
Net income                                                1,336            3,312           10,716

Less dividends and accretion on preferred stock           2,480              607               --
                                                      -------------------------------------------
Income (loss) available to common stockholders        $  (1,144)       $   2,705        $  10,716
                                                      ===========================================



See accompanying notes.
</TABLE>


                                                F-4
<PAGE>
<TABLE>
<CAPTION>
                                                      DESA Holdings Corporation

                                      Consolidated Statements of Stockholders' Equity (Deficit)


                                                              Non                 Carryover              Accumulated      Total
                                                             voting  Capital in  Predecessor  Retained      Other      Stockholders'
                                                    Common   Common  Excess of     Basis      Earnings  Comprehensive    Equity
                                                    Stock    Stock   Par Value   Adjustment  (Deficit)      Loss        (Deficit)
                                                    --------------------------------------------------------------------------------
                                                                                                     (In Thousands)
<S>                                                <C>      <C>       <C>      <C>         <C>          <C>          <C>
Balance at March 2, 1996                            $ 234    $   18    $26,514  $(32,309)   $ (89,829)   $   (30)     $ (95,402)
Comprehensive income:
 Net income                                            --        --         --        --       10,716         --         10,716
 Foreign currency translation adjustment               --        --         --        --           --       (278)          (278)
                                                                                                                      ---------
Comprehensive income                                   --        --         --        --           --         --         10,438
Exercise of stock options                               2        --        208        --           --         --            210
                                                    ---------------------------------------------------------------------------
Balance at March 1, 1997                              236        18     26,722   (32,309)     (79,113)      (308)       (84,754)
Comprehensive income:
 Net income                                            --        --         --        --        3,312         --          3,312
 Foreign currency translation adjustment               --        --         --        --           --       (256)          (256)
                                                                                                                      ---------
Comprehensive income                                   --        --         --        --           --         --          3,056
Exercise of stock options                              --        --          5        --           --         --              5
Exercise of stock options simultaneously
  with the Recapitalization                             2        --        148        --           --         --            150
Tax benefit on exercise of stock options               --        --        177        --           --         --            177
Repurchase of common stock during the
  Recapitalization                                   (223)      (17)   (18,276)       --     (139,190)        --       (157,706)
Issuance of common stock during the Recapitalization  112        --     73,703        --           --         --         73,815
Expenses attributable to the Recapitalization          --        --     (6,536)       --           --         --         (6,536)
Issuance of warrants during the Recapitalization       --        --      3,002        --           --         --          3,002
Issuance of common stock                               11        --      7,050        --           --         --          7,061
Repurchase of common stock                             (1)       --        (69)       --           --         --            (70)
Dividends on preferred stock                           --        --         --        --         (544)        --           (544)
Accretion of preferred stock                           --        --         --        --          (63)        --            (63)
                                                    ---------------------------------------------------------------------------
Balance at February 28, 1998                          137         1     85,926   (32,309)    (215,598)      (564)      (162,407)
Comprehensive income:
 Net income                                            --        --         --        --        1,336         --          1,336
 Foreign currency translation adjustment               --        --         --        --           --       (463)          (463)
                                                                                                                      ---------
Comprehensive income                                   --        --         --        --           --         --            873
Accretion of preferred stock                           --        --         --        --         (253)        --           (253)
Dividends on preferred stock                           --        --         --        --       (2,227)        --         (2,227)
Issuance of common stock                               18        --     12,058        --           --         --         12,076
                                                    ---------------------------------------------------------------------------
Balance at February 27, 1999                         $155      $  1    $97,984  $(32,309)   $(216,742)   $(1,027)     $(151,938)
                                                    ===========================================================================


See accompanying notes.
</TABLE>

                                                                F-5
<PAGE>
<TABLE>
<CAPTION>
                                          DESA Holdings Corporation

                                    Consolidated Statements of Cash Flows


                                                                         Fiscal year ended
                                                         February 27,       February 28,          March 1,
                                                            1999                1998                1997
                                                         -------------------------------------------------
                                                                          (In Thousands)
<S>                                                     <C>                 <C>                 <C>
Operating activities
Net income                                               $  1,336            $  3,312            $ 10,716
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation                                           3,589               2,456               2,432
     Amortization                                           4,998               2,256               2,104
     Deferred income taxes                                    271                 (36)                 --
     Equity in undistributed earnings of joint venture       (170)               (157)               (132)
     Extraordinary item                                        --               2,308                  --
     (Increase) decrease in operating assets, net of
       effects of acquisitions:
         Accounts receivable, net                          (7,888)                131              (2,315)
         Inventories                                       (1,212)             (6,996)               (811)
         Other current assets                                 211                (153)               (337)
     Increase (decrease) in operating liabilities:
       Accounts payable                                     8,592              (7,646)              7,107
       Accrued interest                                    (2,512)              4,437                 798
       Other accrued liabilities                           (5,025)                512              (1,492)
       Income taxes payable                                   (49)                565                 346
       Other liabilities                                      166                 157                 (18)
                                                          -----------------------------------------------
Net cash provided by operating activities                   2,307               1,146              18,398
                                                          -----------------------------------------------

Investing activities
Capital expenditures                                       (4,462)             (5,475)             (2,770)
Dividends received from joint venture                         170                 157                 132
Cash paid for acquisitions, net of cash acquired          (40,694)            (40,294)                 --
Additional fees paid in conjunction with acquisition
  of Heath                                                   (263)                 --                  --
Other                                                          26                (368)               (244)
                                                          -----------------------------------------------
Net cash used in investing activities                     (45,223)            (45,980)             (2,882)
                                                          -----------------------------------------------

                                                    F-6
<PAGE>

<CAPTION>
                                          DESA Holdings Corporation

                              Consolidated Statements of Cash Flows (continued)

                                                                         Fiscal year ended
                                                         February 27,       February 28,          March 1,
                                                            1999                1998                1997
                                                         -------------------------------------------------
                                                                          (In Thousands)
<S>                                                     <C>                 <C>                 <C>
Financing activities
Proceeds from debt                                       $      --           $ 265,500           $      --
Proceeds from issuance of Series C
   Redeemable Preferred Stock                                   --              14,598                  --
Proceeds from issuance of warrants                              --               3,002                  --
Proceeds from issuance of common stock                          --              73,815                  --
Repurchase of common stock                                      --            (157,706)                 --
Repayment of Term Loans                                         --            (183,095)                 --
Payment of expenses attributable to the
   Recapitalization                                             --             (17,670)                 --
Increase (decrease) in revolving loan                           --              43,000              (2,759)
Increase (decrease) in working capital loan                  7,202             (20,020)                 --
Principal payments of Term Loans                            (5,250)             (7,980)             (8,050)
Proceeds from Acquisition Loans                             30,000              20,000                  --
Payments for repurchase of common stock                         --                 (70)                 --
Exercise of stock options                                       --                 155                 210
Proceeds from issuance of common stock                      12,076               7,061                  --
Payment of debt financing costs                             (1,016)                 --                  --
                                                          ------------------------------------------------
Net cash provided by (used in) financing activities         43,012              40,590             (10,599)

Effect of exchange rate changes on cash                         (2)                (20)                 (4)
                                                          ------------------------------------------------
Increase (decrease) in cash and cash equivalents
   for the year                                                 94              (4,264)              4,913
Cash and cash equivalents at beginning of year                 794               5,058                 145
                                                          ------------------------------------------------
Cash and cash equivalents at end of year                  $    888           $     794           $   5,058
                                                          ================================================



See accompanying notes

</TABLE>

                                                    F-7

<PAGE>
                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements

    Fiscal years ended February 27, 1999, February 28, 1998 and March 1, 1997


1. Organization and Basis of Presentation

DESA  Holdings  Corporation  ("Holdings")  was  formed  in 1993  by a  group  of
investors led by Hicks, Muse, Tate & Furst ("Hicks Muse") and certain management
shareholders.  Hicks Muse owned 60% of the outstanding voting shares of Holdings
with the  remaining  shares owned by the  management  shareholders.  In December
1993,   Holdings  acquired  all  of  the  outstanding   common  shares  of  DESA
International,   Inc.   ("DESA")   (the   "Restructuring"   transaction).   This
Restructuring  met the criteria  under the Emerging  Issues Task Force Issue No.
88-16,  "Basis in Leveraged  Buyout  Transactions".  Consequently,  management's
entire residual  interest in Holdings was valued at its predecessor basis and is
shown  as  a  Carryover   Basis   Adjustment  of   $32,308,744,   which  reduces
stockholders'  equity (deficit) on the consolidated balance sheets whereas Hicks
Muse's residual interest was valued at fair value.

