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 March 3, 2001
                                       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.)

 236 Public Square, Suite 103, Franklin, TN                       37064
 (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 14,  2001,  the  aggregate  market  value of the  Common  Stock of the
registrant held by non-affiliates of the registrant was $1,436,856.

Number of shares of the registrant's Common Stock at May 14, 2001: 16,373,148

Number of shares of the  registrant's  Nonvoting  Common  Stock at May 14, 2001:
90,604


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

                                       FISCAL 2001 FORM 10-K ANNUAL REPORT

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

PART I

Item 1.         Business                                                                                       2
Item 2.         Properties                                                                                     9
Item 3.         Legal Proceedings                                                                             10
Item 4.         Submission of Matters to a Vote of Security Holders                                           10

PART II

Item 5.         Market for the Registrant's Common Stock and Related Stockholder Matters                      10
Item 6.         Selected Consolidated Financial Data                                                          10
Item 7.         Management's Discussion and Analysis of Financial Condition and Results of Operations         12
Item 7A.        Quantitative and Qualitative Disclosure About Market Risk                                     18
Item 8.         Financial Statements and Supplementary Data                                                   19
Item 9.         Changes in and Disagreements with Accountants on Accounting and Financial Disclosure          19

PART III

Item 10.        Directors and Executive Officers of the Registrant                                            20
Item 11.        Executive Compensation                                                                        22
Item 12.        Security Ownership of Certain Beneficial Owners and Management                                25
Item 13.        Certain Relationships and Related Transactions                                                26

PART IV

Item 14.        Exhibits, Financial Statement Schedules and Reports on Form 8-K                               26
</TABLE>

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

SIGNATURES


                                       1

<PAGE>

CERTAIN  IMPORTANT  FACTORS This Annual Report on Form 10-K contains  statements
that  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,  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,
and the  seasonality of the Company's  business.  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.


PART I

Item 1. Business.

(a)  GENERAL DEVELOPMENTS OF THE BUSINESS

DESA Holdings  Corporation  ("Holdings") was incorporated  under the laws of the
State of  Delaware  in 1993 and  through  its  consolidated  subsidiaries,  is a
leading  designer,  manufacturer  and  marketer  of  zone  heating/home  comfort
products and specialty  products in the United States. 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,  (vi)  motion  sensor  lighting  and (vii)
doorbells.

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
places a high emphasis on new product development and product line extensions.

At the beginning of fiscal 2001, the Company  reorganized  into three  operating
divisions.  Each  division  is  comprised  of  dedicated  operational  resources
required to support their specific product and geographic categories, and shared
administrative resources for certain corporate functions. The divisions are: (a)
zone heating division,  which includes indoor room heaters,  hearth products and
outdoor  heaters sold in the United  States,  (b) specialty  products  division,
which  includes  specialty  tools and home security  products sold in the United
States and all products  sold in Canada and (c)  international  division,  which
includes  zone  heating  and  specialty  products  manufactured  or  sold in all
geographic areas other than the United States and Canada.

On April 3, 2000, DESA International, Inc. ("DESA") acquired the assets of Trine
Products Company  ("Trine")  located in The Bronx, New York for consideration of
approximately  $11 million.  Trine produces a complete line of door chimes,  and
accessories for residential and commercial applications. Trine products are sold
through mass merchants, home centers, retail chains and hardware cooperatives.

                                       2
<PAGE>

(b)  FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS

The Company has two  reportable  business  segments,  zone heating  division and
specialty products division.  For additional information about the segments, see
Note 12 of Notes to  Consolidated  Financial  Statements  included in Item 14 of
Part III of this report.

(c)  NARRATIVE DESCRIPTION OF THE BUSINESS

ZONE HEATING DIVISION

Zone  heating  division  (56% of Fiscal  2001 Net Sales)  includes  indoor  room
heaters,  hearth products (gas logs,  fireplaces and stoves) and outdoor heaters
sold in the United States.  The Company is a leading  manufacturer  of vent-free
indoor and  outdoor  zone  heating  products in the United  States.  The Company
markets its zone heating  products  under  well-known  brand names such as Reddy
Heater(R), Remington(R), Vanguard(R), Master(R), Comfort Glow(R), Glowarm(R) and
Outdoor Leisure (R).

The zone heating market includes a broad range of products that are used to heat
limited areas as  distinguished  from central  heating  systems that are used to
heat entire  buildings.  The zone heating  market is  currently  estimated to be
approximately $1 billion in size, with hearth products (i.e., vented gas hearth,
vent-free   gas   hearth,   wood   fireplaces,   wood   stoves/inserts,   pellet
stoves/inserts)  accounting  for more than half of the total market;  indoor gas
heaters,  outdoor  heaters,  and  accessories  comprise  the  remainder  of this
segment.

The  Company's  zone  heating  division is organized  into four primary  product
categories:

o        Indoor vent-free
o        Vent-free hearth
o        Vented hearth
o        Outdoor heating products

INDOOR VENT-FREE - Indoor vent-free heating  appliances include vent-free liquid
propane gas and natural gas space heaters that provide  economical  supplemental
heat to a specific area as  distinguished  from central heating systems that are
used to heat  entire  buildings.  Vent-free  products  utilize a more  efficient
burner system that avoids the need for outside venting.

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 that
avoids the need for outside venting. Vent-free heaters are generally smaller and
more physically attractive than their vented counterparts.  The Company has been
the market leader in vent-free gas heaters since 1983.

The Company offers a wide variety of 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 gas. Key  applications  of these  products  include use in family rooms,
dens,  kitchens and commercial  offices.  The Company's indoor vent-free heaters
are sold at retail prices that are significantly lower than vented gas heaters.

Vent-free  heaters are classified  into two different  types:  infrared and blue
flame.  Infrared models employ ceramic plaque burners that 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.  Enhanced  blue-flame  models  are
available for heavy-duty garage and
                                       3
<PAGE>

workshop  applications.  Optional  accessories  such  as  floor  bases  and  fan
accessories are also available.

VENT-FREE HEARTH - Vent-free  hearth products  include gas logs,  fireplaces and
stoves that are utilized for both  decorative  and economic  heating.  Vent-free
products utilize a more efficient burner system that avoids the need for outside
venting.

In 1993, the Company  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 are an  aesthetically  attractive,  economical  and
efficient  source of heat that are used primarily by individuals who enjoyed the
ambiance  of a  fireplace  but  wanted to avoid the  trouble  and  inconvenience
associated with burning wood. The Company'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.

Management  estimates that the Company's  products account for approximately 44%
of the  vent-free  hearth  products  sold in the  United  States,  with no other
competitor accounting for more than 14%.

VENTED HEARTH - Vented hearth products  include gas logs,  fireplaces and stoves
that are utilized for both  decorative and economic  heating.  Unlike  vent-free
products,  vented  heaters  require a  discharging  of emissions  outside of the
dwelling.

The  Company  entered  the  vented  hearth  market in August  1998 by  acquiring
Fireplace  Manufacturers  Inc.  ("FMI"),  a  manufacturer  of  direct  vent  gas
fireplaces and gas logs, and wood burning metal fireplaces. The Company's vented
hearth products are primarily manufactured in Santa Ana, California.  Management
estimates the vented hearth  market in the United States at  approximately  $400
million.

OUTDOOR HEATING  PRODUCTS - 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,  workshops  and outdoor work areas.  Commercial  applications
include  heating  factories,  warehouses,  construction  sites and  agricultural
areas.

SPECIALTY PRODUCTS DIVISION

The  specialty  products  division  (41% of  Fiscal  2001  Net  Sales)  includes
specialty  tools and home security  lighting  products sold in the United States
and  all  products  sold  in  Canada.   Specialty   products  division  includes
powder-actuated fastening systems (tools and accessories) used to fasten wood to
concrete or steel and stapling/rivet  tools,  electrical  products such as chain
saws and portable  generators,  chimes  (wired and  wireless)  and motion sensor
lighting products. These products are marketed under well-known brand names such
as  Remington(R),   Master(R),   Powerfast(R),   Trine(R),  Heath/Zenith(R)  and
JourneyMan  (R).  These  products  are sold to both  Do-it-yourself  ("DIY") and
commercial customers.

Specialty products division is organized into four main product categories:

o        Motion Sensor lighting
o        Specialty Fastening Systems Products
o        Electrical Products
o        Chimes (doorbells)


                                       4
<PAGE>


MOTION SENSOR LIGHTING - The Company's motion sensor lighting products, marketed
under the  Heath/Zenith  (R) and  JourneyMan  (R) brands,  are  comprised of two
primary product  categories:  Motion Sensor Security  Lighting and Motion Sensor
Decorative Lighting. The Company'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 Range Boost.  The  security  lighting  products
include  halogen and  traditional  PAR  (flood)  lighting  fixtures.  Decorative
lighting  products  include cast  aluminum  lanterns  and solid brass  lanterns.
Management  estimates that the North American residential motion sensor lighting
market to be in excess of $125 million.

The Company designs and  manufactures  its products  through its Hong Kong based
subsidiary, Heath Company Ltd., which provides purchasing, engineering, contract
manufacturing,  administration and assembly.  The Company uses subcontractors in
China who assemble products  according to predetermined  specifications and ship
assembled  products to Heath Ltd. The Company  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.

SPECIALTY    FASTENING   SYSTEMS   -   Specialty   fastening   systems   include
powder-actuated tools, power loads and fasteners.  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 that in turn
drives the nail. The Company sells two powder-actuated tools targeted at the DIY
market and seven tools targeted at the commercial market.  Sales of powder loads
and fasteners account for over 50% of this product category's revenues.

The Company  manufactures  and packages the  fasteners  (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.

The Company is the market leader in the U.S. retail  powder-actuated tool market
that includes the commercial and DIY markets.  The Company estimates that it has
an 85% market share.

ELECTRICAL  PRODUCTS - The Company 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.  The
Company  assembles  and  markets  a line of  electric  chain  saws that are used
primarily by homeowners for light-duty pruning and trimming.  The Company offers
several models including an extended reach polesaw.

Management estimates the domestic electric chain saw market is approximately $45
million in size, and that the Company is the market leader with a 72% share. The
electric  chain saw market is mature  and  industry  volume has been  reasonably
stable over the past five years.  The Company  traditionally  maintains a modest
presence in the portable electric generator market.

CHIMES - Chimes  include door chimes (both wired and  wireless),  push  buttons,
transformers,  bells,  buzzers  and  accessories.  The  products  are  primarily
imported from the Far East and are either ready to ship or require some assembly
and  packaging  in the  U.S.  The  Company  uses  subcontractors  in  China  who
manufacture and assemble  products  according to  predetermined  specifications.
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.

Management estimates the U.S. wired and wireless doorbell market to be in excess
of $65 million.  The Company has a 76% market share and is the market  leader in
the wireless segment

                                       5
<PAGE>

of the U.S. doorbell industry. The Company offers a diverse line of products and
utilizes a proprietary sound chip to differentiate  itself. The wireless control
systems industry is a diverse industry that includes  products ranging from home
automation  systems to garage door  openers to wireless  doorbells.  The Company
also competes in the wired doorbell segment of the U.S. doorbell industry and is
the market leader with a 49% share.

SALES, MARKETING AND DISTRIBUTION

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

    DESA Sales            Channel of Distribution        Products Marketed          Approximate Number
    Organization                                                                         of Sales
                                                                                      Representatives
------------------------------------------------------------------------------------------------------
<S>                       <C>                          <C>                               <C>
General Consumer           Mass Merchants               Indoor Heating                    100
                           Hardware Co-ops              Hearth Products
                           Home Centers                 Outdoor Heating
                           Warehouse Clubs
                           Catalog Showrooms
                           Agricultural Supply
                           Auto Parts Retailers

Specialty Heating          Utilities                    Indoor Heating                    25-35
                           Propane Marketers            Hearth Products
                           Specialty Distributors       Outdoor Heating
                           Appliance Distributors

Construction               Equipment Distributors       Outdoor Heating                   50-60
                           Equipment Renters            Generators

Specialty Products         Mass Merchants               Specialty Fastening Systems        125
                           Hardware Co-ops              Electrical Products
                           Home Centers Warehouse       Home Security
                           Stores
                           Catalog Showrooms
                           Agricultural Supply
</TABLE>

MARKETING - The Company's  marketing staff utilizes a variety of traditional and
innovative  programs to increase  consumer  awareness  and  augment  sales.  The
Company uses limited  national  advertising and relies instead on local customer
advertising through newspapers and circular flyers. The Company 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 largest channel for
The  Company's  products.  Other  channels,  include  specialty  heating,  farm,
construction,  heating-ventilation-air conditioning (HVAC), electrical wholesale
distribution and industrial.

                                       6
<PAGE>

INTERNATIONAL

In fiscal 2001,  $18.6 million or 5% of the Company's gross sales were generated
in international  markets such as Canada,  Europe,  Mexico and the Far East. The
Company  believes  that the  international  category  represents  a  significant
opportunity  for  increased  sales in the  future,  and during  fiscal  2001 the
Company  renewed its focus on global  markets.  During fiscal 2001,  the Company
established  Desico S.A. de C.V., a manufacturing  and sales office in Monterey,
Mexico.  Desico began  manufacturing  and selling to the Mexican  market  during
third quarter of fiscal 2001.

Also, during fiscal 2001, the Company established a selling office in the United
Kingdom  and  initiated  a  manufacturing  subsidiary  in  the  Europe  Economic
Community.  The Company expects to begin  manufacturing in the second quarter of
fiscal 2002.

The  Company'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.  With the renewed  focus on global  markets,  the Company has begun to
develop products specifically for international markets.

COMPETITION

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

SIGNIFICANT CUSTOMERS

Significant  customers  include  Home Depot and  Lowe's,  the two  largest  home
centers in the world,  who accounted for 31% and 16% of net sales in fiscal year
2001, respectively. Ace and TruServ, leaders in the hardware co-op market; Sears
and Wal-Mart, major mass merchandisers; Sam's and Costco, major warehouse clubs;
and W.W.  Grainger,  a major industrial supply company are also major customers.
Consistent  with  industry  practices,  the  Company  does not  operate  under a
long-term written supply contract with any of its customers.


                                       7
<PAGE>

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

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  backlog of orders  was  approximately  $8.7  million at March 3, 2001
compared  to $16.7  million at  February  26,  2000.

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.  During
fiscal years 2001 and 2000,  warranty costs amounted to  approximately  2.0% and
2.0%, respectively, of sales.

RAW MATERIALS

The Company purchases raw materials and components from a variety of vendors and
generally  most items are available from multiple  sources.  Major raw materials
and components include coil steel,  valves,  burners,  controls,  paint, motors,
fans, electrical parts, loads and packaging materials.  Management believes that
the materials used in the production of the Company's  products are available at
competitive prices from an adequate number of alternative suppliers and does not
believe  that the loss of any single  supplier  would  have a  material  adverse
effect on the Company's business.

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 (February 14,
2000 for the  Company's  Bronx,  NY facility)  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

The Company's  zone heating  products  operation is seasonal.  As a result,  the
number of workers  employed by the Company at any  particular  time varies.  The
work force is  accustomed  to seasonal  layoffs of two to four months.  In 2001,
total  employment  averaged  1,408 with a low of 1,105  employees in March and a
peak of 1,697 employees in October.

