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

                                    FORM 10-K

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

(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
         THE SECURITIES EXCHANGE ACT OF 1934
         For the Fiscal Year Ended February 26, 2000
                                       OR
[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
         OF 1934 For the transition period from ______ to ______

                       Commission File Number 333-44969-01

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

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

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


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

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

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


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

                                      None
                                (Title of Class)

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

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

As of May 19,  2000,  the  aggregate  market  value of the  Common  Stock of the
registrant held by non-affiliates of the registrant was $12,770,927.

Number of shares of the registrant's Common Stock at May 19, 2000: 16,217,537

Number of shares of the  registrant's  Nonvoting  Common  Stock at May 19, 2000:
90,604

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                            DESA HOLDINGS CORPORATION

                          1999 FORM 10-K ANNUAL REPORT

                                Table of Contents

<S>                <C>                                                                                          <C>
PART I

Item 1.             Business                                                                                        2
Item 2.             Properties                                                                                     12
Item 3.             Legal Proceedings                                                                              13
Item 4.             Submission of Matters to a Vote of Security Holders                                            13

PART II

Item 5.             Market for the Registrant's Common Stock and Related Stockholder Matters                       13
Item 6.             Selected Consolidated Financial and Operating Information                                      13
Item 7.             Management's Discussion and Analysis of Financial Condition and Results of Operations          15
Item 7A.            Quantitative and Qualitative Disclosure About Market Risk                                      21
Item 8.             Financial Statements and Supplementary Data                                                    23
Item 9.             Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           23

PART III

Item 10.            Directors and Executive Officers of the Registrant                                             23
Item 11.            Executive Compensation                                                                         25
Item 12.            Security Ownership of Certain Beneficial Owners and Management                                 29
Item 13.            Certain Relationships and Related Transactions                                                 31

PART IV

Item 14.            Exhibits, Financial Statement Schedules and Reports on Form 8-K                                31

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
</TABLE>

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<PAGE>



CERTAIN  IMPORTANT  FACTORS This Annual Report on Form 10-K contains  statements
which constitute  forward looking  statements  within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Annual Report on Form 10-K and include  statements  regarding the
strategies,  beliefs or current  expectations of Desa Holdings Corporation (with
its  consolidated  subsidiaries,  "DESA",  "Holdings" or the  "Company") and its
management.  Readers are cautioned that any such forward looking  statements are
not guarantees of future performance and involve risks and uncertainties,  which
could  cause  actual  results to differ  materially  from  those in the  forward
looking  statements.  Such factors  include but are not limited to the Company's
vulnerability to adverse general economic and industry conditions because of its
leverage,  the Company's ability to obtain future financing on acceptable terms,
the  Company's  ability  to  integrate   acquired   companies  and  to  complete
acquisitions  on  satisfactory  terms,  the demand  and price for the  Company's
products  relative to production  costs,  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  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.  DESA 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.

In November / December  1999,  DESA hired a new executive  management  team with
extensive  experience in the heating appliance industry.  This team is replacing
the former Chief Executive  Officer and Chief Operating  Officer who resigned in
November 1999, effective April 2000. As a result, DESA will reorganize in fiscal
2001 into three divisions,  zone heating,  specialty products and international.
The executive team consists of W. Michael Clevy  (President and Chief  Executive
Officer),  Stephen L. Clanton (Chief  Financial  Officer),  David B.  Schumacher
(President  - Zone  Heating  Division),  James R. Wiese  (President  - Specialty
Products Division) and Augusto H. Millan (President - International Division).

On April 3, 2000, DESA acquired the assets of Trine Products  Company  ("Trine")
located in Bronx,  New York for  consideration  of  $11,097,000.  Trine's annual
sales for their most recent  year-end  (June 30,  1999) were  approximately  $25
million.  Trine  produces a complete line of door

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chimes,  and  accessories for  residential  and commercial  applications.  Trine
products  are sold through  mass  merchants,  home  centers,  retail  chains and
hardware cooperatives.

(b) FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS

The Company operates in two reportable business segments,  zone heating products
and specialty products.  For additional information about the segments, see Note
13 of Notes to Consolidated  Financial  Statements included in Item 8 of Part II
of this report.

(c)  NARRATIVE DESCRIPTION OF THE BUSINESS

PRODUCTS

Zone Heating Products (56% of Fiscal 2000 Net Sales)

The zone heating market is comprised of indoor gas heaters, hearth products (gas
logs, fireplaces and stoves) and outdoor heaters. DESA is a leading manufacturer
of vent-free indoor and outdoor zone heating products in the United States. DESA
markets its zone heating products under well-known brand names such as Reddy(R),
Remington(R),  Vanguard(R),  Master(R) and Comfort  Glow(R).  The Company's zone
heating business is organized into two primary product categories:

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

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

Specialty Products (44% of Fiscal 2000 Net Sales)

DESA's specialty  products business includes  powder-actuated  fastening systems
(tools and accessories) used to fasten wood to concrete or steel, stapling/rivet
tools and electrical  products such as chain saws,  portable generators and home
security products. These products are marketed under well-known brand names such
as Remington(R), Master(R), Powerfast(R) and Heath/Zenith(R).

STRATEGY

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

Implementation  of Lean  Enterprise  processes.  DESA has committed to implement
Lean Enterprise processes throughout its organization. Lean Enterprise processes
focus on improving

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the value the Company  provides to its customers,  the value stream that creates
customer driven performance,  manufacturing flow from raw materials to delivered
goods,  demand pull  approach to  manufacturing  and  improved  overall  product
quality.  DESA expects to realize benefits from lower manufacturing and overhead
costs, reduced lead times, reduced inventory levels and improved product quality
and customer service.

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

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

Capitalize on Favorable Trends for Gas Products.  Management believes that there
is an increasing  homeowner  preference  for gas which  represents a significant
growth  opportunity for DESA as all of its indoor heating products are fueled by
natural or propane gas.  Additionally,  by focusing on vent-free  gas  products,
which  have lower  installation  costs and  provide  increased  fuel  efficiency
compared to vented products,  the Company is well positioned to benefit from the
fastest growing segments of the zone heating market.

Increase  Penetration  of  International  Markets.  Similar  to the trend in the
United  States,  the global  do-it-yourself  ("DIY")  markets  are  experiencing
attractive growth rates.  Four of the ten largest home improvement  retailers in
the world are based outside of the United States.  However,  international sales
comprised  only 5% of  DESA's  total  sales  in  fiscal  2000.  The  Company  is
accelerating development of products suitable for international markets.

Make Strategic Acquisitions.  The Company intends to seek selective acquisitions
where it can expand its  existing  product  portfolio,  utilize its  diversified
distribution  channels  and achieve  operational  synergies.  Over the last five
years,  58% of  the  Company's  sales  growth  has  come  through  acquisitions.
Management  believes that the markets in which it operates are highly fragmented
and there are numerous  manufacturers of complementary  products that would make
attractive acquisition candidates.

PRODUCTS AND MARKETS

DESA is the leader in a number of markets  where its quality  manufacturing  and
innovative  product design have resulted in a strong competitive  position.  The
Company's  products are sold for both  consumer  and  commercial  use  utilizing
multiple  distribution  channels  and a  variety  of brand  names.  The  Company
currently  serves  markets for zone  heating  products and  specialty  products.
Approximately 95% of the Company's 2000 sales were domestic and 5% of sales were
international.

Zone Heating

Market Overview

The zone heating market includes a broad range of products that are used to heat
limited areas as  distinguished  from central  heating  systems that are used to
heat entire  buildings.  The zone heating  market is  currently  estimated to be
approximately  $1.0  billion in size,  with hearth  products

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(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.

Market Outlook

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

Benefits of low-cost zone heating.  Over the past decade,  zone heating products
have  become  increasingly  popular  because:  (i)  propane  and natural gas are
significantly  cheaper  on a BTU basis than  electricity,  (ii)  consumers  have
become aware of the cost advantage of zone heating  versus  central  heating and
(iii)  fireplaces  are being used as both heating  sources and  decorative  home
furnishing.  This growing preference for gas represents a growth opportunity for
DESA as almost  all of its  indoor  heating  products  are  fueled by natural or
propane  gas.  Management  believes the market is  under-penetrated.  Gas hearth
shipments  have  been  growing  at a rate in excess of 30% per year for the past
five years.  Management estimates that there are over 27 million homes have been
plumbed  for gas and have a  fireplace,  providing  an  opportunity  for gas log
sales. In addition, an estimated 36 million homes are plumbed for gas but do not
have a fireplace, representing a significant opportunity for the installation of
vent-free fireplaces and logs.

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

Favorable  Regulatory  Development.  A positive development for vent-free indoor
heating products (heaters, gas logs, fireplaces,  stoves) involves the easing of
state  restrictions  regarding  the sale and use of these  products.  As of last
year,  47 of the 50 states in the United  States  permitted  the sale and use of
vent-free  indoor  heating  products.  This is up from 43 states in the previous
year,   following  the  trend  towards  an  easing  of   restrictions  by  state
governments.

Indoor Heating Products

DESA's  indoor  zone  heating  products  consist   primarily  of  three  product
categories:  (i)  vent-free  natural gas and  propane-fueled  residential  space
heaters; (ii) hearth products,  including vent-free gas fireplaces and logs; and
(iii) direct vent products under the FMI (as hereinafter defined) brand.

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

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

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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.  Both  infrared and blue flame models are  available  with
either manual or thermostatic control and with piezo ignition.

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

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

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

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

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

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

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

With the  acquisition of FMI, DESA is now competing in the vented hearth market,
which has annual sales in the United States of approximately $400 million.  DESA
currently  intends to take  advantage of its position as a market leader in vent
free products as it competes in the vented hearth market.