On November  26, 1997,  J.W.  Childs  Equity  Partners,  L.P. and certain  other
investors  (collectively,  the  "Investors")  acquired 89.6% of the  outstanding
shares of Holdings. In connection with such transaction,  Holdings issued to the
Investors  11,373,973  shares  of $.01 par value  common  stock,  for  aggregate
consideration  of $73.8 million  ($6.49 per share) and 17,600 shares of $.01 par
value Series C redeemable  preferred stock (the "Preferred  Stock") and warrants
to purchase 463,232 shares of Holdings'  nonvoting common stock (the "Warrants")
in exchange for aggregate  consideration of $17.6 million. In addition,  certain
of Holdings' existing  stockholders  retained a portion of their existing shares
of capital stock which have a total value of $8.6 million  ($6.49 per share) and
represent 10.4% of the outstanding shares of Holdings.

Holdings used such proceeds, together with a portion of the proceeds borrowed by
its  wholly-owned  subsidiary,  DESA, under new term loans and a working capital
loan facility (the "Credit Facility") with NationsBank,  N.A. ("NationsBank") as
administrative  agent, to repurchase  89.6% of its outstanding  common stock and
nonvoting  common  stock  for  $157,706,000  ($6.53  per  share,   inclusive  of
$1,119,000 (or $.04 per share)  relating to a purchase price  adjustment for net
working capital that was higher at the closing date than originally estimated at
the measurement  date). The remaining  proceeds from the Credit Facility and the
proceeds from the issuance by DESA of $130,000,000 of Senior  Subordinated Notes
were used to repay the  outstanding  amounts  under  Holdings'  existing  credit
agreement (see Notes 6 and 8).

                                      F-8
<PAGE>
                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


1. Organization and Basis of Presentation (continued)

The above described  transactions have been accounted for as a  recapitalization
(the  "Recapitalization")  with  all  amounts  paid to the  former  shareholders
recorded as reductions in stockholders' equity (deficit).

2. Company Operations

Holdings  is engaged in the  manufacturing  and  marketing  of various  consumer
product lines,  including zone heating products and specialty products primarily
throughout  the United  States and  Europe.  Two  significant  customers,  which
operate in the hardware  homecenter  industry,  accounted for 29% and 11% of net
sales,   respectively,   in  fiscal  year  1999,  17%  and  13%  of  net  sales,
respectively, in fiscal year 1998 and 13% and 11% of net sales, respectively, in
fiscal year 1997. The receivable balances from these two customers  collectively
represented  37% and 25% of Holdings'  accounts  receivable at February 27, 1999
and February 28, 1998.

Other than a small amount of goodwill,  Holdings  has no assets,  operations  or
cash flows independent of DESA and,  accordingly,  separate financial statements
for DESA have not been  provided  as  management  believes  that such  financial
statements   are  not   material  to  an   investor.   Holdings  has  fully  and
unconditionally guaranteed the Credit Facility and the Senior Subordinated Notes
(see Note 6).

3. Summary of Significant Accounting Policies

Fiscal Year

Holdings'  fiscal year ends on the  Saturday  closest to February 28. The fiscal
years  for the  consolidated  financial  statements  included  herein  ended  on
February 27, 1999 (52 weeks), February 28, 1998 (52 weeks) and March 1, 1997 (52
weeks).


                                      F-9

<PAGE>
                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


3. Summary of Significant Accounting Policies (continued)

Consolidation

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

Cash Equivalents

Holdings considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.

Inventories

Inventories  are  stated  at the  lower  of  cost  or  market.  The  cost of all
inventories in the United States is valued using the last-in, first-out ("LIFO")
method while the cost of all foreign  inventories  is valued using the first-in,
first-out ("FIFO") method. Holdings believes the LIFO method results in a better
matching  of current  costs with  current  revenues.  At  February  27, 1999 and
February  28, 1998,  approximately  82% of the total  inventories  are costed at
LIFO.  The effect of using the LIFO method in fiscal  years 1999,  1998 and 1997
was to increase pre-tax income by $541,000, $284,000 and $278,000, respectively.

If the LIFO method of valuing  inventories was not used, total inventories would
have been  $1,198,000  and $657,000 lower than reported at February 27, 1999 and
February 28, 1998, respectively.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Major renewals and betterments
are capitalized whereas  maintenance and repairs are expensed as incurred.  Upon
disposition,  the asset cost and related  accumulated  depreciation  are removed
from the accounts, and any resulting gain or loss is included in income.

                                      F-10

<PAGE>
                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


3. Summary of Significant Accounting Policies (continued)

Depreciation  of plant and equipment is determined  on the  straight-line  basis
over the following estimated useful lives:

Buildings and improvements                   33 years
Machinery and equipment                      5-12 years
Furniture and fixtures                       5-10 years
Tooling and molds                            2-3 years

Income Taxes

Holdings accounts for income taxes using the liability  method.  Deferred income
taxes reflect the net tax effects of temporary  differences between the carrying
amounts of assets and  liabilities  for  financial  reporting  purposes  and the
amounts  used for  income tax  purposes  and are  determined  based on tax rates
expected to be in effect when the taxes are actually paid or refunds received.

Financing Costs

Financing  costs are  amortized  using the interest  method over the life of the
related debt  instrument.  The amortization of these financing costs is included
in other operating expenses in the consolidated statements of income.

Goodwill

Goodwill is amortized on the  straight-line  basis over 40 years and is recorded
at cost less accumulated  amortization.  Holdings reviews the  recoverability of
its  goodwill  by  comparing  the  unamortized  carrying  value  to  anticipated
undiscounted  future cash flows.  Any impairment is charged to expense when such
determination  is  made.  Accumulated  amortization  at  February  29,  1999 and
February 28, 1998 was $6,809,000 and $4,828,000,  respectively, and amortization
expense for fiscal  years 1999,  1998 and 1997 was  $1,981,000,  $1,168,000  and
$1,118,000, respectively.

                                      F-11

<PAGE>
                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


3. Summary of Significant Accounting Policies (continued)

Warranty Costs

Holdings  warrants  its  products  against  defects  in  design,  materials  and
workmanship  generally for six months to two years,  depending on the product. A
provision for estimated  future costs related to warranty expense is recorded on
an accrual basis when products are shipped.

Foreign Currency Translation

All assets,  liabilities  and results of operations  are measured in the primary
currency  ("functional  currency")  in which each entity  conducts its business.
Assets  and  liabilities  denominated  in a currency  other than the  functional
currency are remeasured  and stated in the functional  currency based on current
or historical  exchange rates. Gains or losses arising therefrom are included in
net income.  Adjustments  resulting from translating foreign functional currency
assets and liabilities into U.S.  dollars,  based on current exchange rates, are
recorded  in a separate  component  of  stockholders'  equity  (deficit)  called
"Accumulated  other   comprehensive   loss"  and  are  included  in  determining
comprehensive income.  Revenues and expenses are translated into U.S. dollars at
average monthly  exchange  rates.  The Canadian dollar has been determined to be
the functional currency for DESA's Canadian subsidiary,  the Netherlands Guilder
for its  European  subsidiary  and the  Hong  Kong  dollar  for  its  Hong  Kong
subsidiary.