                                       8
<PAGE>

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  hourly  labor  force  in The  Bronx,  New York is
represented by the United  Steelworkers of America  (AFL-CIO) under a three-year
year contract expiring August 2001. The Company considers its labor relations to
be good.  The Manchester and  Shelbyville,  Tennessee and Santa Ana,  California
facilities 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.

Item 2.  Properties.

The  principal  executive  offices  for the  Company  are  located at 236 Public
Square,  Suite 103,  Franklin,  Tennessee 37064,  telephone:  (615) 599-6501.The
Bowling Green, Kentucky facilities serve as the administrative  services offices
for  all  divisions.   The  Company's   zone  heating   products  are  primarily
manufactured in Bowling Green,  Kentucky and Santa Ana, California.  The Company
also leases warehouse space in Bowling Green, Kentucky and Manchester, Tennessee
as needed. The manufacturing facilities in Manchester,  Tennessee and The Bronx,
New York produce the  specialty  products  sold by the  Company.  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>

Franklin, Tennessee                       2,000         Leased          Corporate Headquarters

Bowling Green, Kentucky                  225,000        Owned           Corporate and zone heating
                                        28 acres                        Administrative offices,
                                                                        Manufacturing, Engineering,
                                                                        Distribution

Bowling Green, Kentucky                  450,000        Leased          Specialty products administrative
                                        21 acres                        offices, Distribution

Shelbyville, Tennessee                   123,000        Leased          Manufacturing
                                        14 acres

The Bronx, New York                      42,000         Leased          Manufacturing, Distribution

Santa Ana, California                    101,125        Leased          Manufacturing, Distribution

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

</TABLE>

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

                                       9
<PAGE>

operations  in the  Shelbyville  facility  will be moved to Bowling Green during
first quarter fiscal 2002. Management is reviewing  alternatives for utilization
of the Shelbyville facility.

Item 3.  Legal Proceedings.

The  Company  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 the  Company 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 2001.

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 82  holders  of the  Company's  Common  Stock  and one  holder of the
Company's  Nonvoting  Common Stock as of May 14, 2001.  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.


Item 6.  Selected Consolidated Financial Data.

Set forth  below are  selected  historical  consolidated  financial  data of the
Company. The summary historical  consolidated financial data as of March 3, 2001
and February 26, 2000,  and for each of the years in the three year period ended
March 3,  2001  have  been  derived  from  our  audited  consolidated  financial
statements.  The summary historical  consolidated  financial data as of February
28, 1998 and March 1, 1997 and for the two year period  ended  February 28, 1998
have been derived from our audited  consolidated  financial statements 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.


                                       10
<PAGE>
<TABLE>
<CAPTION>

                                                                   Fiscal Year
                                        -------------------------------------------------------------------
                                        2001(1)(11)      2000       1999 (10)     1998(2)(9)       1997
                                        -----------      ----       ---------    ----------       ----
                                                                  (in Thousands)
<S>                                    <C>           <C>           <C>           <C>           <C>

Statement of Income Data(12):
Net sales(3)                            $ 403,092     $ 393,924     $ 317,237     $ 224,169     $ 209,105
Cost of sales                             267,651       264,293       214,369       145,770       131,168
                                        -----------------------------------------------------------------
Gross profit                              135,441       129,631       102,868        78,399        77,937
Operating costs and expenses              101,660        91,799        73,043        50,191        45,257
                                        -----------------------------------------------------------------
Operating profit                           33,781        37,832        29,825        28,208        32,680
Interest expense                           32,598        28,853        27,864        17,327        14,509
                                        -----------------------------------------------------------------
Income before provision for income
taxes and extraordinary item                1,183         8,979         1,961        10,881        18,171
Income taxes                                  488         4,909           947         5,430         7,621
                                        -----------------------------------------------------------------
Income before extraordinary item              695         4,070         1,014         5,451        10,550
Extraordinary item(4)                          --            --            --         2,308            --
                                        -----------------------------------------------------------------
Net income                                    695         4,070         1,014         3,143        10,550
Less dividends and accretion on
preferred stock                             3,136         2,769         2,480           607            --
                                        -----------------------------------------------------------------
Net income (loss) available for
common stockholders                     $  (2,441)    $   1,301     $  (1,466)    $   2,536     $  10,550
                                        =================================================================
Ratio of earnings to fixed
  charges(5)                                 1.0x          1.3x          1.1x          1.6x          2.1x
Other Data(12):
EBITDA(6)                               $  44,909     $  48,307     $  38,412     $  32,920     $  37,216
EBITDA margin(7)                             11.1%         12.3%         12.1%         14.7%         17.8%
Capital expenditures                        3,771         5,529         4,462         5,475         2,770
Depreciation                                4,528         4,425         3,589         2,456         2,432
Amortization                                6,600         6,050         4,998         2,256         2,104
Net cash provided by operating              1,314        14,590         2,307         1,146        18,398
  activities
Net cash used in investing activities     (14,991)       (5,434)      (45,233)      (45,980)       (2,882)
Net cash provided by (used in)             15,900        (9,871)       43,012        40,590       (10,599)
  financing activities
Balance Sheet Data (at period end):
Cash and cash equivalents                   2,388           173           888           794         5,058
Working capital (deficit)(8)                6,631        16,361        26,929        26,703        (8,789)
Total assets                              233,896       228,139       202,638       155,244        91,761
Long-term debt (less current
  portion)                                249,163       265,846       285,138       261,105       130,600
Redeemable preferred stock                 23,057        19,937        17,207        14,661            --
Stockholders' equity (deficit)           (150,057)     (152,271)     (152,652)     (162,799)      (84,977)
</TABLE>

----------------------
(1)  53-week fiscal year.

(2)  The Company was party to a recapitalization in November 1997 which impacted
     interest expense, stockholders' equity (deficit) and long term debt.

(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 year 1998.

                                       11
<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 a portion 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  income 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 Universal Heating Inc. data for the period from August 19,
     1998 (date of acquisitions) through February 27, 1999.

(11) Includes Trine data for the period from April 7, 2000 (date of acquisition)
     forward.

(12) During  fiscal  2001,  the  Company  changed its method of  accounting  for
     inventories  from the last in, first out ("LIFO")  method to the  first-in,
     first out ("FIFO")  method.  As a result of this  change,  all periods have
     been  restated to conform to the FIFO method of  inventory  valuation.  See
     footnote 1 to the Consolidated  Financial  Statements  contained in Part IV
     hereof.


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 Data" and the audited Consolidated  Financial Statements
of the Company and the notes thereto included elsewhere in this Annual Report.

The Company is  organized  in three  divisions.  Each  division is  comprised of
dedicated  operational  resources required to support their specific product and
geographic categories, and shared administrative resources for certain corporate
functions.  The divisions are: (a) zone heating division,  which includes indoor
room  heaters,  hearth  products and outdoor  heaters sold in the United  States
(approximately  56%  of net  sales),  (b)  specialty  products  division,  which
includes  specialty  tools and home security  products sold in the United States
and all  products  sold  in  Canada  (approximately  41% of net  sales)  and (c)
international division,  which includes zone heating and specialty products sold
in all geographic  areas other than the United States and Canada  (approximately
3% of net sales).

                                       12
<PAGE>

Zone heating division and specialty  products division are reportable  segments.
Prior  amounts  have  been   reclassified  to  conform  to  the  current  year's
presentation:

Principally  due to sales of zone heating  products,  the Company's  business is
seasonal,  as depicted by the following table that sets forth certain  operating
results of the Company for each of the four  consecutive  fiscal quarters in the
periods  ending March 3, 2001,  February 26, 2000 and February 27, 1999 (dollars
in thousands).
<TABLE>
<CAPTION>
                                   First        Second          Third        Fourth
                                  Quarter       Quarter        Quarter       Quarter        Year
                                -------------------------------------------------------------------
<S>                             <C>            <C>           <C>           <C>           <C>
Fiscal 2001
    Total net sales              $ 70,619       $110,622      $144,713      $ 77,138       $403,092
    Operating profit (loss)      $   (300)      $ 11,666      $ 20,581      $  1,834       $ 33,781
Fiscal 2000
    Total net sales              $ 67,793       $ 97,924      $156,763      $ 71,444       $393,924
    Operating profit             $    581       $ 11,030      $ 24,552      $  1,669       $ 37,832
Fiscal 1999
    Total net sales              $ 40,754       $ 75,416      $134,679      $ 66,388       $317,237
    Operating profit (loss)      $ (1,372)      $  8,746      $ 22,580      $   (129)      $ 29,825

</TABLE>
Approximately  60% to 70% 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  44% of  the  Company's  annual  sales  volume  is  booked  in the
five-month period of March through July.

Results of Operations

The following  table sets forth certain  income  statement  information  for the
Company for the fiscal years ended March 3, 2001, February 26, 2000 and February
27, 1999.
<TABLE>
<CAPTION>
                                                              Fiscal Year Ended
                               ------------------------------------------------------------------------------
                                            Percentage                Percentage                Percentage
                                  2001     of Net Sales      2000     of Net Sales     1999     of Net Sales
                               ------------------------------------------------------------------------------
<S>                             <C>          <C>          <C>          <C>          <C>            <C>
Net sales                        $403,092     100.0%       $393,924     100.0%       $317,237       100.0%
Cost of sales                     267,651      66.4%        264,293      67.1%        214,369        67.6%
                               ------------------------------------------------------------------------------
Gross profit                      135,441      33.6%        129,631      32.9%        102,868        32.4%
Operating costs and               101,660      25.2%         91,799      23.3%         73,043        23.0%
    expenses
                               ------------------------------------------------------------------------------
Operating profit                   33,781       8.4%         37,832       9.6%         29,825         9.4%
Interest expense                   32,598       8.1%         28,853       7.3%         27,864         8.8%
                               ------------------------------------------------------------------------------
Income before provision for         1,183       0.3%          8,979       2.3%          1,961         0.6%
    income taxes
Provision for income taxes            488       0.1%          4,909       1.2%            947         0.3%
                               ------------------------------------------------------------------------------
Net income                       $    695       0.2%       $  4,070       1.0%       $  1,014         0.3%
                               ==============================================================================

</TABLE>
                                       13
<PAGE>
Year Ended March 3, 2001 Compared to the Year Ended February 26, 2000

Net Sales.  Net sales for fiscal 2001 were $403.1  million,  an increase of $9.2
million or 2.3%  compared to fiscal 2000 sales of $393.9  million.  Zone heating
product  sales were $226.9  million,  an increase of $18.1  million or 8.6% from
fiscal  2000.  This  increase is primarily  due to an  increased  demand for all
categories of heating products.  Specialty products had sales of $165.7 million,
a decrease of $7.4 million or 4.3% from fiscal 2000.  This decrease is primarily
due to reduced  demand for  generators in fiscal 2001 compared to unusually high
demand in the prior year  related to  concerns of year 2000  computer  problems.
This decrease is partially  offset by increased home security  product sales and
incremental sales from the acquisition of Trine in April 2000.

Cost of Sales. Cost of sales for fiscal 2001 were $267.7 million, an increase of
$3.4 million or 1.3% from fiscal 2000.  This increase is primarily  attributable
to increased  sales volumes in the period.  Cost of sales as a percentage of net
sales  improved  to  66.4%  in  fiscal  2001  from  67.1% in  fiscal  2000.  The
improvement is primarily due to a change in the mix of units sold and the impact
of the Company's focus on cost reduction  programs.  As a result,  gross margins
improved to 33.6% in fiscal 2001 compared to 32.9% in 2000.

Operating Costs and Expenses.  Operating costs and expenses for fiscal 2001 were
$101.7  million,  an increase of $9.9  million or 10.7% from fiscal  2000.  As a
percentage of sales,  operating costs and expenses  increased to 25.2% in fiscal
2001 from  23.3% in  fiscal  2000.  The  increase  as a percent  of net sales is
primarily  attributable  to a sales  program  costs  related  to a change in the
product and customer mix,  redundant  costs related to the  integration of Trine
and start-up costs related to certain international operations.

Operating Profit.  Operating profit was $33.8 million in fiscal 2001, a decrease
of $4.1 million or 10.7% from fiscal 2000. Operating profit attributable to zone
heating products was $23.0 million or 9.2% higher than fiscal 2000. The increase
is primarily attributable to increased volume.  Operating profit attributable to
specialty  products was $13.0 million in fiscal 2001, a decrease of $3.6 million
or 21.5% from  fiscal  2000.  The  decrease  is  primarily  attributable  to the
decrease in net sales due to the reduced demand for generators.

EBITDA.  EBITDA for fiscal 2001 was $44.9 million, a decrease of $3.4 million or
10.7% from fiscal  2000.  EBITDA is defined as income  before  income taxes plus
interest  expense and  depreciation as well as amortization  expense  associated
with  intangibles  and deferred  charges.  EBITDA is  presented  because it is a
widely accepted financial  indicator of a leveraged company's ability to service
and / or incur  indebtedness  and because  management  believes that EBITDA is a
relevant measure of the Company's ability to generate cash without regard to the
Company's capital structure or working capital needs. However, EBITDA should not
be  considered  as an  alternative  to net  income as a measure  of a  company's
operating  results or to cash flows from  operating  activities  as a measure of
liquidity as defined by generally accepted accounting principles.

Interest  Expense.  Interest  expense  for  fiscal  2001 was $32.6  million,  an
increase of $3.7  million or 13.0%  compared  to fiscal  2000.  The  increase is
primarily  associated  with higher  interest  rates and higher levels of working
capital borrowing.

Income Taxes. The income tax rate for fiscal 2001 was 41.3% compared to 54.7% in
fiscal 2000.  The decrease is due primarily to differences in the mix of taxable
income from domestic and foreign sources.

Net  Income.  Net income was $0.7  million in fiscal  2001  compared  to $4.1 in
fiscal  2000.  The  decrease of $3.4  million or 83% is due  primarily to higher
operating costs and expenses and interest offset by reduced income taxes.

                                       14
<PAGE>
Year Ended February 26, 2000 Compared to the Year Ended February 27, 1999

Net Sales.  Net sales for fiscal 2000 were $393.9 million,  an increase of $76.7
million or 24.2% compared to fiscal 1999 sales of $317.2  million.  Zone heating
product  sales were $208.9  million,  an increase of $46.7 million or 28.8% from
fiscal  1999.  This  increase is primarily  due to an  increased  demand for the
outdoor  heating and hearth  product lines and the  acquisition of FMI in fiscal
1999.

Specialty products had sales of $173.1 million,  an increase of $34.4 million or
24.8% from fiscal 1999.  This increase is primarily  due to an increased  demand
for  generators  related to  concerns  of year 2000  computer  problems  and new
product sales.  These increases were offset by a major customer  adjusting their
decorative  lighting  inventories  that resulted in lower fiscal 2000 demand for
related product lines.

Cost of Sales. Cost of sales for fiscal 2000 were $264.3 million, an increase of
$49.9 million or 23.3% from fiscal 1999. This increase is primarily attributable
to increased  sales in the period.  Cost of sales as a  percentage  of net sales
improved to 67.1% in fiscal 2000 from 67.6% in fiscal 1999.  The  improvement is
primarily due to lower  manufacturing  overhead per unit of zone heating product
and the Company's focus on cost reduction programs.  As a result,  gross margins
improved to 32.9% in fiscal 2000 compared to 32.4% in 1999.