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Outdoor Heating Products

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

Specialty Products

DESA's specialty products category consists of (i) home security products,  (ii)
specialty fastening systems (i.e.,  powder-actuated  tools and staple guns), and
(iii)  electrical  products (i.e.,  chain saws and electric  generators).  These
products are sold to both DIY and commercial  customers.  The specialty  product
category  represents  44% of the  Company's  sales  which  have  grown  at a 36%
compound annual growth rate ("CAGR") from fiscal 1995 to fiscal 2000.

Home Security

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

Motion Sensor  Security  Lighting.  Within its motion sensor  security  lighting
product line,  Heath/Zenith offers approximately 58 stock keeping units ("SKUs")
representing  a variety of security  lighting  products  which appeal to various
segments  of the DIY market.  Heath/Zenith's  primary  focus is to  de-emphasize
promotional  products and to emphasize  its high quality,  high margin  products
that are made with metal fixtures and hoods,  and which contain such value-added
features as Pulse Count, Dual BriteTM, and 270(degree) activation capability.

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

Motion Sensor Decorative Lighting. There are approximately 38 SKUs in the motion
sensor  decorative  lighting  products  category.  Heath/Zenith's  motion sensor
decorative  lighting  products were  introduced in 1992 as part of  management's
strategy to move  consumers  to higher  price point  products.  Included in this
product line are coach lanterns, cast aluminum lanterns, brass lanterns and post
lanterns.

Market  Overview.  Management  believes the North American  residential  outdoor
decorative  lighting  industry to be approximately  $400 million.  The market is
primarily driven by the home improvement and remodeling  industry.  As a result,
the overall retail outdoor  decorative  lighting industry has benefited from the
expansion in the home improvement industry and DIY retail channel. Historically,
the  decorative  lighting  market was dominated by standard  (switch  activated)
lighting  products.  However,  as customers become more aware of the benefits of
motion sensor

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lighting products such as energy efficiency,  crime deterrence, and convenience,
they  are  requiring  motion  sensor  capabilities  in  their  outdoor  lighting
products.

Wireless  Doorbells.   Management  believes   Heath/Zenith's  wireless  doorbell
products are positioned to take advantage of an underserved market. Heath/Zenith
has become the market  leader in the  wireless  doorbell  industry by offering a
diverse line of products and, most importantly,  by differentiating  its product
with a proprietary sound chip.

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

Specialty Fastening Systems Products

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

Market Overview.  The total domestic  powder-actuated  tool market in which DESA
competes  is  approximately  $90  million,  consisting  of  $60  million  in the
commercial  market and $30 million in the DIY market. In fiscal 1999, DESA had a
market share of 88% in the DIY segment.  The staple gun and related  accessories
market  size is  approximately  $110  million of which DESA has a modest  market
share.

Electrical Products

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

DESA  traditionally  maintains  a  modest  presence  in  the  portable  electric
generator market. Approximately 39% of the Company's generator sales are made to
W.W.  Grainger who offers this product line to end-users  through its  equipment
catalog and industrial supply outlets.

Market Overview.  The domestic  electric chain saw market is  approximately  $40
million in size,  and DESA is the market  leader with a 54% share.  The electric
chain saw market is mature and industry volume has been  reasonably  stable over
the past five years.


International

In fiscal  2000,  $19.5  million or 5% of DESA's  gross sales were  generated in
international  markets  such as Canada,  Europe and the Far East.  Although  the
global markets have not traditionally  been an area of DESA's focus, the Company
believes that the international  category  represents a significant  opportunity
for increased sales in the future.  International  markets have the potential to
surpass the home improvement market in the United States.

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

                                       8
<PAGE>


Sales, Marketing and Distribution

Sales.  DESA has organized its domestic sales force by channels of  distribution
and product  categories  in order to optimize the  effectiveness  of its selling
efforts.  DESA management  believes that such a structure enhances the Company's
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
 Organization                                                                         Number of Sales
                                                                                      Representatives
-------------------------------------------------------------------------------------------------------
<S>                       <C>                          <C>                               <C>
General Consumer           Mass Merchants               Indoor Heating                      120
                           Hardware Co-ops              Hearth Products
                           Home Centers                 Outdoor Heating
                           Warehouse Stores
                           Catalog Showrooms
                           Agricultural Supply

Specialty Heating          Utilities                    Indoor Heating                     40-50
                           Propane Marketers            Hearth Products
                           Specialty Distributors
                           Appliance Distributors

Construction               Equipment Distributors       Outdoor Heating                    50-60
                           Equipment Renters            Generators

Specialty Products         Mass Merchants               Specialty Fastening Systems         100
                           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. DESA uses
limited  national  advertising and relies instead on local customer  advertising
through  newspapers and circular flyers.  DESA has also created a broad national
network of independent, factory-trained service centers to provide local support
to customers and end-users.

Distribution.  The Company's significant customers include all of the major home
center accounts.  The Company's consumer  channels,  which include home centers,
mass  merchants,  warehouse  clubs and hardware  co-ops,  are the most important
channel  for DESA's  products  and were  responsible  for 68% of its fiscal 2000
domestic sales. Other channels,  including specialty heating, farm, construction
and industrial, contributed 32% of domestic sales in fiscal 2000.

Significant Customers

Significant  customers  include  Home Depot and  Lowe's,  the two  largest  home
centers in the world,  who accounted for 25% and 13% of net sales in fiscal year
2000, respectively. Ace and TruServ, leaders in the hardware co-op market; Sears
and  Wal-Mart/Sam's,  major  mass

                                       9
<PAGE>

merchandisers;  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.

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

Management Information Systems ("MIS")

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

Manufacturing

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

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

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

                                       10
<PAGE>

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

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.

Trademarks, Patents and Licenses

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

Backlog and Warranty

The Company's backlog consists of cancelable orders and is dependent upon trends
in consumer demand  throughout the year.  Customer order patterns vary from year
to year, largely because of annual differences in consumer  end-product  demand,
marketing strategies, overall economic conditions and weather conditions. Orders
for the Company's products are generally subject to cancellation until shipment.
As a  result,  comparison  of  backlog  as of any date in a given  year with the
backlog at the same date in a prior year is not necessarily  indicative of sales
trends.  Moreover,  the Company  does not believe  that  backlog is  necessarily
indicative of the  Company's  future  results of  operations  or prospects.  The
Company's backlog of orders was approximately $16.7 million at February 26, 2000
compared to $35.0 million at February 27, 1999.  The decline is primarily due to
a $20.0 million  decrease in generator order backlog.  The increase in generator
orders in fiscal 2000 was primarily  driven by increased  demand for  generators
related to concerns of year 2000 computer problems.

The Company's  warranty  policy is to accept returns of products with defects in
materials or  workmanship.  The Company will also accept  returns of incorrectly
shipped  goods  where the Company  has been  notified on a timely  basis and, in
certain  cases,  to maintain  customer  good will.  During fiscal years 2000 and
1999, warranty costs amounted to approximately 2.0% and 2.1%,  respectively,  of
sales.

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

                                       11
<PAGE>

manufacturing  facilities  was  completed on August 9, 1997 and did not identify
any material matters. The Company believes,  although there can be no assurance,
that  liabilities  relating to  environmental  matters  will not have a material
adverse effect on its future financial position or results of operations.


Employees

DESA's zone heating products  operation is seasonal.  As a result, the number of
workers employed by the Company at any particular time varies. The work force is
accustomed to seasonal layoffs of two to four months.  In 2000, total employment
averaged  1,384 with a low of 1,085  employees  in February  and a peak of 1,668
employees in September.

The hourly labor force in Bowling  Green,  Kentucky is  represented by the Sheet
Metal Workers  International  Association  (AFL-CIO) under a three-year contract
expiring in June 2001. The 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 facility serves as the administrative  services offices
as well as the manufacturing site for DESA's zone heating products,  both indoor
and outdoor. The Company also leases warehouse space in Bowling Green,  Kentucky
and Manchester,  Tennessee as needed.  The facilities in Shelbyville,  Tennessee
and Santa Ana,  California  manufacture  the hearth  products sold by DESA.  The
manufacturing  facility in Manchester,  Tennessee  produces the specialty  tools
sold by DESA. In addition to these manufacturing facilities,  the Company leases
sales offices and warehouse locations in Toronto, Canada, Rotterdam, Holland and
Hong Kong, China.
<TABLE>
<CAPTION>

            Location            Square Footage       Ownership               Function
-------------------------------------------------------------------------------------------------------
<S>                              <C>                 <C>             <C>
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

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


                                       12
<PAGE>
<CAPTION>

            Location            Square Footage       Ownership               Function
-------------------------------------------------------------------------------------------------------
<S>                              <C>                 <C>             <C>
Hong Kong, China                     9,100            Leased          Procurement, Distribution

Santa Ana, California               101,125           Leased          Manufacturing, Distribution

</TABLE>

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

Item 3.  Legal Proceedings.

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

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

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of fiscal 2000.

                                     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 81  holders  of the  Company's  Common  Stock  and one  holder of the
Company's  Nonvoting  Common Stock as of May 19, 2000.  The Company has not paid
any  dividends  on any  class of  common  equity  in the last two  years  and is
prohibited from doing so by the terms of the senior credit facility.

On February 24, 2000, the Company issued  approximately  10,108 common shares to
an  employee  of the Company in  exchange  for  non-cash  assets with a value of
$65,705. The sale was exempt from registration under the Securities Act of 1933,
as amended, pursuant to Section 4(2) thereunder.

Item 6.  Selected Consolidated Financial and Operating Information.

Set forth below are selected  historical  consolidated  financial data and other
historical   consolidated   operating  data  of  DESA.  The  summary  historical
consolidated  financial  data as of February  26, 2000 and February 27, 1999 and
for each of the years in the three year period ended February 26, 2000 have been
derived  from  our  audited  consolidated  financial  statements.   The  summary
historical consolidated financial data as of March 1, 1997 and March 2, 1996 and
for the two year period  ended March 1, 1997 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.