Derivative Financial Instruments

Gains and losses related to interest rate protection  agreements used to convert
floating  rate debt to a fixed  rate  basis are  recorded  over the lives of the
agreements as an adjustment to interest expense (see Note 7).

Holdings utilizes forward exchange foreign currency  contracts to reduce foreign
exchange  risks that arise from exchange rate  movements  between the dates that
foreign  currency  transactions for the purchase of inventories are entered into
and the date they are consummated. Gains and losses related to qualifying hedges
of foreign  currency risk exposure are deferred and recorded as  adjustments  to
the carrying amounts of the related assets when the hedge transactions occur.


                                      F-12


<PAGE>
                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


3. Summary of Significant Accounting Policies (continued)

Impact of Recently Issued Accounting Pronouncements

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

Use of Estimates

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

4. Acquisitions

On February 4, 1998,  Holdings purchased all of the issued and outstanding stock
of Heath Holding Corp. ("Heath") for an aggregate purchase price of $42,365,000.
The purchase  price  consisted of  $40,365,000  in cash and a $2,000,000  junior
subordinated  note  payable.  In fiscal 1999,  Holdings  incurred an  additional
$263,000 of expenses  related to the  acquisition  of Heath.  Such expenses have
been included as an addition to goodwill.  Heath is engaged in the manufacturing
and distribution of motion-sensor lighting products and wireless home-controlled
devices,  all of which are  included in the  Specialty  Products  segment of the
Company. Holdings accounted for such acquisition using the purchase method.


                                      F-13


<PAGE>
                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


4. Acquisitions (continued)

The fair value of the assets  acquired  and  liabilities  assumed at February 4,
1998 is summarized as follows (in thousands):

Current assets                                 $   25,757
Property, plant and equipment                         458
Other assets                                        3,428
Goodwill                                           22,974
Current liabilities                                (9,989)
                                               ----------
                                               $   42,628
                                               ==========


Certain  adjustments  were  recorded  during  fiscal 1999 to  finalize  purchase
accounting.

The  acquisition  of Heath was  financed  through  the  issuance  by Holdings of
1,081,852 shares of its common stock to certain of the Investors,  borrowings of
$20,000,000 under the NationsBank Acquisition Loan Commitment, the issuance of a
$2,000,000 note to H.I.G. Investment Group, L.P. and certain other note holders,
and additional borrowings under the NationsBank Working Capital Loan Commitment.
The goodwill  related to the  acquisition  of Heath is being  amortized  over 40
years.

On August 19, 1998, Holdings consummated two acquisitions. Holdings acquired all
of the outstanding stock of Fireplace  Manufacturers,  Inc. ("FMI"),  which then
merged into DESA,  for a net cash purchase  price of  $25,734,000.  The purchase
price includes non-compete agreements,  with certain executives of FMI, covering
a three-year period for aggregate payments of $3,050,000. Holdings also acquired
the worldwide rights (except in China) to distribute  Universal Heating,  Inc.'s
and its  affiliates'  ("UHI") indoor heating  products,  through DESA U.S. Inc.,
which then merged into DESA, for a cash purchase price of $12,634,000, including
non-compete payments of $1,998,000. Holdings financed the two acquisitions, both
of which  are  involved  in the  manufacturing  and  marketing  of zone  heating
products,   through   borrowings  of  $26,292,500   under  the  Credit  Facility
(Acquisition  Loan B) and the  issuance of  1,860,677  shares of Common Stock to
existing stockholders for $12,075,500.

Holdings  accounted  for  such  acquisitions  using  the  purchase  method  and,
accordingly,  the results of operations of such  acquisitions have been included
in Holdings' results of operations from the acquisition dates.


                                      F-14


<PAGE>
                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


4. Acquisitions (continued)

The following  summarizes the fair value of the assets  acquired and liabilities
assumed at August 19, 1998 for the two acquisitions (in thousands):

Current assets                                   $    4,450
Property, plant and equipment                         1,201
Other intangible assets                              15,734
Goodwill                                             20,043
Current liabilities                                  (3,060)
                                                 ----------
                                                 $   38,368
                                                 ==========

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

The following  unaudited  supplemental pro forma  information is presented as if
the acquisitions of FMI and UHI had been completed as of March 1, 1998 and March
2, 1997 and as if the  acquisition  of Heath had been  completed  as of March 2,
1997 and March 3, 1996 (in thousands):

                                                Fiscal year ended
                                    February 27,     February 28,      March 1,
                                        1999            1998            1997
                                  ----------------------------------------------

Net sales                          $329,944           $333,991         $253,520
Operating profit                     30,462             34,519           29,990
Income before extraordinary item        852              7,119            7,132
Net income                              852              4,811            7,132

5. Accounts Receivable

Accounts  receivable are net of an allowance for doubtful accounts of $1,628,000
and $1,517,000 at February 27, 1999 and February 28, 1998, respectively.


                                      F-15


<PAGE>
                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


6. Financing Arrangements

As part of the Recapitalization discussed in Note 1, Holdings entered into a new
credit agreement on November 26, 1997 with  NationsBank,  UBS Securities LLC and
Nationsbanc  Montgomery Securities,  Inc. (the "Lenders"),  which was amended in
May  1998,  that  consists  of a  Working  Capital  Loan  Commitment  of  up  to
$75,000,000 (which includes a Swing-Line Loan Commitment of up to $5,000,000), a
Term A Loan Commitment ("Term A Loan") of $50,000,000,  a Term B Loan Commitment
("Term  B  Loan")  of  $50,000,000,  an  Acquisition  Loan  Commitment  of up to
$20,000,000   and  an  Acquisition  B  Loan  Commitment  of  up  to  $30,000,000
(collectively,   the  "Credit   Facility").   Also,  in   connection   with  the
Recapitalization,  DESA issued $130,000,000 aggregate principal amount of Senior
Subordinated  Notes to qualified  institutional  buyers, as defined in Rule 144A
under the Securities Exchange Act of 1933.

The Credit Facility  requires a Clean-Up Period,  as defined,  under the Working
Capital Loan Commitment,  for a period of 30 consecutive days occurring  between
January 1 and May 30 in each calendar year  commencing  January 1, 1998.  During
the  Clean-Up  Period,  the sum of Working  Capital  advances,  Letter of Credit
advances and Swing Line loan advances  outstanding shall not exceed  $24,000,000
in 1998 and $15,000,000 for any Clean-Up Period  thereafter.  Holdings failed to
comply with the requirements  for the Clean-Up Period occurring  between January
1, 1999 and May 30, 1999 (See Note 21).

Holdings had no outstanding balance drawn against the $5,000,000 Swing-Line Loan
Commitment  at February 27, 1999 and February 28,  1998.  The  Swing-Line  Loan,
which accrues interest  monthly at the prime rate plus 1.25% per annum,  extends
to the earlier of November  26, 2003 or 30 days after the  requested  borrowing.
After the expiration of the Swing-Line  Loan period,  the $5,000,000  Commitment
remains as part of the Working Capital Loan Commitment of $75,000,000.

Commencing in fiscal 1999,  the required  annual  payments  under the Term A and
Term B Term Loans are  increased  by 50% of any excess  cash flows at the end of
the fiscal  year,  as defined.  No excess cash flow  payments  were  required in
fiscal 1999.