Operating Costs and Expenses.  Operating costs and expenses for fiscal 2000 were
$91.8  million,  an increase of $18.8  million or 25.7% from fiscal  1999.  This
increase is primarily attributable to the net sales increase. As a percentage of
sales, operating costs and expenses increased to 23.3% in fiscal 2000 from 23.0%
in fiscal 1999. This increase is primarily attributable to the benefits obtained
by the absorption of fixed  administrative  and engineering costs over a greater
unit volume of sales offset by  inefficiencies  encountered with the set-up of a
new distribution facility for zone heating products and increased customer sales
program costs.

Operating Profit. Operating profit was $37.8 million in fiscal 2000, an increase
of $8.0 million or 26.9% from fiscal 1999. Operating profit attributable to zone
heating  products was $21.0  million or 29.9%  higher than fiscal 1999.  This is
mainly   attributable  to  increased  net  sales  and  higher  factory  overhead
absorption  offset by higher selling costs and shipping costs.  Operating profit
attributable to specialty products was $16.6 million in fiscal 2000, an increase
of $4.3 million or 34.6% from fiscal 1999.  This is  primarily  attributable  to
increased sales offset by a change in sales mix related to generator sales.

EBITDA. EBITDA for fiscal 2000 was $48.3 million, an increase of $9.9 million or
25.8% from fiscal  1999.  EBITDA is defined as income  before  income taxes plus
interest  expense and  depreciation as well as amortization  expense  associated
with  intangibles  and deferred  charges.  EBITDA is  presented  because it is a
widely accepted financial  indicator of a leveraged company's ability to service
and / or incur  indebtedness  and because  management  believes that EBITDA is a
relevant measure of the Company's ability to generate cash without regard to the
Company's capital structure or working capital needs. However, EBITDA should not
be  considered  as an  alternative  to net  income as a measure  of a  company's
operating  results  or to cash  flows from  operating  activities  as measure of
liquidity as defined by generally accepted accounting principles.

                                       15
<PAGE>
Interest  Expense.  Interest  expense  for  fiscal  2000 was $28.9  million,  an
increase  of $1.0  million or 3.6%  compared  to fiscal  1999.  The  increase is
primarily associated with higher interest rates.

Income Taxes. The income tax rate for fiscal 2000 was 54.7% compared to 48.4% in
fiscal 1999.  The increase is due primarily to differences in the mix of taxable
income from domestic and foreign sources and goodwill  amortization  that is not
deductible for tax purposes.

Net  Income.  Net income was $4.1  million in fiscal  2000  compared  to $1.0 in
fiscal 1999.  The  increase of $3.1  million or 301% is due  primarily to higher
sales volume offset by related taxes and expenses.

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 2001 was $1.3 million compared
to $14.6 million for fiscal 2000, a decrease of $13.3 million.  Cash provided by
operating  activities  in fiscal 2001 was  principally  the result of  decreased
inventory  levels  and  current  year  income and  offset by  decreased  current
liabilities.  Net cash  provided by  operating  activities  was $2.3 million for
fiscal 1999.

Net cash used in investing  activities was $15.0 million in fiscal 2001 compared
to net cash used of $5.4  million  in fiscal  2000.  Net cash used in  investing
activities reflects the fiscal 2001 acquisition of Trine for approximately $11.5
million,  and capital  expenditures  of $3.8  million and $5.5 million in fiscal
2001 and fiscal 2000, respectively. Cash used for investing activities in fiscal
1999 was $45.2 million.

Net cash provided by (used in) financing  activities was $15.9 million in fiscal
2001,  ($9.9)  million in fiscal 2000 and $43.0 million in fiscal 1999. Net cash
provided by financing  activities in fiscal 2001 primarily reflects the issuance
of $6.0  million of debt and $5.0  million of equity to acquire  Trine,  greater
working capital requirements and is offset by the repayment of debt. Fiscal 2000
primarily reflects the repayment of debt.

Credit Facility

Working  Capital Loan  Commitment.  In November 1997,  DESA entered into a $75.0
million senior  secured  revolving  credit  facility.  The Working  Capital Loan
Commitment  will mature  November 26, 2003. As of March 3, 2001, the Company has
$43.9 million outstanding under the Working Capital Loan Commitment.  Borrowings
under the revolving credit facility are used to provide seasonal working capital
requirements of the Company. The Company can utilize letters of credit under the
Working Capital Loan Commitment up to $10,000,000.  As of March 3, 2001, letters
of credit of $1.8 million are outstanding under the Working Capital Facility. In
accordance  with the terms of the Credit  Facility  (hereinafter  defined),  the
ability of the Company to incur additional  indebtedness is limited, as defined.
At May 23,  2001,  the  Company  can  incur  additional  indebtedness  of $18.8
million.

The Working  Capital Loan  Commitment,  together with Term A Loan,  Term B Loan,
Term C Loan, Acquisition Loan and Acquisition B Loan (collectively,  the "Credit
Facility")  contain  customary

                                       16
<PAGE>

covenants  and events of  default,  including  substantial  restrictions  on the
Company's  ability to pay dividends or make  distributions to  stockholders.  At
March 3, 2001, the Company did not comply with the interest  coverage ratio, the
fixed charge ratio and the total leverage ratio (together,  the "Covenants") for
fourth quarter fiscal 2001. On May 23, 2001, the Company  entered into Amendment
and  Waiver  No. 7 to the  Loan  Documents  and  Amendment  No. 3 to the  Credit
Agreement  (together,  the  "Amendment"),  an amendment to the Credit  Facility,
which  waives the  Company's  failure  to comply  with the  requirements  of the
Covenants.  The Amendment extended the maturity of the Guaranteed Line of Credit
(hereinafter  defined) to November 23, 2003, amended the financial covenants and
their method of calculation,  as defined and increased the interest rates on all
existing   outstanding   borrowings  under  the  Credit  Facility  by  1/2%.  In
conjunction  with the  Amendment,  the Company sold  9,375,000  shares of common
stock on May 30, 2001 to current  shareholders  for an  aggregate  sale price of
$7,500,000.

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 Credit
Facility is secured by  substantially  all assets of the Company  (including the
capital stock of DESA) 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  provides for a Clean-Up Period,  as defined therein,  under
the  Working  Capital  Loan  Commitment,  for a period  of 30  consecutive  days
occurring  between  January  1 and  May 30 in each  calendar  year.  During  the
Clean-Up Period, the sum of Working Capital advances,  Letter of Credit advances
and other  loan  advances  outstanding  shall  not  exceed  $30,000,000  for any
Clean-Up Period.  The Company  completed this requirement prior to the filing of
this report for the Clean-Up period ending May 30, 2001.

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 therein. No excess cash flow payment was required in
fiscal 2001.

Guaranteed Line of Credit

On May 25, 1999,  the Company  entered into an  agreement  establishing  a $15.0
million line of credit (the "Line of Credit"), which, pursuant to the Amendment,
matures  on  November  23,  2003.  The  Line  of  Credit  is  unsecured  and  is
unconditionally  guaranteed  by UBS Capital LLC, a  shareholder  of the Company.
Borrowings  under the Line of Credit  bear  interest  at an annual rate equal to
either  (at the  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.

9 7/8% Senior Subordinated Notes

Holdings'  subsidiary,  DESA, is the issuer of 9 7/8% Senior  Subordinated Notes
due  December  15, 2007 in the amount of  $130,000,000.  The notes are fully and
unconditionally  guaranteed by Holdings.  Interest is payable  semi-annually  on
June 15 and December 15. The Senior  Subordinated Notes can be redeemed prior to
the mandatory  redemption date based upon the occurrence of certain  events,  as
defined.

Preferred Stock

Holdings'  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,  Holdings may exchange the Preferred Stock for junior subordinated
notes  (the  "Exchange  Notes")  having  substantially  the  same  terms  as the
Preferred Stock. The Indenture permits Holdings, under certain circumstances, to
exchange all

                                       17
<PAGE>
outstanding  Preferred Stock for Exchange Notes in an aggregate principal amount
equal  to the  aggregate  liquidation  preference  of  the  Preferred  Stock  so
exchanged. The Exchange Notes will require Holdings 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,  Holdings 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.  Holdings 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 Holdings to make such catch-up payment.

Management  believes that cash flow from operations and  availability  under the
Working  Capital  Loan  Commitment  and  Guaranteed  Line of Credit will provide
adequate funds for the Company's  foreseeable  working  capital  needs,  planned
capital  expenditures and debt service  obligations.  Additionally,  the Company
reviews potential  acquisitions and  relationships  from time to time and may be
required to seek additional debt to fund any acquisition.  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, Mexican and Hong Kong operations. A portion of the
Company's  operations  consists of  purchasing  and sales  activities in foreign
jurisdictions.  The Company  manufactures  its products in the United States and
Mexico,  purchases  products in Europe,  China, and Japan and sells the products
primarily in North  America 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.

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.  In
fiscal 1999, the Company entered into interest rate swap agreements with Bank of
America to manage its exposure to interest rate fluctuations.  The interest rate
swap  agreements  provided for payment by the Company of fixed rates of interest
based on three  month  LIBOR.  Notional  principal  amounts of these  agreements
totaled $125 million,  of which $75 million  terminated in November 1999 and $50
million was  canceled at the option of Bank of America in February  2000.  There
are no interest rate swap agreements outstandng at March 3, 2001.

                                       18
<PAGE>

The following table summarizes the carrying amounts and estimated fair values of
the Company's remaining financial  instruments at March 3, 2001 and February 26,
2000:

<TABLE>
<CAPTION>
                                             March 3, 2001                  February 26, 2000
                                       Carrying           Fair          Carrying           Fair
                                        Amount           Value           Amount            Value
                                      -------------------------------------------------------------
                                                             (in thousands)

<S>                                    <C>             <C>              <C>               <C>
Bank debt                              $156,587         $56,587         $157,504          $157,504

Senior subordinated notes               130,000          74,100          130,000            96,850

Guaranteed Line of Credit                13,450          13,450               --                --

Note payable                                 --              --            1,842             1,842
Foreign exchange contracts-
  unrealized loss                            --              23               --               473
</TABLE>

Based on the average  outstanding  amount of variable rate  indebtedness  of the
Company in fiscal  years 2001 and 2000,  a one  percentage  point  change in the
interest  rates for the  Company's  variable  rate debt would have  impacted the
Company's  fiscal  years  2001 and 2000  interest  expense  by an  aggregate  of
approximately $1.9 and $1.9 million, respectively.

Foreign Currency Exchange Rate Risk

The Company  does not  conduct a  significant  portion of its 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   covering
approximately  85% to 95% of its budgeted (future) net foreign currency purchase
transactions  over a period  of four  quarters.  Gains  and  losses  related  to
qualifying  hedges of foreign  currency  risk  exposures  are recorded  when the
related  inventory  is  purchased.  At March 3, 2001,  the  Company  had forward
exchange  contracts,  with maturities  ranging from May 2001 to October 2001, to
purchase  approximately  $4.0 million in foreign  currency.  Because the Company
does not have  significant  foreign  sales,  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.

Item 8.  Financial Statements and Supplementary Data.

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

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

None.

                                       19
<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.  The Board of Directors is
elected annually and serves until the next annual meeting of shareholders.

The  Company's  stockholders  have entered into a  Stockholders  Agreement  (the
"Stockholders  Agreement")  that obligates the Company and the  stockholders  to
take all necessary actions to include certain nominees of J. W. Childs Partners,
L.P.  ("Childs") and its affiliates  and associates  ("JWC  Holders") (who could
constitute a majority of the board of directors)  and one nominee of UBS Capital
LLC  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.

 Name                    Age                Positions
--------------------------------------------------------------------------------
Raymond B. Rudy           70     Chairman and Director
W. Michael Clevy          52     Chief Executive Officer, President, Director
John W. Childs            59     Director
Adam L. Suttin            33     Director
Michael Greene            39     Director
Joseph J. Incandela       54     Director
James E. Ashton           58     Director
Terry G. Scariot          52     Director
Stephen L. Clanton        49     Senior Vice President, Chief Financial Officer
Augusto H. Millan         51     President - International Division
David B. Schumacher       41     President - Zone Heating Division
James R. Wiese            51     President - Specialty Products Division

Raymond B. Rudy was appointed the Company's Chairman in April 1999. Mr. Rudy has
been a Managing  Director of J.W.  Childs  Associates  ("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 Affiliates of CPC  International.  From 1984 to
1986, Mr. Rudy was Chairman,  President and CEO of Arnold Foods Company, Inc. He
is Chairman of American Safety Razor Company and The Hartz Mountain Corporation,
Vice Chairman of Empire Kosher  Poultry,  Inc. and a director of Widmer Brothers
Brewing Company and American Safety Razor Company.

W.  Michael  Clevy  joined  DESA in  September  1999 as a  Director  and  became
President and Chief  Executive  Officer in November  1999.  Prior to joining the
Company,  he held positions with  International  Comfort  Products  Corporation,
Toronto,  Ontario,  Canada as President  and Chief  Executive  Officer from 1995
until  its  acquisition  by  United  Technologies  Corporation  in  1999  and as
President and Chief  Operating  Officer of the  International  Comfort  Products
Corporation's U.S.  operating  subsidiary from 1994 to 1995. He is a director of
York International Corporation, Pameco Corporation, and Derlan Industries, Ltd.

John W. Childs has been  President of JWCA since July 1995 and a Director of the
Company  since 1997.  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.  He is a director of Big V Supermarkets,  Inc., Quality Stores,  Inc.,
Chevys, Inc., Pan Am International Flight Academy,  Inc., Ross University,  Bass
Pro Shops, Inc., The Hartz Mountain  Corporation,  American Safety Razor Company
and Edison Schools, Inc.

                                       20
<PAGE>

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, The NutraSweet Company, Ross University and Empire Kosher Poultry, Inc.
He has been a director of the Company since 1997.

Michael Greene is a Managing Director of UBS Capital,  LLC, 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. He has been a director of
the Company since 1997.

Joseph J. Incandela, is Managing Director of Shields and Company, Inc., a Boston
based investment banking firm and was elected a Director of the Company in April
1999.  He 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.

Dr.  James E. Ashton was elected a Director of the Company in April 2000.  He is
Chairman of Poco Graphite,  Inc., a manufacturer of specialty  graphite material
and  President  of Ashton  and  Associates,  a  management  consulting  company.
Previously,  from 1998 to 2000 he was  Chairman and Chief  Executive  officer of
Precision  Partners,  Inc.  Prior to joining  Precision  Partners  Inc.,  he was
Chairman and CEO of Fiberite, Inc., a manufacturer of composite materials. He is
on the board of Insilco Corporation and ThermaSys Corporation and holds a Ph.D.,
M.S. from Massachusetts Institute of Technology and an MBA from Harvard Business
School.

Terry G. Scariot  joined AMCA  International  Consumer and  Automotive  Products
Division as Vice President - Finance in 1984 and was appointed  Chief  Financial
Officer of DESA  International,  Inc. in 1985 and held that position until March
1996 when he was  appointed  President  and  joined the Board of  Directors.  In
April,  1999 he was  appointed  President  and Chief  Executive  Officer for the
Company and held those  positions until November 1999. He has been a Director of
the  Company  since  1996.  He is  currently  a partner in the  investment  firm
Remington Capital, L.L.C.