                                       13
<PAGE>
<TABLE>
<CAPTION>
                                                                       Fiscal Year
                                           -----------------------------------------------------------------
                                              2000       1999 (10)     1998(1)(9)       1997      1996(1)(2)
                                              ----       ---------     ----------       ----      ----------
                                                                  (in Thousands)
<S>                                       <C>           <C>           <C>           <C>           <C>
Statement of Operating Data:
Net sales(3)                               $ 393,924     $ 317,237     $ 224,169     $ 209,105     $ 186,324
Cost of sales                                262,742       213,828       145,486       130,890       116,217
                                           -----------------------------------------------------------------
Gross profit                                 131,182       103,409        78,683        78,215        70,107
Operating costs and expenses                  91,799        73,043        50,191        45,257        37,828
                                           -----------------------------------------------------------------
Operating profit                              39,383        30,366        28,492        32,958        32,279
Interest expense                              28,853        27,864        17,327        14,509         7,073
                                           -----------------------------------------------------------------
Income before provision for income taxes      10,530         2,502        11,165        18,449        25,206
Income taxes                                   5,536         1,166         5,545         7,733        10,703
                                           -----------------------------------------------------------------
Income before extraordinary item               4,994         1,336         5,620        10,716        14,503
Extraordinary item(4)                             --            --         2,308            --         2,638
                                           -----------------------------------------------------------------
Net income                                     4,994         1,336         3,312        10,716        11,865
Less dividends and accretion on
preferred stock                                2,769         2,480           607           716           853
                                           -----------------------------------------------------------------
Net income (loss) available for common
stockholders                               $   2,225     $  (1,144)    $   2,705     $  10,716     $  11,012
                                           =================================================================
Ratio of earnings to fixed charges(5)           1.3x          1.1x          1.6x          2.2x          4.0x
Other Data:
EBITDA(6)                                     49,858        38,953        33,204        37,494        36,574
EBITDA margin(7)                                12.7%         12.3%         14.8%         17.9%         19.6%
Capital expenditures                           5,529         4,462         5,475         2,770         2,122
Depreciation                                   4,425         3,589         2,456         2,432         2,332
Amortization                                   6,050         4,998         2,256         2,104         1,963
Net cash provided by operating                14,590         2,307         1,146        18,398        19,375
    activities
Net cash used in investing activities         (5,434)      (45,233)      (45,980)       (2,882)       (2,060)
Net cash provided by (used in)                (9,871)       43,012        40,590       (10,599)      (17,989)
    financing activities
Balance Sheet Data (at period end):
Cash and cash equivalents                        173           888           794         5,058           145
Working capital (deficit)(8)                  17,999        27,643        27,095        (8,566)       (1,194)
Total assets                                 229,777       203,352       155,636        91,984        85,545
Long-term debt (less current portion)        265,846       285,138       261,105       130,600       149,709
Redeemable preferred stock                    19,937        17,207        14,661            --            --
Stockholders' equity (deficit)              (150,633)     (151,938)     (162,407)      (84,754)      (95,402)
---------
<FN>
(1)   DESA was party to  recapitalizations  in November 1997 and January 1996 which impacted interest expense,
      stockholders' equity (deficit) and long term debt.

(2)   53-week fiscal year.

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

                                                      14
<PAGE>

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

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

(6)   EBITDA is defined as income  before  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 UHI (as  hereinafter  defined)  data for the  period  from  August  19,  1998 (date of
      acquisitions) through February 27, 1999.
</FN>
</TABLE>

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

Introduction

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

The Company is organized into two primary product  categories:  (a) Zone Heating
Products  (56% of fiscal 2000 net sales),  which  includes  indoor room heaters,
hearth products and outdoor heaters,  and (b) Specialty  Products (44% of fiscal
2000 net sales),  which includes  powder-actuated  fastening  systems (tools and
accessories),  electrical  products  and home  security  products.  The  Company
records sales upon shipment of products to its customers.  Net sales  constitute
gross sales net of returns and allowances and cash discounts.

Principally due to sales of zone heating products,  DESA's business is seasonal,
as depicted by the following table that sets forth certain  operating results of
DESA for each of the four  consecutive  fiscal  quarters in the  periods  ending
February  26,  2000,  February  27,  1999 and  February  28,  1998  (dollars  in
thousands):

                                       15
<PAGE>
<TABLE>
<CAPTION>

                                First     Second      Third      Fourth
                               Quarter    Quarter    Quarter     Quarter      Year
                              ------------------------------------------------------
<S>                          <C>         <C>        <C>        <C>         <C>
Fiscal 2000
    Total Net Sales           $ 67,793    $ 97,924   $156,763   $ 71,444    $393,924
    Operating Profit          $    581    $ 11,030   $ 24,552   $  3,220    $ 39,383
Fiscal 1999
    Total Net Sales           $ 40,754    $ 75,416   $134,679   $ 66,388    $317,237
    Operating Profit (loss)   $ (1,372)   $  8,746   $ 22,580   $    412    $ 30,366
Fiscal 1998
    Total Net Sales           $ 24,754    $ 65,635   $103,015   $ 30,765    $224,169
    Operating Profit (Loss)   $     72    $ 12,157   $ 20,375   $ (4,112)   $ 28,492
</TABLE>


Approximately  68% 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
49% of the Company's annual sales volume are booked in the five-month  period of
March through July.

Results of Operations

The following table sets forth certain income statement information for DESA for
the fiscal years ended  February  26,  2000,  February 27, 1999 and February 28,
1998.

<TABLE>
<CAPTION>
                                                              Fiscal Year Ended
                              -------------------------------------------------------------------------------

                                           Percentage                Percentage                    Percentage
                                 2000     of Net Sales    1999      of Net Sales       1998       of Net Sales
                              --------------------------------------------------------------------------------
<S>                          <C>            <C>        <C>            <C>          <C>              <C>
Net sales                     $393,924       100.0%     $317,237       100.0%       $224,169         100.0%
Cost of sales                  262,742        66.7%      213,828        67.4%        145,486          64.9%
                              -----------------------------------------------------------------------------
Gross profit                   131,182        33.3%      103,409        32.6%         78,683          35.1%
Operating costs and             91,799        23.3%       73,043        23.0%         50,191          22.4%
    expenses                  -----------------------------------------------------------------------------

Operating profit                39,383        10.0%       30,366         9.6%         28,492          12.7%
Interest expense                28,853         7.3%       27,864         8.8%         17,327           7.7%
                              -----------------------------------------------------------------------------
Income before provision for     10,530         2.7%        2,502         0.8%         11,165           5.0%
    income taxes
Provision for income taxes       5,536         1.4%        1,166         0.4%          5,545           2.5%
                              -----------------------------------------------------------------------------
Income before extraordinary      4,994         1.3%        1,336         0.4%          5,620           2.5%
     item
Extraordinary item                  --         0.0%           --         0.0%          2,308           1.0%
                              -----------------------------------------------------------------------------
Net income                    $  4,994         1.3%     $  1,336         0.4%       $  3,312           1.5%
                              =============================================================================
</TABLE>


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 $218.8  million,  an increase of $41.0 million or 23.1% from
fiscal  1999.  This  increase is primarily  due to an  increased  demand for the
outdoor  heating  and hearth  product  lines and the  acquisition  of  Fireplace
Manufacturers Inc. ("FMI") in fiscal 1999.

                                       16
<PAGE>

Specialty products had sales of $175.1 million,  an increase of $35.7 million or
25.6% 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 which resulted in lower fiscal 2000 demand for
related product lines. In April,  2000, the Company acquired the assets of Trine
Products  Company  ("Trine")  of Bronx,  New York.  Trine had sales for the year
ended June 30, 1999 of approximately $25 million.

Cost of Sales. Cost of sales for fiscal 2000 were $262.7 million, an increase of
$48.9 million or 22.9% 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 66.7% in fiscal 2000 from 67.4% 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 33.3% in fiscal 2000 compared to 32.6% 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 $39.4 million in fiscal 2000, an increase
of $9.0 million or 29.8% from fiscal 1999. Operating profit attributable to zone
heating  products was $27.1  million or 40.9%  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 $17.4 million in fiscal 2000, an increase
of $2.0 million or 12.7% 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 $49.9 million,  an increase of $10.9 million
or 28.0% 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.

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 52.4% compared to 46.6% 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 $5.0  million in fiscal  2000  compared  to $1.3 in
fiscal 1999.  The  increase of $3.7  million or 273% is due  primarily to higher
sales volume offset by related taxes and expenses.

                                       17
<PAGE>

Year Ended February 27, 1999 Compared to the Year Ended February 28, 1998

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

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

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

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

EBITDA. EBITDA for fiscal 1999 was $39.0 million, an increase of $5.7 million or
17.3% from fiscal  1998.  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 need. 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.

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

Income Taxes.  Income taxes  decreased by 70.7% from $4.1 million in fiscal 1998
to $1.2  million in fiscal  1999,  primarily  as the result of the  increase  in
interest  expense  discussed  above.  The  overall  effective  income  tax  rate
decreased  from 50% in fiscal 1998 to 47% in fiscal 1999. The effective tax rate
is greater than the statutory rate due to the non-tax  deductibility of goodwill
amortization.

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

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

                                       18
<PAGE>

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 2000 was $14.6 million compared
to $2.3 million for fiscal 1999, an increase of $12.3 million.  Cash provided by
operating  activities in fiscal 2000 was  principally the result of current year
income and increased current liabilities offset by increased inventory. Net cash
provided by operating activities was $1.1 for fiscal 1998.