                                      F-16

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


6. Financing Arrangements (continued)

This credit agreement includes various restrictive  covenants which, among other
things, prohibit payment of dividends to common stockholders, set maximum limits
on capitalized  lease  obligations  and capital  expenditures,  require  minimum
consolidated EBITDA (as defined) levels, and set consolidated interest coverage,
fixed charge coverage and leverage  ratios.  At February 27, 1999,  Holdings had
failed to comply with the  requirements  the Total Leverage Ratio (See Note 21).
Substantially all of Holdings'  consolidated assets are pledged under the Credit
Facility and Senior Subordinated Notes.
<TABLE>
<CAPTION>
Outstanding borrowings consist of the following (in thousands):
                                                                    February 27,   February 28,
                                                                        1999           1998
                                                                   ----------------------------
<S>                                                                <C>             <C>

9 7/8% Senior Subordinated Notes due 2007 (A)                       $130,000         $130,000
NationsBank and various banks Term A Loan (B)                         44,875           49,125
NationsBank and various banks Term B Loan (C)                         48,750           49,750
NationsBank and various banks Working Capital Loan Commitment (D)     22,682           15,480
NationsBank and various banks Acquisition Loan  (E)                   20,000           20,000
NationsBank and various banks Acquisition B Loan  (F)                 30,000             --
Note payable related to acquisition of Heath (G)                       2,138            2,000
                                                                    -------------------------
Total outstanding borrowings                                         298,445          266,355
Less current portion of long-term debt                                13,307            5,250
                                                                    -------------------------
Total long-term debt                                                $285,138         $261,105
                                                                    =========================
</TABLE>

(A)  The Senior  Subordinated  Notes are payable on December 15, 2007 and accrue
     interest at a rate of 9.875% per annum.  Interest is payable  semi-annually
     on June 15 and  December  15,  commencing  on June  15,  1998.  The  Senior
     Subordinated  Notes can be redeemed prior to the mandatory  redemption date
     based upon the occurrence of certain events, as defined. DESA is the issuer
     of the  Senior  Subordinated  Notes,  which are  fully and  unconditionally
     guaranteed by Holdings.

(B)  The Term A Loan is payable in quarterly  installments  through November 26,
     2003 and accrues  interest at the prime rate plus 1.50% or LIBOR plus 2.50%
     at the option of Holdings.  Interest is payable on a quarterly  basis under
     the prime rate  option or at the end of each  LIBOR  period.  The  weighted
     average  interest rate was 7.85% and 8.16% in 1999 and 1998,  respectively.
     Once repaid, the Term A Loan may not be reborrowed.


                                      F-17


<PAGE>
                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


6. Financing Arrangements (continued)

(C)  The Term B Loan is payable in quarterly  installments  through November 26,
     2004,  and  accrues  interest  at the prime rate plus  1.875% or LIBOR plus
     2.875% at the option of Holdings.  Interest is payable on a quarterly basis
     under  the  prime  rate  option  or at the end of each  LIBOR  period.  The
     weighted  average  interest  rate was  8.27%  and  8.53% in 1999 and  1998,
     respectively. Once repaid, the Term B Loan may not be reborrowed.

(D)  The Working Capital Loan Commitment is payable at any time at the option of
     Holdings prior to November 26, 2003 and accrues  interest at the prime rate
     plus 1.50% or LIBOR plus 2.50%,  at the option of  Holdings.  The  weighted
     average  interest rate was 7.96% and 8.25% in 1999 and 1998,  respectively.
     Interest is payable on a quarterly  basis under the prime rate option or at
     the end of each LIBOR period.  Holdings can utilize letters of credit under
     the Working Capital Loan  Commitment up to $10 million.  As of February 27,
     1999 and February 28, 1998,  letters of credit of $718,000 and  $2,291,000,
     respectively,  are outstanding  under the Working Capital Loan  Commitment.
     Borrowings are generally limited to specific  percentages of eligible trade
     receivables  and inventory.  Holdings pays commitment fees of 1/2 of 1% per
     annum on the daily unutilized Working Capital Loan Commitment.

(B)  The  Acquisition  Loan is payable in quarterly  installments  commencing in
     February 2000 and extending through November 26, 2003 and accrues interest,
     which is payable  quarterly,  at the prime  rate plus  1.875% or LIBOR plus
     2.875% at the option of Holdings.  The weighted  average  interest rate was
     8.27%  and  8.25%  in  1999  and  1998,  respectively.   Once  repaid,  the
     Acquisition Loan may not be reborrowed.

(F)  The Acquisition B Loan is payable in quarterly  installments  commencing in
     February 2000 and extending through November 26, 2003 and accrues interest,
     which is payable  quarterly,  at the prime  rate plus  1.875% or LIBOR plus
     2.875%,  at the option of Holdings.  The weighted average interest rate was
     8.33% in 1999. Once paid, the Acquisition B Loan may not be reborrowed.


                                      F-18


<PAGE>
                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


6. Financing Arrangements (continued)

(G)  The note payable is due on December 31, 2008 and accrues interest, which is
     payable semi-annually beginning June 30, 1998, at a rate of 7.5% per annum.
     Holdings may elect, upon written notice, to defer any interest payments, in
     which event such interest payments shall  effectively  convert to principal
     and accrue interest at a rate of 7.5% per annum.  In fiscal 1999,  $138,000
     of interest payments were deferred and were converted into principal.

In  accordance  with the terms of the Credit  Facility,  the  ability of DESA to
incur additional indebtedness is limited, as defined. At February 27, 1999, DESA
can incur additional indebtedness of $29.0 million.

Cash  payments  for  interest  for the fiscal  years ended  February  27,  1999,
February  28,  1998  and  March  1,  1997  were  $30,514,000,   $12,890,000  and
$13,656,000, respectively.

The following  table shows the required  future  repayments  under the Company's
financing arrangements (in thousands):

Fiscal years ending:
   2000                                             $   13,307
   2001                                                 29,375
   2002                                                 23,500
   2003                                                 23,500
   2004                                                 35,225
   Thereafter                                          173,538
                                                     ---------
                                                     $ 298,445
                                                     =========

7. Financial Instruments

Holdings'  financial  instruments  recorded on the  consolidated  balance sheets
include cash and cash  equivalents,  accounts  receivable,  accounts payable and
debt obligations. Due to their short-term maturity, the carrying amounts of cash
and cash equivalents,  accounts receivable and accounts payable approximate fair
market value.

                                      F-19


<PAGE>
                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


7. Financial Instruments (continued)

The following table summarizes the carrying amounts and estimated fair values of
Holdings' remaining financial  instruments at February 27, 1999 and February 28,
1998 (bracketed amount represents an asset) (in thousands):
<TABLE>
<CAPTION>
                                       February 27, 1999                 February 28, 1998
                                ------------------------------------------------------------
                                   Carrying        Fair            Carrying          Fair
                                    Amount         Value            Amount           Value
                                ------------------------------------------------------------

<S>                             <C>             <C>              <C>             <C>
Bank debt                       $ 166,307       $ 166,307        $ 134,355       $ 134,355
Senior subordinated notes         130,000         102,700          130,000         135,525
Note payable                        2,138           2,138            2,000           2,000
Interest rate swap agreements        --              (438)            --              --

</TABLE>

Methods and assumptions used in estimating fair values are as follows:

Bank Debt: The carrying  amounts of Holdings'  variable rate bank borrowings for
revolving loans and term loans approximate their fair values.

Senior  Subordinated  Notes:  The fair value of DESA's fixed rate borrowings are
estimated based on quoted market prices.

Note Payable:  The carrying amount of Holdings' note payable  approximates  fair
value  because the  effective  rate of interest  approximates  the rate at which
Holdings could borrow funds with similar remaining maturities.