Stephen L. Clanton joined the Company as Senior Vice President,  Chief Financial
Officer in  December  1999.  Prior to joining  the  Company,  he was Senior Vice
President,  Chief  Financial  Officer and  Treasurer for  International  Comfort
Products Corporation,  Toronto, Ontario, Canada, from 1996 to 1999 and Executive
Vice President and Chief Financial  Officer for Falcon Products Inc., St. Louis,
Missouri, from 1988 to 1996.

Augusto H. Millan  joined the Company as  President,  International  Division in
December 1999. Prior to joining the Company he held positions with International
Comfort Products Corporation,  Toronto, Ontario, Canada as Senior Vice President
and General Manager,  International Sales and General Manager, Aftermarket Sales
from 1996 to 1999 and Vice President, Financial Operations from 1994 to 1996. He
is a  non-executive  Director  of eAir LLC,  a  wholesaler  of Air  conditioning
products.

David B. Schumacher  joined the Company as President - Zone Heating  Division in
December   1999.   Prior  to  joining  the  Company,   he  held  positions  with
International Comfort Products  Corporation,  Toronto,  Ontario,  Canada as Vice
President and General Manager,  Commercial  Products Group from 1997 to 1999, as
Senior  Director,  Product  Marketing  from  1995 to 1997 and  Manager - Product
Marketing from 1993 to 1995.

                                       21
<PAGE>
James R. Wiese  joined  DESA as  President  -  Specialty  Products  Division  in
December 1999. Prior to joining the Company he held positions with International
Comfort Products Corporation,  Toronto, Ontario, Canada as Senior Vice President
and  General  Manager,  Residential  Products  Group 1996 to 1999,  Senior  Vice
President  Planning  and  Logistics  from 1995 to 1996,  Senior Vice  President,
Marketing from 1994 to 1995 and Vice President Sales from 1993 to 1994.

Item 11. Executive Compensation.

The following table sets forth compensation  earned for all services rendered to
the Company during fiscal 2001,  fiscal 2000 and fiscal 1999 as  applicable,  by
the Company's chief executive officer and the most highly compensated  executive
officers other than the Company's chief  executive  officer  (collectively,  the
"Named Executive Officers").
<TABLE>
<CAPTION>

                                              Summary Compensation Table

                                              Annual Compensation
                               -----------------------------------------------          Long-Term
                                                                                      Compensation
                                                                                         Awards
                                                                                      --------------
                                                                                                              All
                                                                                        Number of            Other
                                                                 Other Annual          Securities            Comp-
      Name and Principal        Fiscal    Salary    Bonus(1)     Compensation          Underlying           ensation
          Position at            Year       ($)        ($)           ($)                 Options              ($)
         March 3, 2001
---------------------------------------------------------------------------------------------------------------------
<S>                             <C>       <C>         <C>          <C>                  <C>                <C>
W. Michael Clevy                 2001      462,115         --        26,204               722,919            8,800
  President and Chief            2000      124,942     34,400            --                    --               --
  Executive Officer              1999           --         --            --                    --               --

Stephen L. Clanton               2001      218,077         --        38,073  (2)          200,000            8,399
  Senior Vice President and      2000       44,423     12,200            --                    --               --
  Chief Financial Officer        1999           --         --            --                    --               --

Augusto H. Millan                2001      208,292         --        11,509               175,000            8,000
  President-- International      2000       45,015     12,300            --                    --               --
  Division                       1999           --         --            --                    --               --

David B. Schumacher              2001      218,077         --        24,297  (3)          175,000            3,836
  President-- Zone Heating       2000       38,769     10,700            --                    --               --
  Division                       1999           --         --            --                    --               --

James R. Wiese                   2001      218,077         --        21,599               175,000            8,198
  President-- Specialty          2000       38,769     10,700            --                    --               --
  Products Division              1999           --         --            --                    --               --

</TABLE>
(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)  Includes $30,534 for vehicle allowance.


                                       22
<PAGE>

(3)  Includes $18,398 for company car.


The Company  granted the options set forth and described in the following  table
to the Named Executive Officers in fiscal 2001:
<TABLE>
<CAPTION>


                                     Option/SAR Grants in Last Fiscal Year
                                                                                        Potential Realizable
                                                                                          Value at Assumed
                                                                                        Annual Rates of Stock
                                                                                       Price Appreciation for
                            Number of        % of Total                                      Option Term
                           Securities       Options/SARs                              -----------------------
                           Underlying        Granted to     Exercise for
                           Option/SARs      Employees in     Base Price   Expiration
          Name             Granted (#)       Fiscal Year       ($/Sh)        Date       5% ($)       10% ($)
--------------------------------------------------------------------------------------------------------------
<S>                         <C>                <C>            <C>          <C>       <C>           <C>

W. Michael Clevy             721,249            44.5%          6.50         10/8/10   2,766,513     12,216,412
W. Michael Clevy               1,670              .1%          6.50         5/10/11       6,405         28,285
Stephen L. Clanton           200,000            12.3%          6.50         6/15/10     817,563      3,959,225
Augusto H. Millan            175,000            10.8%          6.50         6/15/10     715,368      3,464,322
David B. Schumacher          175,000            10.8%          6.50         6/15/10     715,368      3,464,322
James R. Wiese               175,000            10.8%          6.50         6/15/10     715,368      3,464,322

</TABLE>

The following  table sets forth the number of securities  underlying the options
held by the Named Executive Officers at the end of fiscal 2001:

<TABLE>
<CAPTION>


                 Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values

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

W. Michael Clevy                  --                --                288,500/434,419                 --
Stephen L. Clanton                --                --                 40,000/160,000                 --
Augusto H. Millan                 --                --                 35,000/140,000                 --
David B. Schumacher               --                --                 35,000/140,000                 --
James R. Wiese                    --                --                 35,000/140,000                 --

</TABLE>

                                       23
<PAGE>

Employment Arrangements with Executive Officers

Mr. Clevy is currently employed pursuant to an employment agreement that carries
a three-year term. Under this agreement,  Mr. Clevy receives an annual salary of
$445,000.  Pursuant to the employment agreement, the salary of Mr. Clevy will be
subject to annual  increases at the  discretion of the Board of Directors of the
Company.  Mr.  Clevy is  eligible  to  receive  an annual  bonus  based upon the
Company's  performance against the Company's annual management plan, as approved
by the Board of Directors.

Director Compensation

No director  received  any  compensation  for his services as director in fiscal
year 2001 except Mr. Incandela who received a director's fee of $10,000 per year
plus $1,000 per meeting  attended.  Mr.  Incandela  has been granted  options to
purchase  10,000  shares of the Company's  common stock at $6.49 per share.  The
options vest annually in equal installments in fiscal years 2000, 2001 and 2002.

Change of Control Arrangement

In the event of a change of control of the Company after which the employment of
Mr.  Clevy with the  Company is not  continued,  Mr.  Clevy will be  entitled to
change of control  benefits  unless the equity  investment  of Mr. Clevy in DESA
shall have tripled in value.  Such  benefits are  comprised of twelve  months of
salary or salary for the  remainder of his  employment  agreement,  whichever is
greater, fringe benefits and a pro-rated portion of any bonus for which he would
otherwise be eligible.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of the Board of Directors of the Company is comprised
of Messrs. Rudy, Childs, Ashton, and Clevy. Mr. Clevy is an executive officer of
the Company. Mr. Rudy is a Managing Director of JWCA, Mr. Childs is President of
JWCA, and Mr. Ashton is Chairman and CEO of Precision Partners, Inc.

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. Clevy, Clanton,  Schumacher, Wiese and Millan in fiscal
2001.

The  Compensation  Committee  determined  the  salary  levels  of the  Company's
executive officers,  including the Chief Executive Officer,  for fiscal 2001, as
well as the  amounts of bonuses  paid in fiscal 2001 for  performance  in fiscal
2000. 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 2001 in respect of 2000 and salary levels for fiscal 2001,  the  Compensation
Committee took into account

                                       24
<PAGE>

the past or  expected  future  contributions  of each  executive  officer to the
Company's strategic goals.

COMPENSATION COMMITTEE

RAYMOND B. RUDY, Chairman
W. MICHAEL CLEVY
JAMES E. ASHTON
JOHN W. CHILDS

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 the Company by each  person  known to the Company to be the
beneficial  owner of more than five  percent of the Common Stock of the Company,
each director of the Company, each Named Executive Officer 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.  Such  information  is  presented  as of May 14,  2001,  except as
otherwise indicated.

                                                         Shares
                                                      Beneficially
                     Name and Address                    Owned          Percent
--------------------------------------------------------------------------------

J.W. Childs Equity Partners, L.P.(1)                   10,381,854        63.4%
     One Federal Street
     Boston, Massachusetts
UBS Capital LLC(2)                                      3,043,751        18.6
     299 Park Avenue
     New York, New York
John W. Childs(1)(3)(4)                                10,801,578        66.0
     One Federal Street
     Boston, Massachusetts
Raymond B. Rudy(1)(3)(5)                               10,410,401        63.6
     One Federal Street
     Boston, Massachusetts
Adam L. Suttin(1)(3)(6)                                10,423,312        63.7
     One Federal Street
     Boston, Massachusetts
Michael Greene(2)(7)                                    3,043,751        18.6
     299 Park Avenue
     New York, New York
Joseph Incandela(8)                                         6,666         *
W. Michael Clevy(9)                                       519,270         3.2
James E. Ashton                                            38,462         *
Terry G. Scariot                                                0         *
Stephen L. Clanton(10)                                    101,539         *
David B. Schumacher(11)                                    42,692         *
James R. Wiese(12)                                         96,539         *
Augusto H. Millan(13)                                      50,385         *
All Directors and executive officers as a group (11
 persons)(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)   14,770,887       90.2%

 *  Less than 1.0%

                                       25
<PAGE>

(1)  Includes  148,572 shares deemed  beneficially  owned by Childs  pursuant to
     warrants.
(2)  Includes  43,504  shares  deemed  beneficially  owned  by UBS  Capital  LLC
     pursuant to warrants.
(3)  Includes  all  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. Also includes 11,885 shares held in the Suttin Family Trust.
(7)  All shares shown are beneficially  owned by UBS Capital LLC. Mr. Greene may
     also be deemed to be a beneficial owner.
(8)  Includes 6,660 shares that Mr.  Incandela has the right to acquire pursuant
     to currently exercisable options.
(9)  Includes [ ] shares  that Mr.  Clevy has the right to acquire  pursuant  to
     currently exercisable options.

Item 13. Certain Relationships and Related Transactions

The Company pays JWCA 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 expiring in November 2002 and  automatically  renewable for
successive  extension  terms of one year,  unless JWCA or the Company shall give
notice of termination.

The  Company  pays UBS  Capital  LLC an  annual  management  fee of  $51,000  in
consideration of UBS Capital LLC'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  expiring  in November  2002 and
automatically  renewable for successive  extension terms of one year, unless UBS
Capital LLC or the Company shall give notice of termination.

Part IV

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

(a)(1)   Financial Statements

                        DESA HOLDINGS CORPORATION

Report of Independent Auditors                                           F-1

Consolidated Balance Sheets at March 3, 2001 and February 26, 2000       F-2

                                       26
<PAGE>

                        DESA HOLDINGS CORPORATION

Consolidated  Statements of Income for the fiscal years ended
March 3, 2001, February 26, 2000 and February 27,1999                    F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended March 3, 2001, February 26, 2000 and February
27, 1999                                                                 F-5

Consolidated Statements of Cash Flows for the fiscal years ended
March 3, 2001, February 26, 2000 and February 27, 1999                   F-6

Notes to Consolidated Financial Statements for the fiscal years
ended March 3, 2001, February 26, 2000 and February 27, 1999             F-8

(a)(2)   Financial Statement Schedules

         SCHEDULE II - Valuation and Qualifying Accounts

         All other  schedules  for  which  provision  is made in the  applicable
         accounting regulation of the Securities and Exchange Commission are not
         required  under  the  related  instructions  or  are  inapplicable  and
         therefore have been omitted.

<TABLE>
<CAPTION>

(a) (3)  Exhibits

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., the Company and each Stockholder of the Company 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 Manufacturers, Inc et al.
3.1          Articles of Incorporation of DESA International, Inc.                                     *
3.1A         Articles of Incorporation of the Company                                                  *
3.2          By-laws of 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.
</TABLE>

                                       27
<PAGE>
<TABLE>
<CAPTION>

Exhibit No.                          Description of Document
<S>         <C>                                                                                       <C>
10.2         Management Incentive Plans of the Company, dated March 1, 1997                            *
10.3         Sales Compensation and Incentive Plan of the Company for fiscal year 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                                    *
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                                                                           ****
10.37        Amendment and Waiver No. 4 to the Loan Documents dated as of May 25, 1999                 *****
             by and among the Company, DESA International, Inc., NationsBank, N.A., UBS
             Securities LLC, Banc of America Securities LLC et al.
</TABLE>


                                       28
<PAGE>
<TABLE>
<CAPTION>

Exhibit No.                          Description of Document
<S>         <C>                                                                                       <C>
10.38        Employment agreement, dated as of November 10, 1999 between the Company and               ******
             W. Michael Clevy
10.39        Amendment and Waiver No. 5 to the Loan Documents  dated as of April                       #
             7, 2000 to the Credit Agreement  dated as of November 26, 1997 by
             and among the Company, DESA International, Inc., the Lender Parties
             party thereto,  UBS Securities LLC, Banc of America  Securities LLC
             (formerly  NationsBanc  Montgomery  Securities  LLC)  and  Bank  of
             America, N.A. (formerly NationsBank, N.A.).
10.40        Amendment No. 1 to the Credit Agreement dated as of July 28, 2000 to the                  #
             Credit Agreement dated as of May 26, 1999 between DESA International,
             Inc. and Bank of America, N.A. (formerly NationsBank, N.A.).
10.41        Amendment and Waiver No. 6 to the Loan Documents dated as of January 16, 2001             ##
             to the Credit Agreement dated as of November 26, 1997 by and among the Company,
             DESA International, Inc., the Lender Parties party thereto, UBS Security LLC,
             Banc of America LLC (formerly NationsBanc Montgomery Securities LLC) and Bank
             of America, Securities N.A.(formerly NationsBank N.A.).
10.42        Amendment No. 2 to the Credit Agreement dated as of January 16, 2001 to the               ##
             Credit Agreement dated as of May 26, 1999 between DESA International, Inc. and
             Bank of America N.A. (formerly NationsBank, N.A.).
10.43        Amendment and Waiver No. 7 to the Loan Documents dated as of May 23, 2001 to              Filed
             the Credit Agreement dated as of November 26, 1997 by and among the Company,              herewith
             DESA International, Inc., the  Lender Parties party thereto, UBS Security LLC,
             Banc of America LLC (formerly NationsBanc Montgomery Securities LLC) and Bank
             of America, Securities N.A. (formerly NationsBank N.A.).
10.44        Amendment No. 3 to the Credit Agreement dated as of May 23, 2001 to the Credit            Filed
             Agreement dated as of May 26, 1999 between DESA International, Inc. and Bank of           herewith
             America N.A. (formerly NationsBank, N.A.).
18           Independent auditors' letter relating to change in accounting principle,                  Filed
             dated April 13, 2001.                                                                     herewith

</TABLE>


*        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
*****    Incorporated  by reference to the Company's  Annual Report on Form 10-K
         for the period ended February 27, 1999
******   Incorporated  by reference to the  Company's  Quarterly  Report on Form
         10-Q for the period ended November 27, 1999
#        Incorporated  by reference to the  Company's  Quarterly  Report on Form
         10-Q for the period ended September 2, 2000
##       Incorporated  by reference to the  Company's  Quarterly  Report on Form
         10-Q for the period ended December 2, 2000


                                       29
<PAGE>


(b)      Reports on Form 8-K

         The Company filed no reports on Form 8-K during fourth quarter, 2001.