Net cash used in investing activities was $5.4 million compared to net cash used
of $45.2 and $46.0 million in fiscal 1999 and 1998, respectively.  Net cash used
in investing  activities reflects capital expenditures of $5.5 million in fiscal
2000. Cash used for investing activities in fiscal 1999 and fiscal 1998 reflects
the acquisition of FMI, UHI and Heath/Zenith.

Net cash (used in) provided by financing activities was ($9.9) million in fiscal
2000,  $43.0 million in fiscal 1999 and $40.6  million in fiscal 1998.  Net cash
used for  financing  activities  primarily  show the repayment of debt in fiscal
2000  and  proceeds  of the  acquisition  loans  utilized  for  the  FMI and UHI
acquisitions in fiscal 1999 and Heath Zenith acquisition in fiscal 1998.

Concurrently with the Recapitalization (as hereinafter  defined),  the Company's
wholly  owned  subsidiary,  DESA  International,  Inc.,  issued  9  7/8%  Senior
Subordinated  Notes due 2007 (the "Old Notes"),  guaranteed by the Company,  for
$130.0  million in gross  proceeds,  and entered  into a $100.0  million  senior
secured term loan facility (the "Term Loan Facility") and a $75.0 million senior
secured revolving credit facility (the "Working Capital  Facility," and together
with  the  Term  Loan  Facility  and  certain  other  facilities,   the  "Credit
Facility").  The Term Loan  Facility is comprised of two  tranches,  each in the
aggregate  principal  amount of $50.0  million.  The  Working  Capital  Facility
provides  revolving  loans in an aggregate  amount of up to $75.0 million.  Upon
closing of the Recapitalization,  the Company borrowed the full amount available
under the Term  Loan  Facility  and $35.5  million  under  the  Working  Capital
Facility.  Borrowings  under the Working Capital Facility were used partially to
refinance  seasonal  borrowings  outstanding under the Company's existing credit
facility.  The amount remaining  available under the Working Capital Facility is
available to fund the working capital  requirements of the Company.  Proceeds to
the Company from the issuance of the Old Notes and from initial borrowings under
the Credit  Facility,  less the  repayment of the existing  credit  facility and
other indebtedness, and transaction expenses, were used to partially finance the
Recapitalization  and the fees  and  expenses  of DESA  incurred  in  connection
therewith.  To provide additional financing to fund the  Recapitalization,  DESA
raised (i) $73.8 million through the sale to J.W. Childs Equity  Partners,  L.P.
("Childs") and certain other investors, including UBS Capital LLC (together with
Childs, the "Equity  Investors") of DESA Common Stock (representing 89.6% of the
outstanding shares upon completion of the Recapitalization),  (ii) $14.6 million
through  the  issuance  to Childs  and the other  Equity  Investors  of the DESA
Preferred Stock and (iii) $3.0 million through the issuance of 463,232  warrants
to purchase DESA Nonvoting  Common Stock at an exercise price of $.01 per share.
In addition,  existing  stockholders  retained  DESA Common Stock valued at $8.6
million  (representing  10.4% of the  outstanding  shares upon completion of the
Recapitalization).   The  above  transactions  have  been  accounted  for  as  a
recapitalization (the  "Recapitalization"),  with all amounts paid to the former
shareholders recorded as a reduction in stockholders equity (deficit).

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

                                       19
<PAGE>

Borrowings under the Credit Facility bear interest at a rate per annum equal (at
the Company's  option) to a margin over either a base rate or LIBOR. The Working
Capital  Facility will mature six years after the closing date. The two tranches
of the Term Loan  Facility  will be  amortized  over a six-year and a seven-year
period, respectively. The Credit Facility and the guarantees thereof are secured
by substantially all assets of DESA (including the capital stock of the Company)
and its direct and indirect  domestic  subsidiaries  and a pledge of the capital
stock of all the Company's direct and indirect subsidiaries,  subject to certain
limitations with respect to foreign  subsidiaries.  The Credit Facility contains
customary covenants and events of default, including substantial restrictions on
the Company's  ability to make dividends or distributions  to stockholders.  The
Company can utilize letters of credit under the Working  Capital  Facility up to
$10,000,000.  As of February  26,  2000,  letters of credit of $1.5  million are
outstanding under the Working Capital Facility.

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.  An excess  cash flow  payment of  $910,000  was
required  in fiscal  2000  which  will be  applied  against  the next  scheduled
principal payments.

On May 25,  1999,  DESA  entered  into  Amendment  and  Waiver No. 4 to the Loan
Documents (the  "Amendment"),  an amendment to their Credit Facility that waived
DESA's failure to comply with the Clean-Up Period, as defined, occurring between
January 1, 1999 and May 30,  1999.  As part of the  Amendment,  DESA's  interest
rates on all existing  outstanding  borrowings  under the Credit  Facility  were
increased by 1/4%.

The Amendment also modified the Clean-Up Period requirement,  as defined,  under
the  Working  Capital  Loan  Commitment,  for a period  of 30  consecutive  days
occurring between January 1 and May 30 in each calendar year commencing  January
1, 1998. During the Clean-Up Period, the sum of Working Capital advances, Letter
of Credit  advances and Swing Line loan  advances  outstanding  shall not exceed
$30,000,000  for any  Clean-Up  Period.  As of  February  26,  2000  and for the
Clean-Up  period  ending May 30, 2000,  DESA has complied with all the financial
covenants,  including the total leverage ratio,  the fixed charge coverage ratio
and the interst coverage ratio.

In conjunction with the Amendment,  J.W. Childs  Associates L.P. and UBS Capital
LLC (the  "Advisors")  agreed to defer any  obligation of DESA to pay management
fees under their  respective  management  agreements until Holdings' fiscal year
2000 financial  statements  have been delivered to the Lenders,  as defined.  At
such time,  Holdings would be obligated to pay such  management fees only if the
Consolidated  EBITDA,  as defined,  of Holdings  for fiscal year 2000 is greater
than $51.6  million and no default,  as defined,  has occurred  under the credit
agreement,  as  amended.  Holdings'  EBITDA for the fiscal  year 2000 was $ 49.9
million and accordingly, no management fees have been paid.

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

The DESA Preferred Stock bears cumulative dividends at the rate of 12% per annum
(payable semi-annually). Dividends will compound to the extent not paid. Subject
to  restrictions   imposed  by  the  Indenture  dated  November  26,  1997  (the
"Indenture"),  the Credit Facility and other documents relating to the Company's
indebtedness, DESA may exchange the DESA Preferred Stock for junior subordinated
notes (the  "Exchange  Notes") having  substantially  the same terms as the DESA
Preferred Stock. The Indenture  permits DESA,  under certain  circumstances,  to

                                       20
<PAGE>

exchange all outstanding DESA Preferred Stock for Exchange Notes in an aggregate
principal  amount  equal to the  aggregate  liquidation  preference  of the DESA
Preferred  Stock so  exchanged.  The  Exchange  Notes will  require DESA to make
semi-annual  interest  payments  thereon at a rate of 12% per annum.  Subject to
compliance  with the debt  agreements  of the Company,  such payments must be in
cash. The Indenture  restricts,  but does not prohibit,  the Company from making
such cash  interest  payments.  Under  the  Exchange  Notes,  DESA may defer the
payment  of  interest  payable on or before  November  30,  2001,  with any such
deferred interest bearing interest at 12% per annum,  compounded  semi-annually.
DESA will be required to make a catch-up payment  immediately prior to the first
interest payment date after the fifth anniversary of the date of issuance to the
extent the aggregate amount of such deferred interest exceeds an amount equal to
one year's  interest on the  originally  issued  Exchange  Notes.  The Indenture
restricts,  but does not  prohibit,  the  ability of DESA to make such  catch-up
payment.

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

The Credit  Facility  provides for  commitments in an aggregate  amount of up to
$197.5  million.  Borrowings  outstanding  under the Credit Facility were $159.3
million on February  26, 2000.  The Company had the ability to incur  additional
indebtedness of $36.7 million under the Credit Facility at February 26, 2000.

Management  believes that cash flow from operations and  availability  under the
Working Capital  Facility and Line of Credit will provide adequate funds for the
Company's  foreseeable working capital needs,  planned capital  expenditures and
debt  service   obligations.   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,  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,
purchases products in Europe,  China, and Japan and sells the products primarily
in the United States,  Canada, and Europe. As a result, the Company's  financial
results  could be  affected  by factors  such as  changes  in  foreign  currency
exchange rates or weak economic  conditions in the foreign  markets in which the
Company  operates.  The Company employs  established  policies and


                                       21
<PAGE>

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,  formerly  Nations  Bank,  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
Nations Bank in February  2000.  The  notional  amounts were used to measure the
interest to be paid or received and do not  represent  the amount of exposure to
credit  loss.  Net  proceeds  to  the  Company  of  $573,000  were  recorded  as
adjustments to interest expense in fiscal 2000.

The following  table  summarizes the carrying  amounts and estimated fair values
the Company's remaining financial  instruments at February 26, 2000 and February
27, 1999 (bracketed amount represents an asset):

                                  February 26, 2000         February 27, 1999
                                 Carrying       Fair      Carrying       Fair
                                  Amount       Value       Amount        Value
                                 -----------------------------------------------
                                               (in thousands)

Bank debt                        157,504      157,504      166,307      166,307
Senior subordinated notes        130,000       96,850      130,000      102,700
Note payable                       1,842        1,842        2,138        2,138
Interest rate swap agreements         --           --           --         (438)
Foreign exchange contracts            --          473           --          228

Based on the average  outstanding  amount of variable rate  indebtedness  of the
Company in fiscal  years 2000 and 1999,  a one  percentage  point  change in the
interest  rates for the  Company's  variable  rate debt would have  impacted the
Company's  fiscal  years  2000 and 1999  interest  expense  by an  aggregate  of
approximately  $1.9 and $1.6 million,  respectively,  after giving effect to the
Company's interest rate swap agreements.