Interest  Rate  Swap  Agreements:  The fair  value  of the  interest  rate  swap
agreements  reflect the estimated amount that Holdings would receive at February
27, 1999 if such contracts were terminated based on quoted market prices.



                                      F-20

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


7. Financial Instruments (continued)

Derivative Financial Instruments

In fiscal  1999,  Holdings  entered  into  interest  rate swap  agreements  with
NationsBank to manage its exposure to interest rate  fluctuations.  The interest
rate swap agreements effectively convert interest rate exposure from variable to
fixed  rates of  interest  without  the  exchange  of the  underlying  principal
amounts.  The interest rate swap agreements  provide for the payment by Holdings
of fixed rates of interest  based on three  month LIBOR  (4.75% at February  27,
1999).  Notional  principal  amounts of these agreements total $125 million,  of
which $75 million  terminates  in November  1999 and $50 million  terminates  in
August 2001.  The  agreements  terminating in August 2001 may be canceled at the
option of NationsBank in February 2000. The notional amounts are used to measure
the interest to be paid or received and do not  represent the amount of exposure
to credit  loss.  Net  payments of $100,000  were  recorded  as  adjustments  to
interest expense in fiscal 1999.

Foreign Exchange Contracts

At February 27, 1999,  Holdings had forward exchange foreign currency contracts,
with  maturities   ranging  from  June  1999  to  September  1999,  to  purchase
approximately  $3.7 million in foreign  currencies  to cover future  payments to
component suppliers.

8. Series C Redeemable Preferred Stock

Holdings is authorized to issue 40,000 shares of $.01 par value  Preferred Stock
which have no voting rights,  except under limited conditions,  as defined. Such
Preferred  Stock has a mandatory  redemption  date on  November  30, 2009 at its
liquidation  value of $1,000 per share plus  accrued and unpaid  dividends.  The
liquidation  value is adjustable  based upon the  occurrence  of certain  future
events,  as  defined.  Such  Preferred  Stock  was  initially  recorded  on  the
consolidated balance sheets at $14,598,000 (this amount is net of the fair value
assigned to the Warrants of $3,002,000--see Note 9) and is being accreted to its
face value of  $17,600,000  over its term.  The accretion of Preferred  Stock is
shown  as a  reduction  to  retained  earnings  (deficit)  on  the  consolidated
statements of stockholders' equity (deficit).



                                      F-21

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


8. Series C Redeemable Preferred Stock (continued)

The holders of Preferred Stock are entitled to receive cumulative dividends at a
rate of 12% per  annum.  Such  dividends  are  payable as and when  declared  by
Holdings' Board of Directors in cash or via the issuance of additional shares of
Preferred  Stock at a value  of  $1,000  per  share  if a cash  dividend  is not
declared prior to any May 31 or November 30 before its  redemption.  In June and
December  1998,  Holdings  issued 1,250 and 1,140  shares of Preferred  Stock as
dividends-in-kind. At February 27, 1999 and February 28, 1998, accrued dividends
(included in other accrued liabilities) on such Preferred Stock were $381,000 or
$19.06 per share and $544,000 or $30.91 per share, respectively.

9. Income Taxes

Significant  components of Holdings'  deferred tax liabilities and assets are as
follows (in thousands):

                                                  February 27,     February 28,
                                                      1999             1998
                                                --------------------------------
Deferred tax liabilities:
   Depreciation and amortization                   $ 1,880          $ 2,142
   Inventory reserves, including LIFO                  454             --
                                                   ------------------------
Total gross deferred tax liabilities                 2,334            2,142
                                                   ------------------------
Deferred tax assets:
   Allowance for doubtful accounts                     514              538
   Inventory reserves, including LIFO                 --                 38
   Accrued expenses                                  2,076            3,154
   Net operating loss carryforwards                  3,002              471
   Other--net                                           98              128
                                                   ------------------------
Total gross deferred tax assets                      5,690            4,329
Valuation allowance                                   (621)            (238)
                                                   ------------------------
Net deferred tax (assets)                          $(2,735)         $(1,949)
                                                   ========================

Shown in consolidated balance sheets as:

Current deferred tax (assets)                      $(2,137)         $(3,730)
Noncurrent deferred tax liability (assets)            (598)           1,781
                                                   ------------------------
Net deferred tax (assets)                          $(2,735)         $(1,949)
                                                   ========================


                                      F-22
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


9. Income Taxes (continued)

Holdings  has net  operating  loss  carryforwards  of  approximately  $2,112,000
available to offset future  taxable  income which expire in 2019.  Holdings also
has Federal net  operating  loss  carryforwards  of  $4,365,000  acquired in the
acquisition of Heath which expire from 2004 through 2017,  $8,000 of minimum tax
credit  carryforwards which have an unlimited  carryforward period and state net
operating  loss  carryforwards  of $27 million  which expire during the next six
years.  The Federal  net  operating  loss and  minimum tax credit  carryforwards
acquired in the  acquisition of Heath are subject to limitations  imposed by the
Internal Revenue Code.

Management has evaluated the need for a valuation allowance against the deferred
tax assets and has determined that all of the deductible temporary  differences,
except $621,000, will be utilized as charges against reversals of future taxable
temporary  differences  and future  taxable  income.  Accordingly,  Holdings has
recorded  a $621,000  valuation  allowance  to reserve  for all of the state net
operating loss carryforwards  acquired in the Heath acquisition which may not be
realized during the carryforward period. If this net operating loss carryforward
is realized,  the reduction of the valuation  allowance will be charged  against
the goodwill from the Heath acquisition.

The provision for income taxes consists of the following (in thousands):

                                               Fiscal Year
                                    1999           1998            1997
                                -----------------------------------------
      Current:
        Federal                 $   438          $ 2,530          $ 5,821
        State and local              --              648            1,110
        Foreign                     457              908              802
                                -----------------------------------------
                                    895            4,086            7,733
                                -----------------------------------------
      Deferred:
        Federal                     215              (38)              --
        State and local              56                2               --
                                -----------------------------------------
                                    271              (36)              --
                                -----------------------------------------
                                $ 1,166          $ 4,050          $ 7,733
                                =========================================

                                      F-23


<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)

9. Income Taxes (continued)

The income statement  classification of the provision (benefit) for income taxes
is as follows (in thousands):

                                                       Fiscal Year
                                             1999         1998           1997
                                         --------------------------------------

Income tax expense attributable to
  continuing operations                   $ 1,166        $ 5,545        $ 7,733
Extraordinary item                           --           (1,495)          --
                                          -------------------------------------
                                          $ 1,166        $ 4,050        $ 7,733
                                          =====================================

Included in earnings  before income tax expense and  extraordinary  item for the
years ended  February 27, 1999,  February 28, 1998 and March 1, 1997 are foreign
earnings of $2,739,000, $1,249,000 and $1,688,000, respectively.

Undistributed   earnings  of   Holdings'   foreign   subsidiaries   amounted  to
approximately  $6,860,000  and  $1,672,000 at February 27, 1999 and February 28,
1998.   Approximately   $6,468,000  of  those  earnings  are  considered  to  be
permanently reinvested and, accordingly, no provision for U.S. federal and state
income taxes has been provided  thereon.  Upon distribution of those earnings in
the form of  dividends  or  otherwise,  Holdings  would be  subject to both U.S.
income taxes (net of foreign tax credits) and  withholding  taxes payable to the
various  foreign  countries.  In the event  that  these  permanently  reinvested
earnings are  distributed,  it is estimated  that U.S.  federal and state income
taxes, net of foreign tax credits, of approximately $2,052,000 would be due.