      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 tosecurity holders.


                                       30
<PAGE>
                        Consolidated Financial Statements

                            DESA Holdings Corporation

                        Fiscal years ended March 3, 2001,
                    February 26, 2000, and February 27, 1999
                       with Report of Independent Auditors











<PAGE>



                            DESA Holdings Corporation

                        Consolidated Financial Statements


                        Fiscal years ended March 3, 2001,
                    February 26, 2000, and February 27, 1999




                                    Contents

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

Consolidated Balance Sheets.............................................  F-2
Consolidated Statements of Income.......................................  F-4
Consolidated Statements of Stockholders' Equity (Deficit)...............  F-5
Consolidated Statements of Cash Flows...................................  F-6
Notes to Consolidated Financial Statements..............................  F-8



<PAGE>




                         Report of Independent Auditors

Board of Directors and Stockholders
DESA Holdings Corporation

We have audited the  accompanying  consolidated  balance sheets of DESA Holdings
Corporation  as of  March  3,  2001  and  February  26,  2000,  and the  related
consolidated  statements of income,  stockholders'  equity  (deficit),  and cash
flows for each of the three fiscal years in the period ended March 3, 2001.  Our
audits also included the  financial  statement  schedule  listed in the Index at
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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  consolidated  financial  position of DESA Holdings
Corporation at March 3, 2001 and February 26, 2000, and the consolidated results
of its  operations  and its cash flows for each of the three fiscal years in the
period ended March 3, 2001, in conformity with accounting  principles  generally
accepted in the United  States.  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.

As discussed in Note 1 to the consolidated financial statements,  in fiscal 2001
the Company changed its method of accounting for inventories.

                                                  /s/ Ernst & Young LLP
Nashville, Tennessee
April 13, 2001, except for Note 15, as to
which the date is May 30, 2001


                                      F-1
<PAGE>
<TABLE>
<CAPTION>

                               DESA Holdings Corporation

                              Consolidated Balance Sheets

                                                            March 3,  February 26,
                                                              2001        2000
                                                          ------------------------
                                                            (In Thousands, Except
                                                               Number of Shares)
<S>                                                       <C>          <C>

Assets
Current assets:
   Cash and cash equivalents                               $   2,388    $     173
   Accounts receivable, net                                   41,894       32,921
   Inventories:
     Raw materials                                               486          209
     Work-in-process                                          10,938        9,756
     Finished goods                                           37,869       47,443
                                                          ------------------------
                                                              49,293       57,408
   Deferred tax assets                                         3,274        2,854
   Other current assets                                        6,376        2,003
                                                          ------------------------
Total current assets                                         103,225       95,359

Property, plant and equipment:
   Land                                                          525          525
   Buildings and improvements                                  6,561        6,294
   Machinery and equipment                                    43,336       39,361
   Furniture and fixtures                                      1,273        1,090
                                                          ------------------------
                                                              51,695       47,270
   Less accumulated depreciation                             (35,084)     (30,574)
                                                          ------------------------
                                                              16,611       16,696

Goodwill, net                                                 95,312       93,818

Other assets, net                                             18,748       22,266




                                                          ------------------------
Total assets                                               $ 233,896    $ 228,139
                                                          ========================
</TABLE>

                                         F-2
<PAGE>
<TABLE>
<CAPTION>


                                                            March 3,  February 26,
                                                              2001        2000
                                                          ------------------------
                                                            (In Thousands, Except
                                                               Number of Shares)
<S>                                                       <C>          <C>

Liabilities and stockholders' equity (deficit)
Current liabilities:
   Accounts payable                                        $  28,701    $  37,040
   Accrued interest                                            3,195        5,233
   Other accrued liabilities                                  13,824       13,225
   Current portion of long-term debt                          50,874       23,500
                                                          ------------------------
Total current liabilities                                     96,594       78,998

Long-term debt                                               249,163      265,846
Deferred tax liabilities                                         903          789
Other liabilities                                             14,236       14,840
                                                          ------------------------
Total liabilities                                            360,896      360,473

Commitments and contingencies

Series C redeemable preferred stock, $.01 par value;
   authorized--40,000 shares at March 3, 2001 and
   February 26, 2000; issued and outstanding--25,245
   shares at March 3, 2001 and 22,461 shares at February
   26, 2000 (liquidation preference--$25,759 at
   March 3, 2001 and $22,882 at February 26, 2000)            23,057       19,937

Stockholders' equity (deficit):
   Common stock, $.01 par value;  authorized--
     50,000,000 shares at March 3, 2001 and February 26,
     2000; issued and outstanding--16,373,148 shares at
     March 3, 2001 and 15,562,656 shares at February 26,
     2000                                                        164          155

   Nonvoting common stock, $.01 par value; authorized--
     3,000,000 shares at March 3, 2001 and February 26,
     2000; issued and outstanding--90,604 shares at
     March 3, 2001 and February 26, 2000                           1
   Capital in excess of par value                            103,334       98,075
   Accumulated deficit                                      (250,906)    (248,465)
   Accumulated other comprehensive loss                       (2,650)      (2,037)
                                                          ------------------------
Total stockholders' equity (deficit)                        (150,057)    (152,271)
                                                          ------------------------
Total liabilities and stockholders' equity (deficit)       $ 233,896    $ 228,139
                                                          ========================
</TABLE>

See accompanying notes

                                         F-3
<PAGE>
<TABLE>
<CAPTION>




                                                 DESA Holdings Corporation

                                             Consolidated Statements of Income


                                                                        Fiscal year ended
                                                          March 3,         February 26,     February 27,
                                                            2001              2000              1999
                                                         -----------------------------------------------
                                                                         (In Thousands)

<S>                                                       <C>              <C>             <C>
Net sales                                                 $ 403,092        $ 393,924       $ 317,237
Cost of sales                                               267,651          264,293         214,369
                                                         -----------------------------------------------
Gross profit                                                135,441          129,631         102,868

Operating costs and expenses:
   Selling                                                   77,238           69,821          54,084
   General and administrative                                18,102           15,890          13,597
   Other                                                      6,320            6,088           5,362
                                                         -----------------------------------------------
                                                            101,660           91,799          73,043
                                                         -----------------------------------------------
Operating profit                                             33,781           37,832          29,825

Interest expense                                             32,598           28,853          27,864
                                                         -----------------------------------------------
Income before provision for income taxes                      1,183            8,979           1,961

Provision for income taxes                                      488            4,909             947
                                                         -----------------------------------------------
Net income                                                      695            4,070           1,014

Less dividends and accretion on preferred stock               3,136            2,769           2,480
                                                         -----------------------------------------------
Income (loss) available to common stockholders            $  (2,441)       $   1,301       $  (1,466)
                                                         ===============================================

</TABLE>


See accompanying notes.

                                       F-4


<PAGE>
<TABLE>
<CAPTION>

                                                      DESA Holdings Corporation

                                      Consolidated Statements of Stockholders' Equity (Deficit)

                                                                                           Accumulated
                                                    Nonvoting  Capital in                     Other           Total
                                             Common   Common   Excess of    Accumulated   Comprehensive   Stockholders'
                                             Stock    Stock    Par Value      Deficit         Loss       Equity (Deficit)
                                          -------------------------------------------------------------------------------
                                                                            (In Thousands)
                                          -------------------------------------------------------------------------------
<S>                                      <C>        <C>       <C>           <C>            <C>             <C>

Balance at February 28, 1998              $    137   $     1   $  85,926     $ (248,299)    $    (564)      $   (162,799)
Comprehensive income:
 Net income                                     --        --          --          1,014            --              1,014
 Foreign currency translation adjustment        --        --          --             --          (463)              (463)
                                                                                                            -------------
Comprehensive income                            --        --          --             --            --                551
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       (249,765)       (1,027)          (152,652)
                                          -------------------------------------------------------------------------------

Comprehensive income:
Net income                                      --        --          --          4,070            --              4,070
Foreign currency translation adjustment         --        --          --             --        (1,010)            (1,010)
                                                                                                            -------------
Comprehensive income                            --        --          --             --            --              3,060
Accretion of preferred stock                    --        --          --           (259)           --               (259)
Dividends on preferred stock                    --        --          --         (2,511)           --             (2,511)
Issuance of common stock                        --        --          91             --            --                 91
                                          -------------------------------------------------------------------------------
Balance at February 26, 2000                   155         1      98,075       (248,465)       (2,037)          (152,271)
                                          -------------------------------------------------------------------------------

Comprehensive income:
 Net income                                     --        --          --            695            --                695
 Foreign currency translation adjustment        --        --          --             --          (613)              (613)
                                                                                                            -------------
Comprehensive income                            --        --          --             --            --                 82
Accretion of preferred stock                    --        --          --           (258)           --               (258)
Dividends on preferred stock                    --        --          --         (2,878)           --             (2,878)
Issuance of common stock                         9        --       5,259             --            --              5,268
                                          -------------------------------------------------------------------------------
Balance at March 3, 2001                  $    164   $     1   $ 103,334     $ (250,906)    $  (2,650)      $   (150,057)
                                          ===============================================================================
</TABLE>


See accompanying notes.


                                      F-5
<PAGE>
<TABLE>
<CAPTION>

                                      DESA Holdings Corporation

                                Consolidated Statements of Cash Flows


                                                                    Fiscal year ended
                                                         March 3,      February 26,   February 27,
                                                          2001             2000            1999
                                                        ------------------------------------------
                                                                         (In Thousands)
<S>                                                      <C>            <C>            <C>

Operating activities
Net income                                                $    695       $  4,070       $  1,014
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation                                            4,528          4,425          3,589
     Amortization                                            6,600          6,050          4,998
     Deferred income taxes                                    (307)         1,155             51
     Equity in undistributed earnings of joint venture        (217)          (233)          (170)
     Change in operating assets and liabilities, net of
       acquisitions:
         Accounts receivable, net                           (3,699)        (2,531)        (7,888)
         Inventories                                        13,826        (13,353)          (671)
         Other current assets                               (5,378)          (683)           212
         Accounts payable                                  (10,591)        11,808          8,592
         Accrued interest                                   (2,002)         2,318         (2,512)
         Other accrued liabilities                          (2,605)         1,443         (5,025)
         Income taxes payable                                  954             --            (49)
         Other liabilities                                    (490)           121            166
                                                          ------------------------------------------
Net cash provided by operating activities                    1,314         14,590          2,307
                                                          ------------------------------------------

Investing activities
Capital expenditures                                        (3,771)        (5,529)        (4,462)
Dividends received from joint venture                          230            185            170
Cash paid for acquisitions, net of cash acquired           (11,466)            --        (40,957)
Other                                                           16            (90)            26
                                                          ------------------------------------------
Net cash used in investing activities                      (14,991)        (5,434)       (45,223)
                                                          ------------------------------------------
</TABLE>

                                                 F-6

<PAGE>
<TABLE>
<CAPTION>

                                      DESA Holdings Corporation

                          Consolidated Statements of Cash Flows (continued)


                                                                    Fiscal year ended
                                                         March 3,      February 26,   February 27,
                                                          2001             2000            1999
                                                        ------------------------------------------
                                                                       (In Thousands)
<S>                                                      <C>            <C>            <C>

Financing activities
Principal payments Term Loans                             $(12,915)     $ (8,375)       $ (5,250)
Proceeds from Term Loans                                     6,000            --              --
Proceeds from Acquisition Loans                                 --            --          30,000
Principal payments Acquisition Loans                       (12,500)       (3,125)             --
Decrease in note payable                                    (1,878)         (456)             --
Net proceeds from working capital loan                      18,498         2,697           7,202
Proceeds from Guaranteed Line of Credit                     13,450            --              --
Proceeds from issuance of common stock                       5,268            91          12,076
Payment of debt financing costs                                (23)         (703)         (1,016)
                                                          -----------------------------------------
Net cash provided by (used in) financing activities         15,900        (9,871)         43,012

Effect of exchange rate changes on cash                         (8)           --              (2)
                                                          -----------------------------------------
Increase (decrease) in cash and cash equivalents
   for the year                                              2,215          (715)             94
Cash and cash equivalents at beginning of year                 173           888             794
                                                          -----------------------------------------
Cash and cash equivalents at end of year                  $  2,388      $    173        $    888
                                                          =========================================

</TABLE>


See accompanying notes.

                                       F-7
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements


1.       Summary of Significant Accounting Policies


Company Operations


DESA Holdings Corporation with it's consolidated subsidiaries (the "Company") 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  31%  and  16%  of  net  sales,
respectively  in fiscal year 2001,  25% and 13% of net sales,  respectively,  in
fiscal  year 2000,  and 29% and 11% of net sales,  respectively,  in fiscal year
1999. The receivable balances from these two customers collectively  represented
39% of the Company's accounts receivable at March 3, 2001 and February 26, 2000.


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


Fiscal Year

The  Company's  fiscal year ends on the  Saturday  closest to  February  28. The
fiscal years for the consolidated  financial statements included herein ended on
March 3, 2001 (53 weeks),  February  26, 2000 (52 weeks),  and February 27, 1999
(52 weeks).



                                      F-8

<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements


1.       Summary of Significant Accounting Policies (continued)


Consolidation

The accompanying  consolidated  financial statements include the accounts of the
Company and its wholly-owned subsidiary,  DESA International,  Inc. ("DESA") and
all of DESA's  wholly-owned  subsidiaries,  including DESA Industries of Canada,
Inc.,  DESA Europe B.V., DESA  Industries of V.I.,  Inc.,  Heath Company Limited
("Heath"),  and Desico, S.A. De C.V. 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

The Company  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 on the first-in, first out
("FIFO") method.

During the fourth  quarter of fiscal  2001,  the  Company  changed its method of
accounting for  inventories  from the last in, first out ("LIFO")  method to the
FIFO method. As a result of this change, the accompanying consolidated financial
statements  have been  retroactively  restated  in  accordance  with  Accounting
Principles Board Opinion No. 20, "Accounting Changes". The impact on accumulated
deficit as of the beginning of fiscal 1999 (the earliest year  presented) of the
retroactive  restatement was to increase the deficit by $392,000.  The effect of
this change on net income  previously  reported for prior years is summarized as
follows:


                                                    2000         1999
                                                 ----------------------

Net Income on the LIFO method                     $ 4,994     $ 1,336
Adjustment for effect of a change in
   accounting principle that is applied
   retroactively                                     (924)       (322)
                                                 ----------------------

Net income as adjusted                            $ 4,070     $ 1,014
                                                 ======================

                                      F-9
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements


1.       Summary of Significant Accounting Policies (continued)

The new method of  accounting  for  inventories  was adopted to more  accurately
measure operating  results,  to more accurately  present  financial  position by
reflecting  more  recent  costs at the  balance sheet  date,  and to  match  the
accounting with the way in which the Company physically manages its inventories.