Foreign Currency Exchange Rate Risk

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


                                       22
<PAGE>

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
Schedules contained in Part IV hereof.

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

                  None.

                                    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.

Pursuant to the Recapitalization Agreement, concurrently with the closing of the
Recapitalization,   the  Company,   the  Equity   Investors   and  the  Existing
Stockholders  (the  "Stockholders")  entered into a Stockholders  Agreement (the
"Stockholders  Agreement").  The Stockholders  Agreement also obligates DESA and
the  Stockholders to take all necessary  actions to include certain  nominees of
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           69     Chairman and Director
W. Michael Clevy          51     Chief Executive Officer, President, Director
John W. Childs            58     Director
Adam L. Suttin            32     Director
Michael Greene            38     Director
Joseph J. Incandela       53     Director
James E. Ashton           57     Director
Terry G. Scariot          51     Director
Stephen L. Clanton        48     Senior Vice President, Chief Financial Officer
Augusto H. Millan         50     President - International Division
David B. Schumacher       40     President - Zone Heating Division
James R. Wiese            50     President - Specialty Products Division
Edward G. Patrick         53     Vice President of Finance, Treasurer
Scott M. Nehm             50     Vice President, Controller

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 Subsidiaries of CPC International. From 1984 to
1986, Mr. Rudy was Chairman,  President and CEO of Arnold Foods Company, Inc. He
is  Chairman  of Beltone  Electronics  Corp.,  Vice  Chairman  of Empire

                                       23
<PAGE>

Kosher Poultry, Inc. and a director of International DiverseFoods,  Inc., 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  their  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.

John W. Childs has been  President of JWCA since July 1995.  Prior to that time,
he was an  executive at Thomas H. Lee Company,  a Boston  based  private  equity
investment company,  from May 1987, most recently holding the position of Senior
Managing Director.  Prior to that, Mr. Childs was with the Prudential  Insurance
Company of America where he held various  executive  positions in the investment
area  ultimately  serving as Senior  Managing  Director in charge of the Capital
Markets Group.  He is a director of Big V  Supermarkets,  Inc.,  Quality Stores,
Inc., Chevys Holdings,  Inc.,  Beltone  Electronics  Corp., Pan Am International
Academy, Inc., American Safety Razor Company and The Edison Project, Inc.

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

Michael Greene is a Managing Director of UBS Capital,  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.

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

Dr.  James E. Ashton was elected a Director of the Company in April 2000.  He is
Chairman and Chief  Executive  officer of Precision  Partners,  Inc., a contract
mechanical  manufacturing  services  supplier of complex  precision metal parts,
tooling and assemblies for original  equipment  manufacturers.  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 Lokring Corporation
and Diametrics  Medical  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. He held that position until April
1999 when he was appointed Chief Executive Officer for the Company.  He resigned
as Chief  Executive  Officer in  November  1999.  He has been a Director  of the
Company since 1996.

Stephen L. Clanton joined DESA 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

                                       24
<PAGE>

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 DESA 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.

David B. Schumacher joined DESA 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.

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 1997 to 1999,  Senior  Vice
President,  Marketing  from 1993 to 1997,  Senior  Director - Sales from 1992 to
1993 and Director, Dealer Development from 1988 to 1992.

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

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

Item 11. Executive Compensation.

The following table sets forth compensation  earned for all services rendered to
the Company during fiscal 2000,  fiscal 1999 and fiscal 1998 as  applicable,  by
the Company's chief executive officers and the most highly compensated executive
officers other than the Company's chief executive  officers  (collectively,  the
"Named Executive Officers").

                                       25
<PAGE>
<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        ($)        ($)                ($)               Options         ($) (21)
       February 26, 2000
------------------------------------------------------------------------------------------------------------------------
<S>                             <C>       <C>         <C>               <C>               <C>               <C>

W. Michael Clevy (2)             2000      124,942     34,400                --                 --              --
  President and Chief            1999           --         --                --                 --              --
  Executive Officer              1998           --         --                --                 --              --

Terry G. Scariot (2) (3)         2000      337,158         --            29,171  (5)            --           9,330
                                 1999      297,391         --            26,719  (6)       277,822 (20)      4,800
                                 1998      274,946    240,000            26,856  (7)            --           4,800

Robert H. Elman (3)              2000      339,038         --            61,736  (8)            --           3,779
                                 1999      600,961         --           128,327  (9)       614,133 (19)      4,800
                                 1998      612,115    630,000           106,808  (9)            --           4,800

John M. Kelly (4)                2000      337,158         --            43,858 (10)            --           9,330
                                 1999      297,391         --            47,224 (11)       277,822 (20)      4,800
                                 1998      274,946    240,000            37,788 (12)            --           4,800

Edward G. Patrick                2000       96,277     27,500            23,859 (13)        5,000            4,418
     Vice President of           1999       84,994     12,500            16,132 (14)       15,000            2,925
     Finance, Treasurer          1998       78,555     25,000            11,809 (15)           --            2,882

Scott M. Nehm                    2000       96,277     27,500            29,258 (16)        5,000            4,418
     Vice President,             1999       84,994     12,500            19,533 (17)       15,000            2,925
     Controller                  1998       78,555     25,000            10,578 (18)           --            2,882
<FN>

(1)   Annual bonuses are indicated for the year in which they were earned and accrued.  Annual bonuses for any year
      are generally paid in the following fiscal year.

(2)   Mr. Scariot resigned from the offices of President and Chief Executive Officer as of November 10, 1999 and Mr.
      Clevy was elected to those offices on that date.

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

(4)   Mr. Kelly was elected Chief Operating Officer on April 5, 1999. Previously,  he was Executive Vice President.
      Mr. Kelly resigned as of November 10, 1999.

(5)   Includes $7,884 for country club memberships and $8,607 for tax planning.

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

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

                                                        26
<PAGE>

(8)   Includes $31,000 for life insurance.

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

(10)  Includes $25,222 for medical expenses.

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

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

(13)  Includes $11,753 for company car.

(14)  Includes $9,060 for company car.

(15)  Includes $9,541 for company car.

(16)  Includes $10,976 for company car and $10,541 for medical expenses.

(17)  Includes $7,337 for company car and $5,890 for medical expenses.

(18)  Includes $8,289 for company car.

(19)  Mr. Elman's options were cancelled on April 5, 1999.

(20)  Mr. Scariot's and Mr. Kelly's options were cancelled on April 30, 2000.

(21)  Includes Company  contributions to the DESA Savings and Investment Plan (401K plan).  Contributions are shown
      in the year made.
</FN>
</TABLE>

The Company  granted the options set forth and described in the following  table
to the Named Executive Officers in fiscal 2000:
<TABLE>
<CAPTION>

                                   Option/SAR Grants in Last Fiscal Year

                                                                                     Potential Realizable
                                                                                       Value at Assumed
                                                                                     Annual Rates of Stock
                       Number of           % of Total                               Price Appreciation for
                       Securities         Options/SARs                                   Option Term
                       Underlying          Granted to     Exercise of              --------------------------
                      Option/SARs         Employees in     Base Price   Expiration
        Name          Granted (#)          Fiscal Year       ($/Sh)        Date       5% ($)      10% ($)
-------------------------------------------------------------------------------------------------------------
<S>                     <C>                     <C>          <C>         <C>          <C>          <C>
Edward G. Patrick        5,000                   5            6.50        7/18/10      20,439       51,797
Scott M. Nehm            5,000                   5            6.50        7/18/10      20,439       51,797
</TABLE>

The following  table sets forth the number of securities  underlying the options
held by the Named Executive Officers at the end of fiscal 2000:

                                       27
<PAGE>
<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>

Edward G. Patrick             750                   --                664/18,586                       --
Scott M. Nehm                  --                   --              1,414/18,586                       --
Terry G. Scariot               --                   --                 0/277,822 (1)                   --
John M. Kelly                  --                   --                 0/277,822 (1)                   --

<FN>
(1)      Mr. Scariot's and Mr. Kelly's options were cancelled on April 30, 2000.
</FN>
</TABLE>

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 2000 except Mr. Incandela who received a director's fee of $10,000 per year
plus a $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.  Said
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,  Greene,  and Clevy.  Prior to his  resignation,  Mr.
Scariot  also served on the  Compensation  Committee.  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. Greene is a Managing Director of UBS Capital LLC.

                                       28
<PAGE>

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. Patrick and Nehm in fiscal 2000.

The  Compensation  Committee  determined  the  salary  levels  of the  Company's
executive officers,  including the Chief Executive Officer,  for fiscal 2000, as
well as the  amounts of bonuses  paid in fiscal 2000 for  performance  in fiscal
1999. 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 2000 in respect of 1999 and salary levels for fiscal 2000,  the  Compensation
Committee took into account 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
                                            MICHAEL GREENE
                                            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  DESA by  each  person  known  to the  Company  to be the
beneficial  owner of more than five  percent of the common  stock of DESA,  each
director of the Company,  each Named  Executive  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 1,  2000,  except  as
otherwise indicated.