The  effective  income tax rate differs from the  statutory  rate as follows (in
thousands):

                                                       Fiscal Year
                                             1999         1998           1997
                                           -----------------------------------

Federal income tax at statutory rate       $   876      $ 3,908       $ 6,457
State income tax, net of federal benefit        36          591           722
Foreign income taxes (benefit)                (502)         471           212
Goodwill amortization                          599          387           387
Other--net                                     157          188           (45)
                                           ----------------------------------
Provision for income taxes                 $ 1,166      $ 5,545       $ 7,733
                                           ==================================


                                      F-24

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)

9. Income Taxes (continued)

Cash payments for income taxes for the years ended  February 27, 1999,  February
28,  1998  and  March  1,  1997  were  $1,883,000,  $5,154,000  and  $7,387,000,
respectively.

10. Comprehensive Income

As of  March  2,  1997,  Holdings  adopted  Statement  of  Financial  Accounting
Standards  No.  130,  "Reporting  Comprehensive  Income"  ("FAS  130").  FAS 130
established new rules for the reporting and display of comprehensive  income and
its components;  however, the adoption of FAS 130 has had no effect on Holdings'
net income or stockholders' equity (deficit). FAS 130 requires Holdings' foreign
currency  translation   adjustment  which,  prior  to  adoption,   was  reported
separately  in  stockholders'   equity  (deficit),   to  be  included  in  other
comprehensive  income.  Amounts reported in prior year financial statements have
been  reclassified  to conform with the  requirements of FAS 130. As of February
27, 1999, the cumulative other  comprehensive loss consisted solely of Holdings'
foreign currency translation adjustment.

11. Stockholders' Equity (Deficit)

Warrants Issued with Series C Redeemable Preferred Stock

The Warrants issued in conjunction with the Recapitalization entitle the holders
to purchase  463,232  shares of  Holdings'  nonvoting  common stock for $.01 per
share and are exercisable at any time prior to their  expiration on November 30,
2009.  Such  Warrants  have been  recorded  at their  fair  value at the time of
issuance  of  $3,002,000  as an addition to capital in excess of par value and a
reduction to the carrying value of the Preferred Stock.

Stock Option Plan

In March 1994,  Holdings  established  the 1994 Stock Option Plan which provided
for the issuance of incentive  stock options or  nonqualified  stock options for
1,169,261  shares of  common  stock.  The  stock  options  were  granted  to key
employees or eligible  nonemployees,  as defined,  as  determined  by the Option
Committee  of the  Board of  Directors,  and the term of the  options  could not
exceed  ten years  from the grant  date.  The  exercise  price of the  incentive
options was equal to or greater  than the fair market  value of the common stock
on the date of grant,  and the exercise  price of the  nonqualified  options was
determined by the Option Committee.


                                      F-25


<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)

11. Stockholders' Equity (Deficit) (continued)

In fiscal 1998 and 1997,  Holdings issued  incentive  options to purchase 49,385
shares and  215,000  shares,  respectively,  of common  stock,  of which  49,385
incentive  options and 15,000  incentive  options,  respectively,  vest in three
equal  annual  installments  commencing  on  the  first  anniversary  date.  The
remaining  200,000  incentive  options issued in fiscal 1997 vested  immediately
upon grant. The weighted average fair value of an option granted during the year
was $0.34 and $0.12 for the years  ended  February  28,  1998 and March 1, 1997,
respectively.  All of the outstanding options under the 1994 Plan were exercised
in November 1997 as part of the 1998 Recapitalization.

The following is a summary of Holdings'  incentive  options under the 1994 Stock
Option Plan:

                                                         Number of
                                                           Shares
                                                         ---------

Outstanding at March 1, 1997                              56,000

Granted on April 1, 1997 at $2.00 per share               21,000
Granted on August 25, 1997 at $2.00 per share             28,385
Exercised in 1998 at $1.00 per share                     (56,000)
Exercised in 1998 at $2.00 per share                     (49,385)
                                                         -------
Outstanding at February 28, 1998                              --
                                                         =======

In  March  1998,  Holdings  adopted  the  1998  Stock  Option  Plan,  which  was
subsequently  amended and restated in September 1998. The 1998 Stock Option Plan
terminates in ten years from its date of inception and provides for the issuance
of incentive  options or  nonqualified  stock  options for  1,462,222  shares of
common stock. The stock options may be granted to key employees,  as defined, as
determined by the Compensation Committee of the Board of Directors, and the term
of the options cannot exceed ten years from the grant date, except for employees
who own stock  possessing  more  than 10% of the  combined  voting  power of all
classes of stock of  Holdings,  for whom the term of the  options is five years.
Certain  options  vest as follows:  5% at the end of year one, 10% at the end of
year two, 60% at the end of year three,  80% at the end of year four and 100% at
the end of year five.  The other  options vest in nine years and six months from
the date of grant and are  subject  to  acceleration  provisions  based upon the
attainment of certain future financial performance goals.


                                      F-26

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


11. Stockholders' Equity (Deficit) (continued)

The exercise  price of the  incentive  options shall be equal to or greater than
the fair  market  value of the  common  stock on the date of grant,  except  for
employees who own stock possessing more than 10% of the combined voting power of
all classes of stock,  for whom the  exercise  price cannot be less than 110% of
the fair market value of the common stock on the date of grant.

The exercise price of the nonqualified options is determined by the Compensation
Committee of the Board of Directors.

The following is a summary of Holdings'  incentive  options under the 1998 Stock
Option Plan:

                                                      Number of
                                                       Shares
                                                     ----------

Outstanding at February 28, 1998                             --

Granted on March 19, 1998 at $6.49 per share            177,000
Granted on July 17, 1998 at $6.49 per share              10,750
Granted on September 1, 1998 at $6.49 per share       1,179,777
Canceled in fiscal 1999                                 (13,000)
                                                      ---------
Outstanding at February 27, 1999                      1,354,527
                                                      =========

None of the options were exercisable at February 27, 1999.

Of these above options issued, 187,750 options vest as follows: 5% at the end of
year one, 10% at the end of year two,  60% at the end of year three,  80% at the
end of year four and 100% at the end of year  five.  The other  options  vest in
nine years and six months from the date of grant and are subject to acceleration
provisions  based upon the  attainment of certain future  financial  performance
goals. As of February 27, 1999, the  performance  goals had not been met and, as
such, no vesting of options was accelerated.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation  ("FAS 123")  requires  Holdings to either adopt a fair value based
method of  expense  recognition  for all stock  based  compensation  awards,  or
provide pro forma net income  information as if the  recognition and measurement
provisions of FAS 123 had been adopted.


                                      F-27
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


11. Stockholders' Equity (Deficit) (continued)

Holdings  decided to account for its stock based  compensation  awards following
the  provisions  of  Accounting  Principles  Board Opinion No. 25 ("APB 25") for
stock issued to employees. APB 25 requires compensation expense to be recognized
only if the market price of the  underlying  stock exceeds the exercise price on
the date of grant. Holdings' stock based awards consist of stock options with an
exercise price equal to market price on the date of grant. As such, Holdings has
not recorded compensation expense in connection with these awards.

The weighted average fair value of an option granted for the year ended February
27, 1999 was $2.42.  The fair value of the options was  estimated at the date of
grant using a minimum value method and the following assumptions:

                                                    Fiscal Year
                                        1999           1998           1997
                                      -----------------------------------------

        Risk-free interest rate       5.32%           6.31%          5.84%
        Average life                  5 years         3 years        3 years
        Dividend yield                0%              0%             0%

For purposes of pro forma  disclosures,  the estimated fair value of the options
is amortized to expense over the options'  vesting  period.  Holdings' pro forma
net income is as follows (in thousands):

                                                    Fiscal Year
                                        1999           1998           1997
                                      -----------------------------------------
Pro forma net (loss) income available
  for common stockholders              $(1,280)       $2,700         $10,702


                                      F-28

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


11. Stockholders' Equity (Deficit) (continued)

Shares Reserved for Issuance

At February  27,  1999,  107,695  shares of common  stock were  reserved for the
exercise  and future grant of stock  options.  At February 27, 1999 and February
28,  1998,  90,604  shares of common  stock  were  reserved  for  issuance  upon
conversion of the nonvoting  common stock. At February 27, 1999 and February 28,
1998,  463,232 shares of nonvoting  common stock were reserved for issuance upon
exercise of outstanding warrants.