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 operations.

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

Revenue Recognition

The Company records sales upon shipment of products to its customers.

Shipping and Handling Costs

The  Company  records all  amounts  billed to a customer  in a sale  transaction
related to  shipping  and  handling  as revenue  earned for the goods  provided.
Shipping and handling costs are included in selling expenses in the accompanying
consolidated  statements of income.  Shipping and handling costs in fiscal 2001,
fiscal 2000 and fiscal 1999 were 2.9%, 2.8% and 2.9% of net sales, respectively.

Warranty Costs

The Company  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.



                                      F-10
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



1.       Summary of Significant Accounting Policies (continued)


Income Taxes

The Company  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 included in other non-current assets and are amortized using
the interest  method over the life of the related debt  instrument.  At year-end
2001 and 2000,  deferred financing costs totaled $12,871,000 and $12,847,000 and
accumulated amortization totaled $5,197,000 and $3,537,000.

Goodwill

Goodwill  is  amortized  on the  straight-line  basis over 15 to 40 years and is
recorded  at  cost  less  accumulated  amortization.  The  Company  reviews  the
recoverability  of its goodwill if the facts and  circumstances  suggest that it
may be impaired.  The review is performed by comparing the unamortized  carrying
value to anticipated  undiscounted  future cash flows of the related assets. Any
impairment is charged to expense when such  determination  is made.  Accumulated
amortization  at March 3,  2001  and  February  26,  2000  was  $11,899,000  and
$9,090,000,  respectively, and amortization expense for fiscal years 2001, 2000,
and 1999 was $2,809,000, $2,281,000, and $1,981,000, respectively.

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

                                      F-11


<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



1.       Summary of Significant Accounting Policies (continued)

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,  the
Hong Kong  dollar for its Hong Kong  subsidiary,  and the  Mexican  peso for its
Mexican subsidiary.

Derivative Financial Instruments

The Company  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.

Advertising Costs

Advertising  costs  are  expensed  as  incurred.   Advertising  expense  totaled
approximately $4,843,000,  $3,345,000, and $2,785,000 for the fiscal years ended
March 3, 2001, February 26, 2000, and February 27, 1999, respectively.

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, as amended,  must first be applied
in the first  quarter  of fiscal  years that begin  after  June 15,  2000.  Upon
adoption on March 4, 2001, the Company began  recognizing all derivatives on the
consolidated balance sheets at fair value.  Derivatives that are not hedges will
be adjusted to fair value through income. If the derivative is a hedge,  changes
in the fair value of derivatives  will generally offset the change in fair value
of the hedged assets, liabilities or firm commitments and be recognized in other
comprehensive  income until the hedged item is  recognized  in  operations.  The
ineffective  portion of a derivative's  change in fair value will immediately be
recognized in operations.  The adoption of FAS 133 on March 4, 2001 did not have
a significant effect on the earnings and financial position of the Company.

                                      F-12
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



1.       Summary of Significant Accounting Policies (continued)

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States  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.

Reclassifications

Certain  reclassifications  have been made to prior year financial statements to
conform to the fiscal 2001 presentation.  These  reclassifications had no effect
on net income (loss) available to common stockholders as previously reported.


2.       Acquisitions

On April 3, 2000, DESA acquired the assets of Trine Products  Company  ("Trine")
located in Bronx, New York for an aggregate  purchase price of approximately $11
million. The acquisition was financed through the sale by the Company of 769,231
shares of common stock to certain of the Company's  investors and  borrowings of
$6,000,000  under the  Credit  Facility  as amended  (Term Loan C). The  Company
accounted for such  acquisition  using the purchase method and has allocated the
purchase price to the net assets  acquired  based on estimated fair values.  Pro
forma results of operations as if the  acquisition had occurred on the first day
of fiscal 2001 and fiscal 2000,  respectively,  would not differ materially from
reported results.  The results of operations for Trine have been included in the
consolidated statements of income from the acquisition date forward.


3.       Accounts Receivable

Accounts  receivable  are net of an allowance for doubtful  accounts of $919,000
and $907,000 at March 3, 2001 and February 26, 2000, respectively.



                                      F-13
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements


4.  Financing Arrangements


Outstanding borrowings consist of the following (in thousands):

                                                         March 3,   February 26,
                                                           2001         2000
                                                         -----------------------

9 7/8% Senior Subordinated Notes due 2007 (A)             $130,000     $130,000
Credit Facility:
  Bank of America and various banks Term A Loan (B)         27,500       37,500
  Bank of America and various banks Term B Loan (C)         45,435       47,750
  Bank of America and various banks Term C Loan (D)          5,400           --
  Bank of America and various banks
    Working Capital Loan Commitment (E)                     43,877       25,379
  Bank of America and various banks Acquisition Loan  (F)   13,750       18,750
  Bank of America and various banks Acquisition B Loan (G)  20,625       28,125
Guaranteed Line of Credit (H)                               13,450           --
Note payable                                                    --        1,842
                                                          ---------------------
Total outstanding borrowings                               300,037      289,346
Less current portion of long-term debt                      50,874       23,500
                                                          ---------------------
Total long-term debt                                      $249,163     $265,846
                                                          =====================


DESA  has  issued  $130  million  of  Senior  Subordinated  Notes  to  qualified
institutional  investors,  as defined in Rule 144A under the  Securities  Act of
1933.  Also, the Company has a Credit  Facility with Bank of America and various
banks consisting of Term Loans, a Working Capital Loan, and Acquisition Loans.

A.   The Senior  Subordinated  Notes are payable on December 15, 2007 and accrue
     interest at a rate of 9.875% per annum.  Interest is payable  semi-annually
     on June 15 and December 15. The Senior Subordinated Notes are unsecured and
     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 DESA
     Holdings Corporation ("Holdings").


                                      F-14

<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements


4.       Financing Arrangements (continued)


B.   The Term A Loan is payable in quarterly  installments  through November 26,
     2003 and accrues interest at the prime rate plus 2.0% or LIBOR plus 3.0% at
     the option of DESA.  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 9.58% and  8.03% in 2001 and  2000,  respectively.  Once
     repaid, the Term A Loan may not be reborrowed.

C.   The Term B Loan is payable in quarterly  installments  through November 26,
     2004, and accrues interest at the prime rate plus 2.25% or LIBOR plus 3.25%
     at the option of DESA.  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 9.82% and  8.52% in 2001 and  2000,  respectively.  Once
     repaid, the Term B Loan may not be reborrowed.

D.   The Term C Loan is payable in quarterly installments which commenced in May
     2000 and extend  through  November  26, 2003,  and accrues  interest at the
     prime rate plus  2.25% or LIBOR plus 3.25% at the option of DESA.  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 9.65% in
     fiscal 2001. Once repaid, the Term C Loan may not be reborrowed.

E.   The Working Capital Loan Commitment is payable at any time at the option of
     DESA prior to November 26, 2003 and accrues interest at the prime rate plus
     2.0% or LIBOR  plus  3.0%,  at the  option of DESA.  The  weighted  average
     interest rate was 9.50% and 8.60% in 2001 and 2000, respectively.  Interest
     is payable on a  quarterly  basis under the prime rate option or at the end
     of each LIBOR period.  DESA can utilize letters of credit under the Working
     Capital Loan Commitment up to $10 million. As of March 3, 2001 and February
     26, 2000,  letters of credit of $1,836,000  and  $1,497,000,  respectively,
     were outstanding under the Working Capital Loan Commitment.  Borrowings are
     generally limited to specific percentages of eligible trade receivables and
     inventory.  DESA pays  commitment  fees of 1/2 of 1% per annum on the daily
     unutilized Working Capital Loan Commitment.


                                      F-15
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



4.       Financing Arrangements (continued)

F.   The Acquisition Loan is payable in quarterly installments that commenced in
     February 2000 and extend  through  November 26, 2003 and accrues  interest,
     which is  payable  quarterly,  at the prime  rate plus  2.25% or LIBOR plus
     3.25% at the option of DESA. The weighted  average  interest rate was 9.77%
     and 8.22% in 2001 and 2000, respectively. Once repaid, the Acquisition Loan
     may not be reborrowed.

G.   The Acquisition B Loan is payable in quarterly  installments that commenced
     in February 2000 and extend through November 26, 2003 and accrues interest,
     which is  payable  quarterly,  at the prime  rate plus  2.25% or LIBOR plus
     3.25%, at the option of DESA. The weighted  average interest rate was 9.85%
     and 8.05% in 2001 and 2000,  respectively.  Once repaid,  the Acquisition B
     Loan may not be reborrowed.

H.   The Guaranteed Line of Credit loan, as extended,  is payable at any time at
     the option of DESA prior to November 23, 2003, and accrues  interest at the
     prime rate plus .25% or LIBOR plus 1.75%,  at the option of DESA.  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 8.30% in
     fiscal 2001. The line is unsecured and is  unconditionally  guaranteed by a
     shareholder of the Company.

In accordance with the terms of the Credit Facility,  the ability of the Company
to incur additional  indebtedness is limited,  as defined. At March 3, 2001, the
Company can incur additional indebtedness of $18.8 million.

The Credit Facility and Senior  Subordinated Notes 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,  limit  the  ability  to incur  additional  indebtedness,  require
minimum  consolidated EBITDA (as defined) levels, and set consolidated  interest
coverage,  fixed  charge  coverage and leverage  ratios.  At March 3, 2001,  the
Company  failed to comply with the  interest  coverage  ratio,  the fixed charge
ratio and the total leverage ratio  covenants  required by the Credit  Facility.
See  Note  15,   "Subsequent   Events".   Substantially  all  of  the  Company's
consolidated assets are pledged under the Credit Facility.


                                      F-16
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements


4.       Financing Arrangements (continued)


The Credit Facility  requires a Clean-Up Period,  as defined,  under the Working
Capital Loan Commitments for a period of 30 consecutive  days occurring  between
January 1 and May 30 in each calendar year. During the Clean-Up Period,  the sum
of Working Capital  advances,  Letter of Credit advances and other loan advances
outstanding shall not exceed $30,000,000.  The Company has already complied with
the  requirements of the Clean-Up Period  occurring  between January 1, 2001 and
May 30, 2001.

The required  annual payments under the Term A and Term B Loans are increased by
50% of any excess  cash  flows at the end of the fiscal  year,  as  defined.  An
excess  cash flow  payment of  $910,000  was  required  in fiscal 2000 which was
applied  against  the next  scheduled  principal  payments.  No excess cash flow
payments were required in fiscal 2001.

Holdings has fully and  unconditionally  guaranteed the Credit  Facility and the
Senior  Subordinated  Notes.

Cash  payments for  interest for the fiscal years ended March 3, 2001,  February
26, 2000, and February 27, 1999 were $34,166,000,  $26,564,000, and $30,514,000,
respectively.

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


                Fiscal years ending:
                   2002                       $   50,874
                   2003                           37,738
                   2004                           55,349
                   2005                           26,076
                   2006                               --
                   Thereafter                    130,000
                                              -----------
                                               $ 300,037
                                              ===========


                                      F-17
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements

5.       Financial Instruments

The Company's 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.

The following table summarizes the carrying amounts and estimated fair values of
the Company's remaining financial  instruments at March 3, 2001 and February 26,
2000 (in thousands):


                                   March 3, 2001           February 26, 2000
                             ---------------------------------------------------
                             Carrying       Fair        Carrying         Fair
                              Amount        Value        Amount          Value
                             ---------------------------------------------------

Bank debt                    $156,587     $156,587       $157,504     $157,504
Senior subordinated notes     130,000       74,100        130,000       96,850
Guaranteed Line of Credit      13,450       13,450             --           --
Note payable                       --           --          1,842        1,842
Foreign exchange contracts-
  unrealized loss                  --           23             --          473



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

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

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

Guaranteed Line of Credit:  The carrying amount of the Guaranteed Line of Credit
approximates fair value because the effective rate of interest  approximates the
rate at which Holdings could borrow money under similar terms.


                                      F-18

<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



5.       Financial Instruments (continued)


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

Foreign exchange  contracts:  The fair value of the foreign  exchange  contracts
reflect  the  estimated  amount  that  would  be  paid if  such  contracts  were
terminated based on quoted market prices.

Derivative Financial Instruments

In fiscal 1999, the Company entered into interest rate swap agreements with Bank
of America to manage its exposure to interest  rate  fluctuations.  The interest
rate swap agreements  effectively converted interest rate exposure from variable
to fixed rates of interest.  The interest rate swap agreements  provided for the
payment by the Company of fixed rates of  interest  based on three month  LIBOR.
Notional  principal amounts of these agreements  totaled $125 million,  of which
$75  million  terminated  in November  1999 and $50 million was  canceled at the
option of Bank of America in February 2000. There was no payment or receipt upon
the  cancellation  of the  swap  contract.  There  are  no  interest  rate  swap
agreements outstanding at March 3, 2001.

Foreign Exchange Contracts

At March 3, 2001, the Company had forward exchange  foreign currency  contracts,
with maturities ranging from May 2001 to October 2001, to purchase approximately
$4.0  million  in foreign  currencies  to cover  future  payments  to  component
suppliers.

                                      F-19


<PAGE>

                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements


6.       Series C Redeemable Preferred Stock

The Company 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  and is being accreted to its face
value over its term. The accretion is shown as a reduction to retained  earnings
(deficit) on the consolidated statements of stockholders' equity (deficit).

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 the
Company's 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 fiscal
2001,  2000  and 1999,  the Company  issued 2,784,  2,471,  and 2,390 shares of
Preferred  Stock,  all as  dividends-in-kind.  At March 3, 2001 and February 26,
2000,  accrued  dividends  (included  in  other  accrued  liabilities)  on  such
Preferred  Stock  were  $515,000  or $20.39  per share and  $421,000  or $18.74,
respectively.

7.       Income Taxes


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

                                                       March 3,     February 26,
                                                         2001           2000
                                                      --------------------------
  Deferred tax liabilities:
     Depreciation and amortization                      $ 1,040       $ 1,167
     Inventory reserves                                    (493)          (87)
                                                      --------------------------
   Total gross deferred tax liabilities                     547         1,080

                                      F-20
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



7.  Income Taxes (continued)





  Deferred tax assets:
     Allowance for doubtful accounts                        172           362
     Accrued expenses                                     2,245         2,292
     Net operating loss carryforwards                       230           913
     Other--net                                             501           199
                                                      --------------------------
   Total gross deferred tax assets                        3,148         3,766
  Valuation allowance                                      (230)         (621)
                                                      --------------------------
  Net deferred tax (assets)                             $(2,371)      $(2,065)
                                                      ==========================

Shown in consolidated balance sheets as:

 Current deferred tax (assets)                          $(3,274)      $(2,854)
 Noncurrent deferred tax liability                          903           789
                                                      --------------------------
 Net deferred tax (assets)                              $(2,371)      $(2,065)
                                                      ==========================

The Company has state net  operating  loss  carryforwards  of $13 million  which
expire in 2001 and 2002. The Federal minimum tax credit carryforward acquired in
the  acquisition  of Heath is 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 $230,000, will be utilized as charges against reversals of future taxable
temporary  differences and future taxable income.  Accordingly,  the Company has
recorded  a $230,000  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 credited against
the goodwill from the Heath acquisition.