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

J.W. Childs Equity Partners, L.P.(1)
     One Federal Street
     Boston, Massachusetts                           10,381,854       64.0%
UBS Capital LLC(2)
     299 Park Avenue
     New York, New York                               2,923,718        18.0

                                       29
<PAGE>

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

John W. Childs(1)(3)(4)
     One Federal Street
     Boston, Massachusetts                           10,801,578        66.6
Raymond B. Rudy(1)(3)(5)
     One Federal Street
     Boston, Massachusetts                           10,410,401        64.2
Adam L. Suttin(1)(3)(6)
     One Federal Street
     Boston, Massachusetts                           10,423,312        64.3
Michael Greene(2)(7)
     299 Park Avenue
     New York, New York                               2,923,718        18.0
Joseph Incandela(8)                                       3,330          *
W. Michael Clevy                                        230,770         1.4
James E. Ashton                                               0          *
Terry G. Scariot                                              0          *
John M. Kelly                                                 0          *
Robert H Elman(9)                                       377,602         2.3
Stephen L. Clanton                                       61,539          *
David B. Schumacher                                       7,692          *
James R. Wiese                                           61,539          *
Augusto H. Millan                                        15,385          *
Edward G. Patrick(10)                                    41,117          *
Scott M. Nehm(11)                                        35,396          *
All Directors and executive officers as a group (16
     persons)(1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)
                                                     14,629,671        90.2%

 *  Less than 1.0%

(1)   Includes  148,572 shares deemed  beneficially  owned by Childs pursuant to
      warrants.
(2)   Includes  43,504  shares  deemed  beneficially  owned by UBS  Capital  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 476 shares held by Mr. Suttin as Trustee for the
      Suttin Family Trust and 11,409 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 3,330 shares that Mr. Incadela has the right to acquire  pursuant
      to currently exercisable options.
(9)   Includes 177,494 shares owned by Mr. Elman's family.
(10)  Includes 750 shares that Mr. Patrick has the right to acquire  pursuant to
      currently exercisable options.
(11)  Includes  1,500 shares that Mr. Nehm has the right to acquire  pursuant to
      currently exercisable options.

                                       30
<PAGE>

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.

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 February 26, 2000 and                     F-2
February 27, 1999

Consolidated Statements of Income for the fiscal years ended
February 26, 2000, February 27,1999 and February 28, 1998                F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended February 26, 2000, February 27, 1999 and
February 28, 1998                                                        F-5

Consolidated Statements of Cash Flows for the fiscal years ended
February 26, 2000, February 27, 1999 and February 28, 1998               F-7

Notes to Consolidated Financial Statements for the fiscal years
ended February 26, 2000, February 27, 1999 and February 28, 1998.        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.



                                       31
<PAGE>
<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., Desa Holdings Corporation and each Stockholder of Desa
             Holdings Corporation named therein
2.2          Stock Purchase Agreement, dated as of January 12, 1998, by and among Heath                *
             Holding Corp., its Shareholders and Optionholders and the Company
2.3          Agreement and Plan of Reorganization, dated May 13, 1998 by and among the                 **
             Company, FMI Acquisition, Inc., Fireplace 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 the DESA International, Inc.                                                   *
3.2A         By-laws of the Company                                                                    *
4.1          Indenture, dated as of November 26, 1997, by and among the Company, DESA                  *
             International, Inc., and Marine Midland Bank relating to $130,000,000 of
             the Company's 9 7/8% Senior Subordinated Notes Due 2007
4.2          Registration Rights Agreement, dated as of November 26, 1997 by and among                 *
             the Company, DESA International, Inc., NationsBanc Montgomery Securities,
             Inc. and UBS Securities LLC
4.3          Purchase Agreement, dated as of November 21, 1997, by and among the                       *
             Company, DESA International, Inc., NationsBanc Montgomery Securities, Inc.
             and UBS Securities LLC
4.4          Global Note Payable to CEDE & Co.                                                         *
4.5          Company Guarantee                                                                         *
10.1         Credit Agreement, dated as of November 26, 1997 by and among the Company,                 *
             DESA International, Inc., NationsBank, N.A., UBS Securities LLC
             and NationsBanc Montgomery Securities, Inc.
10.2         Management Incentive Plans of the Company, dated March 1, 1997                            *
10.3         Sales Compensation and Incentive Plan of the Company for 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

                                       32
<PAGE>

 Exhibit No.                                  Description of Document
<S>         <C>                                                                                       <C>
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.
10.38        Employment agreement, dated as of November 10, 1999 between the Company and W. Michael    ******
             Clevy
27           Financial Data Schedule                                                                   Filed
                                                                                                       herewith
<FN>

*        Incorporated by reference to the Company's Registration Statement on Form S-4 filed on August 5, 1998
         (File No. 333-44969)

**       Incorporated  by reference to the Company's  Statement on Schedule 13D in respect of the common stock
         of Fireplace Manufacturers, Inc. filed on June 5, 1998

***      Incorporated by reference to the Company's  Quarterly Report on Form 10-Q for the period ended August
         29, 1998

****     Incorporated  by  reference  to the  Company's  Quarterly  Report on Form 10-Q for the  period  ended
         November 28, 1998

*****    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
</FN>
</TABLE>

                                                      33
<PAGE>



(b)      Reports on Form 8-K

         The Company filed no reports on Form 8-K during fourth quarter, 2000.

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

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


                                       34
<PAGE>

                        Consolidated Financial Statements

                            DESA Holdings Corporation

                      Fiscal years ended February 26, 2000,
                     February 27, 1999 and February 28, 1998
                       with Report of Independent Auditors











<PAGE>



                            DESA Holdings Corporation

                        Consolidated Financial Statements


                      Fiscal years ended February 26, 2000,
                     February 27, 1999 and February 28, 1998




                                    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  financial  statements  and  schedule of DESA
Holdings  Corporation (the "Company") as listed in the accompanying index to the
financial  statements (Item 14 (a)). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with 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 listed in the accompanying index to the
financial statements (Item 14(a)) present fairly, in all material respects,  the
consolidated  financial  position of DESA Holdings  Corporation  at February 26,
2000 and February 27, 1999, and the  consolidated  results of its operations and
its cash flows for each of the three fiscal  years in the period ended  February
26, 2000, 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.


                                                           Ernst & Young LLP /s/

Stamford, Connecticut
April 21, 2000

                                      F-1

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

                                 Consolidated Balance Sheets

                                                            February 26,        February 27,
                                                                2000                1999
                                                           ---------------------------------
                                                                 (In Thousands, Except
                                                                   Number of Shares)
<S>                                                        <C>                   <C>
Assets
Current assets:
   Cash and cash equivalents                                $     173              $     888
   Accounts receivable, net                                    32,921                 30,390
   Inventories:
     Raw materials                                                209                    986
     Work-in-process                                            9,756                  6,376
     Finished goods                                            50,192                 37,891
                                                            --------------------------------
                                                               60,157                 45,253

   Deferred tax assets                                          1,743                  2,137
   Other current assets                                         2,003                  1,321
                                                            --------------------------------
Total current assets                                           96,997                 79,989

Property, plant and equipment:
   Land                                                           525                    390
   Buildings and improvements                                   6,294                  6,173
   Machinery and equipment                                     39,361                 34,527
   Furniture and fixtures                                       1,090                    725
                                                            --------------------------------
                                                               47,270                 41,815
   Less accumulated depreciation                               30,574                 26,182
                                                            --------------------------------
                                                               16,696                 15,633

Goodwill, net                                                  93,818                 81,882

Deferred tax assets                                                --                    598

Other assets, net                                              22,266                 25,250



                                                            --------------------------------
Total assets                                                $ 229,777              $ 203,352
                                                            ================================

See accompanying notes

                                             F-2
<PAGE>
<CAPTION>
                                                            February 26,        February 27,
                                                                2000                1999
                                                           ---------------------------------
                                                                 (In Thousands, Except
                                                                   Number of Shares)
<S>                                                        <C>                   <C>
Liabilities and stockholders' equity (deficit)
Current liabilities:
   Accounts payable                                         $  37,040              $  25,232
   Accrued interest                                             5,233                  3,075
   Other accrued liabilities                                   13,225                 10,732
   Current portion of long-term debt                           23,500                 13,307
                                                            --------------------------------
Total current liabilities                                      78,998                 52,346

Long-term debt                                                265,846                285,138
Deferred tax liabilities                                          789                     --
Other liabilities                                              14,840                    599
                                                            --------------------------------
Total liabilities                                             360,473                338,083

Commitments

Series C redeemable preferred stock, $.01 par value;
  authorized--40,000 shares at February 26, 2000 and
  February 27, 1999; issued and outstanding--22,461
  shares at February 26, 2000 and 19,990 shares at
  February  27, 1999 (liquidation preference--
  $22,882,000 at February 26, 2000 and $20,371,000 at
  February 27, 1999)                                           19,937                 17,207

Stockholders' equity (deficit):
   Common stock, $.01 par value; authorized--
     50,000,000 shares at February 26, 2000 and February
     27, 1999; issued and outstanding--15,562,656
     shares at February 26, 2000 and 15,548,692 shares at
     February 27, 1999                                            155                    155
   Nonvoting common stock, $.01 par value; authorized--
     3,000,000 shares at February 26, 2000 and
     February 27, 1999; issued and outstanding--90,604
     shares at February 26, 2000 and February 27, 1999              1                      1
   Capital in excess of par value                              98,075                 97,984
   Carryover predecessor basis adjustment                     (32,309)               (32,309)
   Retained earnings (deficit)                               (214,518)              (216,742)
   Accumulated other comprehensive loss                        (2,037)                (1,027)
                                                            --------------------------------
Total stockholders' equity (deficit)                         (150,633)              (151,938)
                                                            --------------------------------
Total liabilities and stockholders' equity (deficit)        $ 229,777              $ 203,352
                                                            ================================
</TABLE>

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

                                       DESA Holdings Corporation

                                   Consolidated Statements of Income


                                                                   Fiscal year ended
                                                  February 26,        February 27,       February 28,
                                                      2000               1999                1998
                                                  ---------------------------------------------------
                                                                         (In Thousands)

<S>                                              <C>                 <C>                 <C>
Net sales                                         $ 393,924           $ 317,237           $ 224,169
Cost of sales                                       262,742             213,828             145,486
                                                  -------------------------------------------------
Gross profit                                        131,182             103,409              78,683

Operating costs and expenses:
   Selling                                           69,821              54,084              36,081
   General and administrative                        15,890              13,597              11,199
   Other                                              6,088               5,362               2,911
                                                  -------------------------------------------------
                                                     91,799              73,043              50,191
                                                  -------------------------------------------------
Operating profit                                     39,383              30,366              28,492

Interest expense                                     28,853              27,864              17,327
                                                  -------------------------------------------------
Income before provision for income taxes             10,530               2,502              11,165

Provision for income taxes                            5,536               1,166               5,545
                                                  -------------------------------------------------
Income before extraordinary item                      4,994               1,336               5,620
Extraordinary loss, net of income tax benefit            --                  --              (2,308)
                                                  -------------------------------------------------
Net income                                            4,994               1,336               3,312

Less dividends and accretion on preferred stock       2,769               2,480                 607
                                                  -------------------------------------------------
Income (loss) available to common stockholders    $   2,225           $  (1,144)          $   2,705
                                                  =================================================
</TABLE>

See accompanying notes.