12. Pension Plans

All  eligible  salaried  employees  are covered by a defined  contribution  plan
("401k").  After  an  employee  has  been  employed  for  six  months,  Holdings
contributes  2%  of  their  salary.   Holdings  matches  an  additional  50%  of
participant  contributions up to a maximum  contribution of 1%. The cost of this
plan was $366,000, $325,000 and $299,000 for the fiscal years ended February 27,
1999, February 28, 1998 and March 1, 1997, respectively.

Holdings has a defined  benefit pension plan covering  substantially  all of its
industrial  employees.  The defined  benefits are based on a service  multiplier
that is multiplied by years of credited  service.  Holdings'  funding  policy is
consistent with the requirements of federal laws and regulations.

Assets of the 401k and deferred benefit pension plans are invested in securities
of governmental agencies, common stocks, insurance contracts and mutual funds.



                                      F-29

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


12. Pension Plans (continued)

The following  table sets forth the funded status of Holdings'  defined  benefit
plan and the amount  recognized in Holdings'  consolidated  balance sheets as of
February 27, 1999 and February 28, 1998 (in thousands):

                                                    1999          1998
                                                 -----------------------
Change in benefit obligation
Benefit obligation at beginning of year          $ 2,217         $ 1,878
 Service cost                                        120              94
 Interest cost                                       170             149
 Amendments                                          194              --
 Actuarial loss                                      161             134
 Benefits paid                                       (57)            (38)
                                                 -----------------------
Benefit obligation at end of year                  2,805           2,217
                                                 -----------------------

Change in plan assets
Fair value of plan assets at beginning of year     2,665           2,081
Actual return on plan assets                         210             408
Employer contributions                               165             214
Benefits paid                                        (57)            (38)
                                                 -----------------------
Fair value of plan assets at end of year           2,983           2,665
                                                 -----------------------

Reconciliation of funded status of the plan
Funded status of the Plan                            178             448
 Unrecognized net actuarial loss                     198              29
 Unrecognized net transition liability                18              25
 Unrecognized prior service cost                     306             139
                                                 -----------------------
Net prepaid asset                                $   700             641
                                                 =======================


                                      F-30

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


12. Pension Plans (continued)

                                                    Fiscal Year
                                        1999           1998           1997
                                      -----------------------------------------

Weighted average assumptions
Discount rate                            7.25%         7.50%          8.00%
Expected return on plan assets           9.00          9.00           9.00

A summary of Holdings' net periodic  pension cost related to the defined benefit
plan for fiscal years 1999, 1998 and 1997 is as follows (in thousands):

                                                            Fiscal Year
                                                  1999       1998        1997
                                                -------------------------------

Service cost--benefits earned during the year   $ 120       $  94        $  85
Interest cost on projected benefit obligation     170         149          136
Expected return on plan assets                   (218)       (181)        (145)
Net amortization and deferral                      33          25           29
                                                ------------------------------
Net pension cost                                $ 105       $  87        $ 105
                                                ==============================

13. Extraordinary Item

In  connection  with the  Recapitalization  (see Note 1),  Holdings  recorded an
extraordinary  loss of  $2,308,000,  net of an income tax benefit of $1,495,000,
related to the write-off of the unamortized  balance of deferred financing costs
associated with a prior refinancing.

14. Lease Commitments

Holdings  leases  certain  machinery,  office and  manufacturing  facilities for
periods up to five years under  operating lease  agreements.  Total rent expense
for fiscal 1999,  1998 and 1997 was  approximately  $3,299,000,  $2,718,000  and
$1,624,000, respectively.

                                      F-31

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


14. Lease Commitments (continued)

Future  minimum lease  payments  under all  noncancellable  operating  leases at
February 27, 1999 are as follows (in thousands):

       Fiscal years ending:
          2000                                        $ 2,641
          2001                                          1,846
          2002                                          1,233
          2003                                          1,009
          2004                                            848
          Thereafter                                    2,561
                                                      -------
       Total minimum lease payments                   $10,138
                                                      =======

15. Other Assets

Other  assets as of February  27,  1999 and  February  28,  1998  consist of the
following, net of related amortization (in thousands):

                                                       1999            1998
                                                     ------------------------

       Non-compete agreements                        $ 4,219          $    --
       Trademarks and intellectual property            9,903               --
       Deferred financing costs                       10,230           10,785
       Other                                             898              704
                                                     ------------------------
                                                     $25,250          $11,489
                                                     ========================

16. Other Operating Expenses

Other operating  expenses includes the amortization of deferred financing costs,
amortization of goodwill and management fees.


                                      F-32
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


17. Segment Information

In fiscal 1999, Holdings adopted Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information" ("FAS
131").  FAS 131  superseded  FASB  Statement  No. 14,  "Financial  Reporting for
Segments of a Business  Enterprise".  FAS 131 establishes  standards for the way
that public business  enterprises report information about operating segments in
annual financial  statements and requires that those enterprises report selected
information about operating segments in interim financial reports.  FAS 131 also
establishes  standards  for related  disclosures  about  products and  services,
geographic  areas and major  customers.  The  adoption of FAS 131 did not affect
results of operations or financial  position,  but did affect the  disclosure of
segment  information.  Prior year information has been changed to conform to the
provisions of FAS 131.

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

Holdings evaluates  performance and allocates  resources based on the reportable
segments  operating  profit or loss. The  accounting  policies of the reportable
segments  are  the  same  as  those  described  in the  summary  of  significant
accounting policies (see Note 3).

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

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


                                      F-33

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



17. Segment Information (continued)

Operational  results and other financial data for the two business  segments for
the years  ended  February  27,  1999,  February  28, 1998 and March 1, 1997 are
presented below (in thousands):

                                      Zone
                                    Heating   Specialty    General
                                    Products   Products   Corporate    Total
                                   --------------------------------------------

Year ended February 27, 1999
Net sales                          $177,815   $139,422   $   --      $317,237
Operating profit (loss)              19,239     15,412     (4,285)     30,366
Depreciation and amortization         4,904      2,072      1,611       8,587
Segment assets (2)                  107,227     81,029     15,096     203,352
Capital expenditures                  3,675        694         93       4,462

Year ended February 28, 1998 (1)
Net sales                           173,753     50,416       --       224,169
Operating profit (loss)              28,428      5,435     (5,371)     28,492
Depreciation and amortization         3,143        481      1,088       4,712
Segment assets (1)                   68,650     71,128     15,858     155,636
Capital expenditures                  4,619        744        112       5,475

Year ended March 1, 1997
Net sales                           167,625     41,480       --       209,105
Operating profit (loss)              35,079      3,568     (5,689)     32,958
Depreciation and amortization         3,262        288        986       4,536
Segment assets                       61,611     19,107     11,266      91,984
Capital expenditures                  2,432        332          6       2,770


(1)  Reflects  acquisition  of home  security  business,  which was  acquired on
     February 4, 1998--see Note 4.

(2)  Reflects  acquisitions  of FMI and UHI,  which were  acquired on August 19,
     1998--see Note 4.