                                      F-21
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



7.  Income Taxes (continued)


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


                                                   Fiscal Year
                                       2001           2000              1999
                                    ------------------------------------------
       Current:
         Federal                     $   983        $ 2,367         $    438
         State and local                 169            936               --
         Foreign                        (357)           451              458
                                    ------------------------------------------
                                         795          3,754              896
       Deferred:
         Federal                        (391)         1,188               25
         State and local                  84            (33)              26
                                    ------------------------------------------
                                        (307)         1,155               51
                                    ------------------------------------------
                                     $   488        $ 4,909         $    947
                                    ==========================================


Included  in  earnings  before  income tax  expense for the years ended March 3,
2001,  February  26,  2000,  and  February  27,  1999 are  foreign  earnings  of
$2,374,000, $706,000, and $2,739,000, respectively.

Undistributed  earnings  of  the  Company's  foreign  subsidiaries  included  in
accumulated deficit amounted to approximately $9,471,000 and $7,207,000 at March
3, 2001 and February 26, 2000,  respectively.  Approximately $9,079,000 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,  the
Company 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 $3,123,000 would be due.


                                      F-22

<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



7.  Income Taxes (continued)

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

                                                           Fiscal Year
                                                   2001        2000       1999
                                               ---------------------------------

Federal income tax at statutory rate             $   414     $ 3,142    $   686
State income tax, net of federal benefit              92         579          6
Foreign income taxes (benefit)                    (1,188)        204       (502)
Goodwill amortization                                892         787        599
Other--net                                           278         197        157
                                               ---------------------------------
Provision for income taxes                       $   488     $ 4,909    $   946
                                               =================================

Cash  payments for income taxes for the years ended March 3, 2001,  February 26,
2000,  and  February  27,  1999 were  $1,114,915,  $2,914,112,  and  $1,883,000,
respectively.

8.       Stockholders' Equity (Deficit)


Warrants Issued with Series C Redeemable Preferred Stock

The Warrants issued in conjunction with the Series C Redeemable  Preferred Stock
entitle the holders to purchase 463,232 shares of the Company's 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 Plans

In March 1998, the Company adopted the 1998 Stock Option Plan (the "Plan").  The
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.  The term
of the options cannot exceed ten years from the grant date, except for employees
who own stock  possessing  more  than 10% of the  combined  voting  power of all
classes of stock of the Company, for whom the term of the options is five years.

                                      F-23
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements


8.       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 the  Company's  incentive  options under the 1998
Stock Option Plan:

                                                         Number of
                                                           Shares
                                                      ----------------
         Outstanding at February 28, 1998                       --
         Granted at $6.49 per share                      1,367,527
         Canceled at $6.49 per share                       (13,000)
                                                      ----------------
         Outstanding at February 27, 1999                1,354,527

         Granted at $6.50 per share                         91,750
         Exercised at $6.50 per share                       (3,855)
         Canceled at $6.49 per share                      (619,133)
                                                      ----------------
         Outstanding at February 26, 2000                  823,289

         Granted at $6.50 per share                        901,000
         Exercised at $6.50 per share                       (2,800)
         Canceled at $6.50 per share                      (602,948)
                                                      ----------------
         Outstanding at March 3, 2001                    1,118,541
                                                      ================



165,133, 10,946 and 0 of the options were exercisable at March 3, 2001, February
26, 2000 and February 27, 1999,  respectively.  All options outstanding at March
3, 2001 have an exercise price of either $6.49 or $6.50 per share.


                                      F-24

<PAGE>



                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



8.       Stockholders' Equity (Deficit) (continued)


Of the above options issued, 66% vest as follows: 20% of the options vest on the
first  anniversary of the effective date of the grant and 20% on each subsequent
anniversary  of the effective  date,  and 34% 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  Company  also issues  options  under an  executive  option  agreement.  The
agreement  provides for non-qualified  options to acquire an aggregate number of
shares equal to 4% of the outstanding  common stock  equivalents of the Company,
on a fully diluted  basis.  40% of the options vest on the first  anniversary of
the effective  date and 20% on each  subsequent  anniversary.  At March 3, 2001,
there were 722,919 options granted, of which, 288,500 options were exercisable.

The Company  accounts  for its stock based  compensation  awards  following  the
provisions of Accounting  Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations 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.  The  Company's  stock  based  awards  consist of stock  options  with an
exercise price equal to market price on the date of grant.  As such, the Company
has not recorded compensation expense in connection with these awards.

The weighted  average fair value of an option  granted for the years ended March
3, 2001,  February 26, 2000 and  February  27, 1999 was $1.67,  $1.96 and $2.42,
respectively.  The fair value of the options was  estimated at the date of grant
using a minimum value method and the following assumptions:


                                                   Fiscal Year
                                       2001           2000           1999
                                   -----------------------------------------

     Risk-free interest rate          5.92%           5.94%          5.32%
     Average life                    5 Years         6 years        5 years
     Dividend yield                     0%             0%             0%



                                      F-25

<PAGE>



                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



8.       Stockholders' Equity (Deficit) (continued)


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


                                                       Fiscal Year
                                               2001        2000       1999
                                            ----------------------------------

 Pro forma net (loss) income available
   for common stockholders                   $(2,452)      $1,224    $(1,602)


Shares Reserved for Issuance

At March 3, 2001,  337,026  shares of common stock were  reserved for the future
grant of stock options. At March 3, 2001 and February 26, 2000, 90,604 shares of
common stock were reserved for issuance upon conversion of the nonvoting  common
stock.  At March 3, 2001 and  February  26,  2000,  463,232  shares of nonvoting
common stock were reserved for issuance upon exercise of outstanding warrants.


9.       Pension Plans

All  eligible  salaried  employees  are covered by a defined  contribution  plan
("401k").  After an  employee  has been  employed  for six  months,  the Company
contributes  0% to 2 1/2% of their salary (0% to 2% of salary prior to September
1, 1999). The Company matches an additional 50% of participant  contributions up
to a maximum  contribution  of 3% (the  Company  matched  an  additional  50% of
participant  contributions up to a maximum contribution of 1% prior to September
1, 1999). The cost of these plans was $677,000,  $632,000,  and $366,000 for the
fiscal  years ended March 3, 2001,  February  26,  2000,  and February 27, 1999,
respectively.

The Company has two defined benefit pension plans covering  substantially all of
its  industrial  employees.  The defined  benefits are calculated at the initial
application  date as the present  value of  benefits  credited  with  respect to
service  before that date. The Company's  funding policy is consistent  with the
requirements of federal laws and regulations.

                                      F-26

<PAGE>

                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



9.       Pension Plans (continued)


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

The  following  table  sets  forth the funded  status of the  Company's  defined
benefit plans and the amount  recognized in the Company's  consolidated  balance
sheets as of March 3, 2001 and February 26, 2000 (in thousands):

                                                              2001       2000
                                                           --------------------
Change in benefit obligation
Benefit obligation at beginning of year                    $ 3,146      $ 2,805
Benefit obligation assumed                                     707           --
 Service cost                                                  155          130
 Interest cost                                                 288          201
 Actuarial loss (gain)                                         (31)          73
 Benefits paid                                                (115)         (63)
                                                           --------------------
Benefit obligation at end of year                            4,150        3,146


Change in plan assets
Fair value of plan assets at beginning of year               3,159        2,983
Plan assets acquired                                           735           --
Actual return on plan assets                                   292           89
Employer contributions                                         100          150
Benefits paid                                                 (115)         (63)
                                                           --------------------
Fair value of plan assets at end of year                     4,171        3,159

Reconciliation of funded status of the plan
Funded status of the Plan                                       21           13
 Unrecognized net actuarial loss                               432          434
 Unrecognized net transition liability                           6           12
 Unrecognized prior service cost                               204          268
                                                           --------------------
Net prepaid asset                                          $   663      $   727
                                                           ====================




                                      F-27

<PAGE>

                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



9.       Pension Plans (continued)


                                                            Fiscal Year
                                                   2001       2000       1999
                                                -------------------------------

Weighted average assumptions
Discount rate                                     7.75%       7.75%       7.25%
Expected return on plan assets                    9.00        9.00        9.00

A summary of the  Company's  net  periodic  pension  cost related to the defined
benefit  plans  for  fiscal  years  2001,  2000,  and  1999  is as  follows  (in
thousands):

                                                            Fiscal Year
                                                    2001      2000      1999
                                                  ---------------------------

Service cost--benefits earned during the year      $ 155     $ 130     $ 120
Interest cost on projected benefit obligation        288       201       170
Expected return on plan assets                      (305)     (253)     (218)
Net amortization and deferral                         27        44        33
                                                  ---------------------------
Net pension cost                                   $ 165     $ 122     $ 105
                                                  ===========================


10.       Lease Commitments


The Company leases certain machinery and equipment for periods up to five years,
expiring  between 2002 and 2006,  and office and  manufacturing  facilities  for
periods up to ten years,  expiring  between 2002 and 2011, under operating lease
agreements.  Total  rent  expense  for fiscal  years  2001,  2000,  and 1999 was
approximately $4,585,000,  $4,808,000, and $3,299,000,  respectively. Certain of
the leases contain  renewal and  escalation  options for periods up to ten years
after the initial term of the lease.


                                      F-28

<PAGE>

                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



10.      Lease Commitments (continued)


Future minimum lease payments under all noncancellable operating leases at March
3, 2001 are as follows (in thousands):

                Fiscal years ending:
                   2002                             $    3,688
                   2003                                  3,050
                   2004                                  2,657
                   2005                                  2,339
                   2006                                  2,075
                   Thereafter                            6,289
                                                    ------------
                Total minimum lease payments          $ 20,098
                                                    ============


11.       Other Assets

Other assets as of March 3, 2001 and February 26, 2000 consist of the following,
net of related amortization (in thousands). Accumulated amortization at March 3,
2001 and February 26, 2000 was $11,578 and $7,777, respectively:

                                                        2001           2000
                                                  -----------------------------

     Non-compete agreements                        $    1,665     $    2,797
     Trademarks and intellectual property               8,505          9,205
     Deferred financing costs                           7,674          9,310
     Other                                                904            954
                                                  -----------------------------
                                                   $   18,748     $   22,266
                                                  =============================

                                      F-29
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



12.      Segment Information


The Company is  organized  in three  divisions.  Each  division is  comprised of
dedicated  operational  resources required to support their specific product and
geographic categories, and shared administrative resources for certain corporate
functions.  The divisions are: (a) zone heating division,  which includes indoor
room heaters, hearth products and outdoor heaters sold in the United States, (b)
specialty  products  division,  which includes specialty tools and home security
products  sold in the  United  States  and all  products  sold in Canada and (c)
international division,  which includes zone heating and specialty products sold
in all  geographic  areas other than the United States and Canada.  Zone heating
division and specialty products division are reportable segments.


Identifiable assets are those assets of the Company that are identified with the
operations in each segment.  Prior amounts have been  reclassified to conform to
the current year's presentation.


Operational  results and other  financial data of the business  segments for the
years  ended  March 3, 2001,  February  26,  2000,  and  February  27,  1999 are
presented below (in thousands):

                                    Zone
                                  Heating      Specialty
                                  Products      Products       Other    Total
                                 -----------------------------------------------

Year ended March 3, 2001
Net sales                        $   226,935    $ 165,694    $10,463    $403,092
Operating profit (loss)               22,971       13,047     (2,237)     33,781
Depreciation and amortization          7,717        3,148        263      11,128
Segment assets                       124,888       98,045     10,963     233,896
Capital expenditures                   2,343          933        495       3,771

Year ended February 26, 2000
Net sales                            208,885      173,135     11,904     393,924
Operating profit                      21,034       16,610        188      37,832
Depreciation and amortization          7,702        2,565        208      10,475
Segment assets                       122,981       96,288      8,870     228,139
Capital expenditures                   3,800        1,617        112       5,529


                                      F-30

<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements




12.      Segment Information (continued)


                                    Zone
                                  Heating      Specialty
                                  Products      Products     Other       Total
                                 -----------------------------------------------

Year ended February 27, 1999
Net sales                          $ 162,212    $ 138,706   $ 16,319   $ 317,237
Operating profit                      16,196       12,336      1,293      29,825
Depreciation and amortization          5,277        3,028        282       8,587
Segment assets                       109,542       84,108      8,988     202,638
Capital expenditures                   3,382        1,080         --       4,462

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

                                               Net Sales
                          -----------------------------------------------------
                                           Fiscal Year Ended
                          March 3, 2001    February 26, 2000  February 27, 1999
                          -----------------------------------------------------

United States             $   384,464        $   374,419        $    294,581
Foreign                        18,628             19,505              22,656
                          -----------------------------------------------------
Consolidated              $   403,092        $   393,924        $    317,237
                          =====================================================

                                           Long-Lived Assets
                          -----------------------------------------------------
                          March 3, 2001    February 26, 2000  February 27, 1999
                          -----------------------------------------------------

United States             $   129,372        $   132,134        $    122,086
Foreign                         1,299                646                 679
                          -----------------------------------------------------
Consolidated              $   130,671        $   132,780        $    122,765
                          =====================================================

Geographic sales data indicates the location from which products are shipped.


                                      F-31
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



13.       Related Party Transactions


Pursuant to the 1998 acquisition of a majority of the outstanding  shares of the
Company by J.W.  Childs  Associates  L.P. and UBS Capital  Management  Inc. (the
"Advisors"),  the Company entered into  management  agreements with 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 $299,000, $88,000, and $284,000 in fiscal
years 2001,  2000,  and 1999,  respectively.  Payments may be made to the extent
permitted by the Credit Facility and Indenture to the 9 7/8% Senior Subordinated
Notes.  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 the Company or the Advisors.

14.       Litigation


The  Company 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 after consultation with legal counsel, 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 the Company.

15.       Subsequent Events


On May 23, 2001, the Company entered into Amendment and Waiver No. 7 to the Loan
Documents  and  Amendment  No.  3  to  the  Credit  Agreement   (together,   the
"Amendment"),  an amendment to their Credit Facility, which waives the Company's
failure to comply with the  requirements  of the interest  coverage  ratio,  the
fixed charge ratio and the total leverage ratio at March 3, 2001.


As  part  of the  Amendment,  the  Company's  interest  rates  on  all  existing
outstanding  borrowings  under the Credit  Facility  were  increased by 1/2%. In
addition,  the Amendment  extended the maturity of the Guaranteed Line of Credit
to November 23, 2003 and modified the  financial  covenants  and their method of
calculation.  In  conjunction  with the  Amendment,  the Company sold  9,375,000
shares of common stock on May 30, 2001 to current  shareholders for an aggregate
sale price of $7,500,000.