                                                 F-4

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

                                      Consolidated Statements of Stockholders' Equity (Deficit)


                                                              Non                 Carryover              Accumulated      Total
                                                             voting  Capital in  Predecessor  Retained      Other      Stockholders'
                                                    Common   Common  Excess of     Basis      Earnings  Comprehensive    Equity
                                                    Stock    Stock   Par Value   Adjustment  (Deficit)      Loss        (Deficit)
                                                    --------------------------------------------------------------------------------
                                                                                                     (In Thousands)
<S>                                                <C>      <C>       <C>      <C>          <C>           <C>          <C>

Balance at March 1, 1997                            $236     $ 18     $ 26,722  $(32,309)    $  (79,113)   $   (308)    $  (84,754)
Comprehensive income:
 Net income                                           --       --           --        --          3,312          --          3,312
 Foreign currency translation adjustment              --       --           --        --             --        (256)          (256)
                                                                                                                        ----------
Comprehensive income                                  --       --           --        --             --          --          3,056
Exercise of stock options                             --       --            5        --             --          --              5
Exercise of stock options simultaneously
  with the Recapitalization                            2       --          148        --             --          --            150
Tax benefit on exercise of stock options              --       --          177        --             --          --            177
Repurchase of common stock during the
  Recapitalization                                  (223)     (17)     (18,276)       --       (139,190)         --       (157,706)
Issuance of common stock during the
  Recapitalization                                   112       --       73,703        --             --          --         73,815
Expenses attributable to the Recapitalization         --       --       (6,536)       --             --          --         (6,536)
Issuance of warrants during the Recapitalization      --       --        3,002        --             --          --          3,002
Issuance of common stock                              11       --        7,050        --             --          --          7,061
Repurchase of common stock                            (1)      --          (69)       --             --          --            (70)
Dividends on preferred stock                          --       --           --        --           (544)         --           (544)
Accretion of preferred stock                          --       --           --        --            (63)         --            (63)
                                                    ------------------------------------------------------------------------------
Balance at February 28, 1998                         137        1       85,926   (32,309)      (215,598)       (564)      (162,407)
Comprehensive income:
 Net income                                           --       --           --        --          1,336          --          1,336
 Foreign currency translation adjustment              --       --           --        --             --        (463)          (463)
                                                                                                                        ----------
Comprehensive income                                  --       --           --        --             --          --            873
Accretion of preferred stock                          --       --           --        --           (253)         --           (253)
Dividends on preferred stock                          --       --           --        --         (2,227)         --         (2,227)
Issuance of common stock                              18       --       12,058        --             --          --         12,076
                                                    ------------------------------------------------------------------------------
Balance at February 27, 1999                         155        1       97,984   (32,309)      (216,742)     (1,027)      (151,938)
Comprehensive income:
 Net income                                                                                       4,994                      4,994
 Foreign currency translation adjustment                                                                     (1,010)        (1,010)
                                                                                                                        ----------
Comprehensive income                                                                                                         3,984
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  $(32,309)     $(214,518)   $ (2,037)     $(150,633)
                                                    ==============================================================================
</TABLE>

See accompanying notes.
                                                                F-5
<PAGE>
<TABLE>
<CAPTION>

                                         DESA Holdings Corporation

                                   Consolidated Statements of Cash Flows


                                                                        Fiscal year ended
                                                          February 26,       February 27,    February 28,
                                                              2000              1999             1998
                                                          -----------------------------------------------
                                                                          (In Thousands)
<S>                                                      <C>                <C>              <C>
Operating activities
Net income                                                $   4,994          $   1,336        $   3,312
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation                                             4,425              3,589            2,456
     Amortization                                             6,050              4,998            2,256
     Deferred income taxes                                    1,782                271              (36)
     Equity in undistributed earnings of joint venture         (233)              (170)            (157)
     Extraordinary item                                          --                 --            2,308
     Change in operating assets and liabilities, net of
       acquisitions:
         Accounts receivable, net                            (2,531)            (7,888)             131
         Inventories                                        (14,904)            (1,212)          (6,996)
         Other current assets                                  (682)               211             (153)
         Accounts payable                                    11,808              8,592           (7,646)
         Accrued interest                                     2,318             (2,512)           4,437
         Other accrued liabilities                            1,443             (5,025)             512
         Income taxes payable                                   965                (49)             565
         Other liabilities                                      121                166              157
                                                          ---------------------------------------------
Net cash provided by operating activities                    14,590              2,307            1,146
                                                          ---------------------------------------------

Investing activities
Capital expenditures                                         (5,529)            (4,462)          (5,475)
Dividends received from joint venture                           185                170              157
Cash paid for acquisitions, net of cash acquired                 --            (40,957)         (40,294)
Other                                                           (90)                26             (368)
                                                          ---------------------------------------------
Net cash used in investing activities                        (5,434)           (45,223)         (45,980)
                                                          ---------------------------------------------
                                                   F-6
<PAGE>
<CAPTION>

                                         DESA Holdings Corporation

                             Consolidated Statements of Cash Flows (continued)


                                                                        Fiscal year ended
                                                          February 26,       February 27,    February 28,
                                                              2000              1999             1998
                                                          -----------------------------------------------
                                                                          (In Thousands)
<S>                                                      <C>                <C>              <C>
Financing activities
Proceeds from debt                                        $      --          $      --        $ 265,500
Proceeds from issuance of Series C
   Redeemable Preferred Stock                                    --                 --           14,598
Proceeds from issuance of warrants                               --                 --            3,002
Proceeds from issuance of common stock                           --                 --           73,815
Repurchase of common stock                                       --                 --         (157,706)
Repayment of Term Loans                                          --                 --         (183,095)
Payment of expenses attributable to the
   Recapitalization                                              --                 --          (17,670)
Decrease in note payable                                       (456)                --               --
Net proceeds from revolving loan                                 --                 --           43,000
Net (payments on) proceeds from working capital loan          2,697              7,202          (20,020)
Principal payments of Term Loans                             (8,375)            (5,250)          (7,980)
Proceeds from Acquisition Loans                              (3,125)            30,000           20,000
Payments for repurchase of common stock                          --                 --              (70)
Exercise of stock options                                        --                 --              155
Proceeds from issuance of common stock                           91             12,076            7,061
Payment of debt financing costs                                (703)            (1,016)              --
                                                          ---------------------------------------------
Net cash (used in) provided by financing activities          (9,871)            43,012           40,590

Effect of exchange rate changes on cash                          --                 (2)             (20)
                                                          ---------------------------------------------
(Decrease) increase in cash and cash equivalents
   for the year                                                (715)                94           (4,264)
Cash and cash equivalents at beginning of year                  888                794            5,058
                                                          ---------------------------------------------
Cash and cash equivalents at end of year                  $     173          $     888        $     794
                                                          =============================================


</TABLE>

See accompanying notes.

                                                   F-7
<PAGE>
                            DESA Holdings Corporation

                   Notes to Consolidated Financial Statements

                                February 26, 2000


1. Organization and Basis of Presentation

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

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

Holdings used such proceeds, together with a portion of the proceeds borrowed by
its  wholly-owned  subsidiary,  DESA, under new term loans and a working capital
loan  facility  (the  "Credit   Facility")   with  Bank  of  America,   formerly
NationsBank,   N.A.,  as  administrative  agent,  to  repurchase  89.6%  of  its
outstanding common stock and nonvoting common stock for $157,706,000  ($6.53 per
share,  inclusive of $1,119,000 (or $.04 per share) relating to a purchase price
adjustment  for net working  capital  that was higher at the  closing  date than
originally  estimated at the measurement  date). The remaining proceeds from the
Credit  Facility and the proceeds from the issuance by DESA of  $130,000,000  of
Senior  Subordinated  Notes  were used to repay the  outstanding  amounts  under
Holdings' existing credit agreement (see Notes 4 and 6).

                                      F-8
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


1. Organization and Basis of Presentation (continued)

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

Company Operations

Holdings  is engaged in the  manufacturing  and  marketing  of various  consumer
product lines,  including zone heating products and specialty products primarily
throughout  the United  States and  Europe.  Two  significant  customers,  which
operate in the hardware  homecenter  industry,  accounted for 25% and 13% of net
sales,   respectively,   in  fiscal  year  2000,  29%  and  11%  of  net  sales,
respectively, in fiscal year 1999 and 17% and 13% of net sales, respectively, in
fiscal year 1998. The receivable balances from these two customers  collectively
represented  39% and 37% of Holdings'  accounts  receivable at February 26, 2000
and February 27, 1999.

Other than a small amount of goodwill,  Holdings  has no assets,  operations  or
cash flows independent of DESA and,  accordingly,  separate financial statements
for DESA have not been  provided  as  management  believes  that such  financial
statements   are  not   material  to  an   investor.   Holdings  has  fully  and
unconditionally guaranteed the Credit Facility and the Senior Subordinated Notes
(see Note 4).