                                      F-34


<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



17. Segment Information (continued)

Financial  information relating to Holdings' operations by geographic area is as
follows (in thousands):

                                                     Net Sales
                                     -----------------------------------------
                                                  Fiscal Year Ended
                                     February 27,    February 28,     March 1,
                                        1999             1998          1997
                                     -----------------------------------------

United States                         $294,581         $206,194       $191,917
Foreign                                 22,656           17,975         17,188
                                      ----------------------------------------
Consolidated                          $317,237         $224,169       $209,105
                                      ========================================


                                                  Long-Lived Assets
                                     -----------------------------------------
                                     February 27,    February 28,     March 1,
                                        1999             1998          1997
                                     -----------------------------------------

United States                         $122,086         $ 87,878       $ 56,108
Foreign                                    679              600            244
                                      ----------------------------------------
Consolidated                          $122,765         $ 88,478       $ 56,352
                                      ========================================


18. Related Party Transactions

Pursuant to a  monitoring  and  oversight  agreement,  Holdings  paid Hicks Muse
$237,000 and $211,000 in fiscal years 1998 and 1997,  respectively,  for certain
financial advisory services provided to Holdings.


                                      F-35


<PAGE>


                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


18. Related Party Transactions (continued)

Pursuant  to  the  1998  Recapitalization,   Holdings  entered  into  management
agreements with J.W. Childs Associates L.P. and UBS Capital Management Inc. (the
"Advisors")  which provide for aggregate  annual  management fees of $240,000 as
consideration for ongoing  consulting and management  advisory  services.  Under
these agreements, the Advisors were paid an aggregate of $284,000 and $81,000 in
fiscal 1999 and 1998, respectively. Payments may be made to the extent permitted
by the Credit Facility and Indenture. The agreements extend for a period of five
years upon which they shall  automatically  extend for successive periods of one
year each, unless terminated by Holdings or the Advisors.

19. Litigation

Holdings is subject to legal  proceedings and claims which arise in the ordinary
course of its business and have not been formally adjudicated. In the opinion of
management,  settlement of these actions when ultimately concluded will not have
a material adverse effect on the results of operations,  cash flows or financial
condition of Holdings.

20. Summarized Financial Information of DESA International, Inc. (Unaudited)

DESA International,  Inc. is the issuer of the 9 7/8% Senior Subordinated Notes.
Holdings has not presented separate  financial  statements and other disclosures
concerning DESA International,  Inc. because management has determined that such
information is not material to holders of the Senior Subordinated Notes.


                                      F-36
<PAGE>


                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


20. Summarized  Financial  Information of DESA International,  Inc.  (Unaudited)
(continued)

The following summarized  consolidated  financial  information is being provided
for DESA  International,  Inc. as of February 27, 1999 and February 28, 1998 and
for the fiscal years ended  February  27,  1999,  February 28, 1998 and March 1,
1997.

Summarized consolidated balance sheet information (in thousands):

                                                      February 27,  February 28,
                                                         1999           1998
                                                      --------------------------

Assets
Current assets                                          $ 187,892     $ 189,040
Net fixed assets                                           15,633        13,559
Goodwill, net                                              80,744        62,259
Deferred tax assets                                           598          --
Other assets                                               25,250        11,489
                                                        -----------------------
                                                        $ 310,117     $ 276,347
                                                        =======================

Liabilities and stockholders' equity (deficit)
Current liabilities                                     $  51,939     $  39,519
Long-term debt                                            153,000       131,105
9 7/8% Senior Subordinated Notes                          130,000       130,000
Deferred tax liabilities                                     --           1,781
Other liabilities                                             599           433
Stockholders' equity (deficit)                            (25,421)      (26,491)
                                                        -----------------------
                                                        $ 310,117     $ 276,347
                                                        =======================

                                      F-37


<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



20. Summarized  Financial  Information of DESA International,  Inc.  (Unaudited)
(continued)

Summarized consolidated statements of operations information (in thousands):

                                                 Fiscal year ended
                                   February 27,     February 28,     March 1,
                                       1999            1998            1997
                                   --------------------------------------------

Net sales                            $317,237       $224,169          $209,105
Income before income taxes              2,698         11,198            18,482
Net income                              1,532          3,345 (1)        10,749

(1)  Includes an extraordinary loss of $2,308,000,  net of an income tax benefit
     of $1,405,000


21. Subsequent Events

Amendment to Credit Facility

On May 25, 1999,  Holdings  entered into  Amendment and Waiver No. 4 to the Loan
Documents (the "Amendment"), an amendment to their Credit Facility, which waives
Holdings'  failure to comply with the Clean-Up Period occurring  between January
1, 1999 and May 30, 1999 and their  failure to comply with the  requirements  of
the Total Leverage Ratio at February 27, 1999.

As part of the Amendment,  Holdings' interest rates on all existing  outstanding
borrowings  under the credit  facility were increased by 1/4%. In addition,  the
Amendment modified the financial covenants,  including the total leverage ratio,
the fixed charge coverage ratio and the interest  coverage ratio.  The Amendment
also  modified  the  Clean-Up  Period  requirement  to provide  that  during the
Clean-Up Period, the sum of Working Capital advances,  Letter of Credit advances
and Swing Line loan advances  outstanding  shall not exceed  $30,000,000 for any
Clean-Up Period.  The Amendment  further provides for an additional  $15,000,000
unsecured line of credit to DESA (the "Childs  Guaranteed  Line of Credit") from
NationsBank,  N.A., which is unconditionally and irrevocably  guaranteed by J.W.
Childs Equity  Partners,  L.P., as evidenced by a promissory note issued by DESA
to NationsBank, N.A. The Childs Guaranteed Line of Credit has a maturity date of
May 31, 2001 and bears interest at the prime rate plus 0.25%, payable quarterly,
or based on LIBOR plus 1.75%, payable at the end of each


                                      F-38

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



21. Subsequent Events (continued)

Amendment to Credit Facility (continued)

interest  period.  In connection with the Amendment,  Holdings paid an amendment
fee of  approximately  $550,000  which will be deferred and  amortized  over the
remaining life of the Credit Facility.

In  conjunction  with the  Amendment,  the  Advisors  have  agreed  to defer any
obligation of Holdings to pay management fees under their respective  management
agreements  until  Holdings'  fiscal year 2000  financial  statements  have been
delivered to the Lenders.  At such time,  Holdings will be obligated to pay such
management fees only if the  Consolidated  EBITDA,  as defined,  of Holdings for
fiscal year 2000 is greater than  $51,600,000  and no Default,  as defined,  has
occurred under the Credit Agreement, as amended.


                                      F-39
<PAGE>
<TABLE>
<CAPTION>


                                               SCHEDULE II - Valuation and Qualifying
                                                  Accounts DESA International, Inc.
                                                          February 27, 1999

              COL. A                   COL. B                          COL. C                       COL. D            COL. E
                                                        -------------------------------------
                                                                      Additions
---------------------------------------------------------------------------------------------------------------------------------
                                        Balance at           Charged to          Charged to         Deductions -     Balance at
           Description              Beginning of Period   Costs and Expenses    Other Accounts      Describe        End of Period
---------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>               <C>                  <C>                 <C>               <C>

Year Ended February 27, 1999:
 Deducted from assets accounts:
  Allowance for doubtful accounts        $1,517,000        $ 49,000 (2)         $202,000 (1)        $140,000          $1,628,000

Year Ended February 28,1998:
  Deducted from asset accounts:
  Allowance for doubtful accounts           936,000        (143,000)(3)          747,000 (1)          23,000           1,517,000

Year Ended March 1,1997:
 Deducted from assets accounts:
  Allowance for doubtful accounts         1,108,000         (63,000)                     (1)         109,000             936,000





-------------------------------
<FN>

(1) Uncollectible accounts written off, net of recovery.

(2) Part of net assets acquired from FMI.

(3) Part of net assets acquired from Heath Holding Corp.
</FN>
</TABLE>