                                      F-32
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



16.      Parent Guarantee of Subsidiary Debt

DESA's  obligations  under the 9 7/8% Senior  Subordinated  Notes  ("Notes") are
fully and  unconditionally  guaranteed  by  Holdings.  The  Company's  condensed
consolidating financial information is provided below:
<TABLE>
<CAPTION>

                                           Condensed Consolidating Balance Sheet
                                                    As of March 3, 2001
                                                      (in thousands)

                                             Parent             DESA           Combined
                                            Guarantor      International,    Non-Guarantor     Consolidating
                                            (Holdings)           Inc.         Subsidiaries      Adjustments    Consolidated
--------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>              <C>             <C>              <C>
Assets:
  Cash and cash equivalents                  $      --         $   1,844        $     544              --        $   2,388
  Accounts receivable, net                          --           142,566           13,102       $(113,774)          41,894
  Inventories:
    Raw materials                                   --               486               --              --              486
    Work-in-process                                 --            10,938               --              --           10,938
    Finished goods                                  --            31,370            6,499              --           37,869
                                             -----------------------------------------------------------------------------
                                                    --            42,794            6,499              --           49,293
  Other current assets                              --             8,346            1,304              --            9,650
                                             -----------------------------------------------------------------------------
  Total current Assets                              --           195,550           21,449        (113,774)         103,225
  Property, plant and equipment                     --            50,223            1,472              --           51,695
  Less accumulated depreciation                     --            34,621              463              --           35,084
                                             -----------------------------------------------------------------------------
                                                    --            15,602            1,009              --           16,611
  Investment in subsidiaries                   (23,425)           13,137               --          10,288               --
  Other assets                                   1,073           112,614              416             (43)         114,060
                                             -----------------------------------------------------------------------------
Total Assets                                 $ (22,352)        $ 336,903        $  22,874       $(103,529)       $ 233,896
                                             =============================================================================

Liabilities and stockholders'
    equity (deficit):
  Current liabilities:
    Accounts payable                         $ 104,090         $  30,051        $   8,334       $(113,774)       $  28,701
    Accrued interest                                --             3,195               --              --            3,195
    Other accrued liabilities                      515            11,925            1,384              --           13,824
    Current portion of long-term
       debt                                         --            50,874               --              --           50,874
                                             -----------------------------------------------------------------------------
  Total current liabilities                    104,605            96,045            9,718        (113,774)          96,594
  Long-term debt                                    --           249,163               --              --          249,163
  Other liabilities                                 --            15,120               19              --           15,139
  Series C redeemable preferred
       stock                                    23,057                --               --              --           23,057
  Stockholders' equity                        (150,014)          (23,425)          13,137          10,245         (150,057)
                                             -----------------------------------------------------------------------------
Total liabilities and
    stockholders' equity                     $ (22,352)        $ 336,903        $  22,874       $(103,529)       $ 233,896
                                             =============================================================================

</TABLE>
                                       F-33

<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



16.      Parent Guarantee of Subsidiary Debt (continued)


<TABLE>
<CAPTION>


                                         Condensed Consolidating Statement of Income
                                                         Fiscal 2001
                                                        (in thousands)


                                             Parent             DESA           Combined
                                            Guarantor      International,    Non-Guarantor     Consolidating
                                            (Holdings)           Inc.         Subsidiaries      Adjustments     Consolidated
----------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>              <C>             <C>              <C>
Net sales                                    $      --          $ 386,667       $  68,221       $ (51,796)       $ 403,092
Cost of sales                                       --            259,932          59,515         (51,796)         267,651
                                             -----------------------------------------------------------------------------
Gross profit                                        --            126,735           8,706              --          135,441
Operating costs and expenses:
  Selling                                           --             72,227           5,011              --           77,238
  General, administrative and
      other                                       (679)            24,685             416              --           24,422
  Undistributed earnings of
      subsidiaries                                 (30)            (3,620)             --           3,650               --
                                             -----------------------------------------------------------------------------
                                                  (709)            93,292           5,427           3,650          101,660
                                             -----------------------------------------------------------------------------
Operating profit                                   709             33,443           3,279          (3,650)          33,781
Interest expense                                    14             32,584              --              --           32,598
                                             -----------------------------------------------------------------------------
Income before provision for
  income taxes                                     695                859           3,279          (3,650)           1,183

Provision for income taxes                          --                829            (341)             --              488
                                             -----------------------------------------------------------------------------
Net income                                   $     695          $      30       $   3,620       $  (3,650)       $     695
                                             =============================================================================

</TABLE>

<TABLE>
<CAPTION>

                                       Condensed Consolidating Statement of Cash Flows
                                                         Fiscal 2001
                                                        (in thousands)



                                             Parent             DESA           Combined
                                            Guarantor      International,    Non-Guarantor     Consolidating
                                            (Holdings)           Inc.         Subsidiaries      Adjustments     Consolidated
----------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>              <C>             <C>              <C>

Net cash (used) provided by                   $ (3,390)         $  3,582         $  1,122    $         --         $  1,314
    operating activities
Net cash used by investing
    activities                                      --           (14,256)            (735)             --          (14,991)
Net cash provided by financing
    activities                                   3,390            12,510               --              --           15,900
  Effect of exchange rate changes
      on cash                                       --                --               (8)             --               (8)
                                             -----------------------------------------------------------------------------
  Increase in cash and cash                         --             1,836              379              --            2,215
      equivalents for the year
Cash and cash equivalents at
    beginning of year                               --                 8              165              --              173
                                             -----------------------------------------------------------------------------
Cash and cash equivalents at end
    of year                                   $     --          $  1,844         $    544    $         --         $  2,388
                                             =============================================================================


</TABLE>

                                       F-34

<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



16.      Parent Guarantee of Subsidiary Debt (continued)


<TABLE>
<CAPTION>


                                            Condensed Consolidating Balance Sheet
                                                   As of February 26, 2000
                                                        (in thousands)


                                             Parent             DESA           Combined
                                            Guarantor      International,    Non-Guarantor     Consolidating
                                            (Holdings)           Inc.         Subsidiaries      Adjustments     Consolidated
----------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>              <C>             <C>              <C>
Assets:
  Cash and cash equivalents                  $      --          $       8       $     165       $      --        $     173
  Accounts receivable, net                          --            139,199           8,887        (115,165)          32,921
  Inventories:
    Raw materials                                   --                209              --              --              209
    Work-in-process                                 --              9,756              --              --            9,756
    Finished goods                                  --             38,811           8,632              --           47,443
                                             -----------------------------------------------------------------------------
                                                                   48,776           8,632              --           57,408
  Other current assets                              --              4,346             511              --            4,857
                                             -----------------------------------------------------------------------------
  Total current Assets                              --            192,329          18,195        (115,165)          95,359
  Property, plant and equipment                     --             45,258           2,012              --           47,270
  Less accumulated depreciation                     --             29,208           1,366              --           30,574
                                             -----------------------------------------------------------------------------
                                                                                   16,050             646           16,696
  Investment in subsidiaries                   (22,885)            10,146              --          12,739               --
  Other assets                                   1,105            114,853             126              --          116,084
                                             -----------------------------------------------------------------------------
Total Assets                                 $ (21,780)         $ 333,378       $  18,967       $(102,426)       $ 228,139
                                             =============================================================================

Liabilities and stockholders'
    equity (deficit):
  Current liabilities:
    Accounts payable                         $ 108,268          $  36,767       $   7,170       $(115,165)       $  37,040
    Accrued interest                                23              5,210              --              --            5,233
    Other accrued liabilities                      421             11,332           1,472              --           13,225
    Current portion of long-term
      debt                                          --             23,500              --              --           23,500
                                             -----------------------------------------------------------------------------
  Total current liabilities                    108,712             76,809           8,642        (115,165)          78,998
  Long-term debt                                 1,842            264,004              --              --          265,846
  Other liabilities                                 --             15,450             179              --           15,629
  Series C redeemable preferred
      stock                                     19,937                 --              --              --           19,937
  Stockholders' equity                        (152,271)           (22,885)         10,146          12,739         (152,271)
                                             -----------------------------------------------------------------------------
Total liabilities and
    stockholders' equity                     $ (21,780)         $ 333,378       $  18,967       $(102,426)       $ 228,139
                                             =============================================================================


</TABLE>


                                       F-35
<PAGE>


                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



16.      Parent Guarantee of Subsidiary Debt (continued)


<TABLE>
<CAPTION>


                                         Condensed Consolidating Statement of Income
                                                         Fiscal 2000
                                                        (in thousands)


                                             Parent             DESA           Combined
                                            Guarantor      International,    Non-Guarantor     Consolidating
                                            (Holdings)           Inc.         Subsidiaries      Adjustments     Consolidated
----------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>              <C>             <C>              <C>
Net sales                                    $      --         $ 377,151        $  65,113       $ (48,340)       $ 393,924
Cost of sales                                       --           254,073           58,560         (48,340)         264,293
                                             -----------------------------------------------------------------------------
Gross profit                                        --           123,078            6,553              --          129,631
Operating costs and expenses:
  Selling                                           --            65,557            4,264              --           69,821
  General, administrative and
    other                                           33            21,482              463              --           21,978
  Undistributed earnings of
    subsidiaries                                (4,260)           (1,107)              --           5,367               --
                                             -----------------------------------------------------------------------------
                                                (4,227)           85,932            4,727           5,367           91,799
                                             -----------------------------------------------------------------------------
Operating profit (loss)                          4,227            37,146            1,826          (5,367)          37,832
Interest expense                                   157            28,696               --              --           28,853
                                             -----------------------------------------------------------------------------
Income before provision for
  income taxes                                   4,070             8,450            1,826          (5,367)           8,979

Provision for income taxes                          --             4,190              719              --            4,909
                                             -----------------------------------------------------------------------------
Net income                                   $   4,070         $   4,260        $   1,107       $  (5,367)       $   4,070
                                             =============================================================================

</TABLE>

<TABLE>
<CAPTION>


                                       Condensed Consolidating Statement of Cash Flows
                                                         Fiscal 2000
                                                        (in thousands)


                                             Parent             DESA           Combined
                                            Guarantor      International,    Non-Guarantor     Consolidating
                                            (Holdings)           Inc.         Subsidiaries      Adjustments     Consolidated
----------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>              <C>             <C>              <C>
Net cash (used) provided by                   $    365           $ 14,778        $   (553)   $         --        $ 14,590
    operating activities
Net cash used provided by investing
    activities                                      --             (5,270)           (164)             --          (5,434)
Net cash used by financing
    activities                                    (365)            (9,506)             --              --          (9,871)
  Effect of exchange rate changes
      on cash                                       --                 --              --              --              --
                                             -----------------------------------------------------------------------------
  Increase (decrease) in cash and                   --                  2            (717)             --            (715)
      cash equivalents for the
      year
Cash and cash equivalents at
    beginning of year                               --                  6             882              --             888
                                             -----------------------------------------------------------------------------
Cash and cash equivalents at end
    of year                                   $     --           $      8        $    165    $         --        $    173
                                             =============================================================================


</TABLE>

                                       F-36

<PAGE>



                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements



16.      Parent Guarantee of Subsidiary Debt (continued)


<TABLE>
<CAPTION>


                                         Condensed Consolidating Statement of Income
                                                         Fiscal 1999
                                                        (in thousands)


                                             Parent             DESA           Combined
                                            Guarantor      International,    Non-Guarantor     Consolidating
                                            (Holdings)           Inc.         Subsidiaries      Adjustments     Consolidated
----------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>              <C>             <C>              <C>

Net sales                                    $     --           $ 296,722       $  73,511       $ (52,996)       $ 317,237
Cost of sales                                      --             202,021          65,344         (52,996)         214,369
                                             -----------------------------------------------------------------------------
Gross profit                                       --              94,701           8,167              --          102,868
Operating costs and expenses:
  Selling                                          --              49,954           4,130              --           54,084
  General, administrative and
    other                                          33              18,438             488              --           18,959
  Undistributed earnings of
    subsidiaries                               (1,211)             (2,324)             --           3,535               --
                                             -----------------------------------------------------------------------------
                                               (1,178)             66,068           4,618           3,535           73,043
                                             -----------------------------------------------------------------------------
Operating profit                                1,178              28,633           3,549          (3,535)          29,825
Interest expense                                  164              27,700                               --          27,864
                                             -----------------------------------------------------------------------------
Income before provision for
  income taxes                                  1,014                 933           3,549          (3,535)           1,961

Provision for income taxes                         --                (278)          1,225              --              947
                                             -----------------------------------------------------------------------------
Net income                                   $  1,014           $   1,211       $   2,324       $  (3,535)       $   1,014
                                             =============================================================================

</TABLE>

<TABLE>
<CAPTION>

                                       Condensed Consolidating Statement of Cash Flows
                                                         Fiscal 1999
                                                        (in thousands)


                                             Parent             DESA           Combined
                                            Guarantor      International,    Non-Guarantor     Consolidating
                                            (Holdings)           Inc.         Subsidiaries      Adjustments     Consolidated
----------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>              <C>             <C>              <C>

Net cash (used) provided by                  $(13,979)          $ 16,077        $    209        $      --         $  2,307
    operating activities
Net cash (used) by investing
    activities                                    (97)           (45,029)            (97)              --          (45,223)
Net cash provided by financing
    activities                                 14,076             28,936              --               --           43,012
  Effect of exchange rate
      changes on cash                              --                 --              (2)              --               (2)
                                             -----------------------------------------------------------------------------
  Increase in cash and cash                        --                (16)            110               --               94
      equivalents for the year
Cash and cash equivalents at
    beginning of year                              --                 22             772               --              794
                                             -----------------------------------------------------------------------------
Cash and cash equivalents at end
    of year                                  $     --           $      6        $    882        $      --         $    888
                                             =============================================================================

</TABLE>



                                      F-37

<PAGE>

<TABLE>
<CAPTION>


                                           SCHEDULE II - Valuation and Qualifying Accounts
                                                      DESA Holdings Corporation

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

Year Ended March 3, 2001:
   Deducted from assets accounts:
      Allowance for doubtful accounts   $   907,000          $ (110,000)          $ 1,397,000 (3)     $ 1,275,000 (1)  $   919,000


Year Ended February 26, 2000:
   Deducted from assets accounts:
      Allowance for doubtful accounts     1,628,000            (608,000)                                  113,000 (1)      907,000


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


</TABLE>


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

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

(2)   Part of net assets acquired from FMI.

(3)   Part of net assets acquired from Trine Products Company.


<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/ W. Michael Clevy
                                  Name:   W. Michael Clevy
                                  Title:  Chief Executive Officer and President
                                          and Director
                                  Dated:  June 1, 2001

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/ W. Michael Clevy       Chief Executive Officer and
W. Michael Clevy           President and Director                June 1, 2001
                           (Principal Executive Officer)

/s/ Raymond B. Rudy        Chairman                              June 1, 2001
Raymond B. Rudy

/s/ John W. Childs         Director                              June 1, 2001
John W. Childs

/s/ Adam L. Suttin         Director                              June 1, 2001
Adam L. Suttin

/s/ Michael Greene         Director                              June 1, 2001
Michael Greene

/s/ Joseph J. Incandela    Director                              June 1, 2001
Joseph J. Incandela

/s/ James E. Ashton        Director                              June 1, 2001
James E. Ashton

/s/ Terry G. Scariot       Director                              June 1, 2001
Terry G. Scariot

/s/ Stephen L. Clanton     Senior Vice President, Chief
Stephen L. Clanton         Financial Officer
                           (Principal Accounting and             June 1, 2001
                           Financial Officer)


                                       31