Summary of Significant Accounting Policies

Fiscal Year

Holdings'  fiscal year ends on the  Saturday  closest to February 28. The fiscal
years  for the  consolidated  financial  statements  included  herein  ended  on
February 26, 2000 (52 weeks), February 27, 1999 (52 weeks) and February 28, 1998
(52 weeks).

                                      F-9
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



1. Organization and Basis of Presentation (continued)

Consolidation

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

Cash Equivalents

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

Inventories

Inventories  are  stated  at the  lower  of  cost  or  market.  The  cost of all
inventories in the United States is valued using the last-in, first-out ("LIFO")
method while the cost of all foreign  inventories  is valued using the first-in,
first-out ("FIFO") method. Holdings believes the LIFO method results in a better
matching  of current  costs with  current  revenues.  At  February  26, 2000 and
February  27,  1999,  approximately  81% and  82%,  respectively,  of the  total
inventories  are costed at LIFO.  The effect of using the LIFO  method in fiscal
years 2000, 1999 and 1998 was to increase pre-tax income by $1,551,000, $541,000
and $284,000, respectively.

If the LIFO method of valuing  inventories was not used, total inventories would
have been $2,749,000 and $1,198,000 lower than reported at February 26, 2000 and
February 27, 1999, respectively.

Property, Plant and Equipment

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

                                      F-10
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


1. Organization and Basis of Presentation (continued)

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

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

Revenue Recognition

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

Warranty Costs

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

Income Taxes

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

Financing Costs

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

                                      F-11
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



1. Organization and Basis of Presentation (continued)

Goodwill

Goodwill is amortized on the  straight-line  basis over 40 years and is recorded
at cost less accumulated  amortization.  Holdings reviews the  recoverability of
its  goodwill  by  comparing  the  unamortized  carrying  value  to  anticipated
undiscounted  future cash flows.  Any impairment is charged to expense when such
determination  is  made.  Accumulated  amortization  at  February  26,  2000 and
February 27, 1999 was $9,090,000 and $6,809,000,  respectively, and amortization
expense for fiscal  years 2000,  1999 and 1998 was  $2,281,000,  $1,981,000  and
$1,168,000, 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 expenses are translated into U.S. dollars at
average monthly  exchange  rates.  The Canadian dollar has been determined to be
the functional currency for DESA's Canadian subsidiary,  the Netherlands Guilder
for its  European  subsidiary  and the  Hong  Kong  dollar  for  its  Hong  Kong
subsidiary.

Derivative Financial Instruments

Gains and losses related to interest rate protection  agreements used to convert
floating  rate debt to a fixed  rate  basis are  recorded  over the lives of the
agreements as an adjustment to interest expense (see Note 5).

Holdings utilizes forward exchange foreign currency  contracts to reduce foreign
exchange  risks that arise from exchange rate  movements  between the dates that
foreign  currency  transactions for the purchase of inventories are entered into
and the date they are

                                      F-12
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



1. Organization and Basis of Presentation (continued)

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

Holdings  expenses the costs of  advertising  as incurred.  Advertising  expense
totaled approximately $3,345,000, $2,785,000 and $1,587,000 for the fiscal years
ended February 26, 2000, February 27, 1999 and February 28, 1998, 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 must first be applied in the first
quarter of fiscal  years that begin after June 15,  2000.  FAS 133 will  require
Holdings to recognize all derivatives on the consolidated balance sheets at fair
value.  Derivatives  that are not hedges must be adjusted to fair value  through
income.  If the  derivative  is a hedge,  depending  on the nature of the hedge,
changes in the fair  value of  derivatives  will  either be offset  against  the
change in fair  value of the  hedged  assets,  liabilities  or firm  commitments
through  earnings or recognized in other  comprehensive  income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will  immediately be recognized in earnings.  Management  does not
believe  that  FAS 133  will  have a  significant  effect  on the  earnings  and
financial  position  of the  Company.  The  Company  expects  to  adopt  FAS 133
beginning in the first quarter of fiscal year 2002 which begins in March 2001.

Use of Estimates

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

                                      F-13
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



2. Acquisitions

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

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

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


Certain  adjustments  were recorded during fiscal year1999 to finalize  purchase
accounting.

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

On August 19,  1998,  the  Company  consummated  two  acquisitions.  The Company
acquired by merger Fireplace Manufacturers, Inc. ("FMI") for a net cash purchase
price of $25,805,000.  The purchase price includes  non-compete  agreements with
certain executives of FMI covering a three year period for aggregate payments of
$3,050,000.  The  Company  also  acquired  certain  of the  assets of  Universal
Heating, Inc. ("UHI") through DESA U.S. Inc., which then merged

                                      F-14
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


2. Acquisitions (continued)

into DESA,  for a cash  purchase  price of  $12,634,000,  including  non-compete
payments  of  $1,998,000.  The Company  financed  the two  acquisitions  through
borrowings of $26,363,500 under the Credit Facility (Acquisition Loan B) and the
issuance of common stock for $12,075,500.

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

      Current assets                                   $ 4,450
      Property, plant and equipment                      1,201
      Other assets                                      15,734
      Goodwill                                          34,234
      Current liabilities                               (3,060)
      Long Term liabilities                            (14,120)
                                                      --------
                                                      $ 38,439
                                                      ========

Holdings   accounted  for  such  acquisitions  using  the  purchase  method  and
accordingly,  certain  adjustments  were recorded during fiscal 2000 to finalize
purchase  accounting.  The results of operations of such  acquisitions have been
included in Holdings' results of operations from the acquisition dates.

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

                                                  Fiscal year ended
                                           February 27,        February 28,
                                              1999                1998
                                           -------------------------------

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


                                      F-15
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


3. Accounts Receivable

Accounts  receivable  are net of an allowance for doubtful  accounts of $907,000
and $1,628,000 at February 26, 2000 and February 27, 1999, respectively.

4. Financing Arrangements

As part of the Recapitalization discussed in Note 1, Holdings entered into a new
credit  agreement on November 26, 1997 with Bank of America,  UBS Securities LLC
and Nationsbanc Montgomery Securities,  Inc. (the "Lenders"),  which was amended
in May  1999,  that  consists  of a Working  Capital  Loan  Commitment  of up to
$75,000,000 (which includes a Swing-Line Loan Commitment of up to $5,000,000), a
Term A Loan Commitment ("Term A Loan") of $50,000,000,  a Term B Loan Commitment
("Term  B  Loan")  of  $50,000,000,  an  Acquisition  Loan  Commitment  of up to
$20,000,000   and  an  Acquisition  B  Loan  Commitment  of  up  to  $30,000,000
(collectively,   the  "Credit   Facility").   Also,  in   connection   with  the
Recapitalization,  DESA issued $130,000,000 aggregate principal amount of Senior
Subordinated  Notes to qualified  institutional  buyers, as defined in Rule 144A
under the Securities Exchange Act of 1933 (the "Senior Subordinated Notes").

The Credit Facility  requires a Clean-Up Period,  as defined,  under the Working
Capital Loan Commitment,  for a period of 30 consecutive days occurring  between
January 1 and May 30 in each calendar year  commencing  January 1, 1998.  During
the  Clean-Up  Period,  the sum of Working  Capital  advances,  Letter of Credit
advances and Swing Line loan advances  outstanding shall not exceed $30,000,000.
Holdings has already  complied  with the  requirements  of the  Clean-Up  Period
occurring between January 1, 2000 and May 30, 2000.

Holdings had a balance of $250,000 drawn against the $5,000,000  Swing-Line Loan
Commitment at February 26, 2000. The  Swing-Line  Loan,  which accrues  interest
monthly  at the prime  rate plus  2.00% per  annum,  extends  to the  earlier of
November 26, 2003 or 30 days after the requested borrowing. After the expiration
of the Swing-Line Loan period, the $5,000,000  Commitment remains as part of the
Working Capital Loan Commitment of $75,000,000.

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 will be
applied against the next scheduled principal payments.

                                      F-16
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


4. Financing Arrangements (continued)

This credit agreement includes various restrictive  covenants which, among other
things, prohibit payment of dividends to common stockholders, set maximum limits
on capitalized  lease  obligations  and capital  expenditures,  require  minimum
consolidated EBITDA (as defined) levels, and set consolidated interest coverage,
fixed  charge  coverage  and leverage  ratios.  At February  26, 2000,  Holdings
complied with the all restrictive  covenants  required by the credit  agreement.
Substantially all of Holdings'  consolidated assets are pledged under the Credit
Facility and Senior Subordinated Notes.

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

                                                           February 26,      February 27,
                                                              2000              1999
                                                           ------------------------------
<S>                                                        <C>                <C>
9 7/8% Senior Subordinated Notes due 2007 (A)               $130,000           $130,000
Bank of America and various banks Term A Loan (B)             37,500             44,875
Bank of America and various banks Term B Loan (C)             47,750             48,750
Bank of America and various banks
   Working Capital Loan Commitment (D)                        25,379             22,682
Bank of America and various banks Acquisition Loan  (E)       18,750             20,000
Bank of America and various banks Acquisition B Loan  (F)     28,125             30,000
Note payable related to acquisition of Heath (G)               1,842              2,138
                                                            ---------------------------
Total outstanding borrowings                                 289,346            298,445
Less current portion of long-term debt                        23,500             13,307
                                                            ---------------------------
Total long-term debt                                        $265,846           $285,138
                                                            ===========================
<FN>
(A)   The Senior  Subordinated  Notes are payable on December 15, 2007 and accrue interest
      at a rate of 9.875% per annum.  Interest  is  payable  semi-annually  on June 15 and
      December 15,  commencing  on June 15,  1998.  The Senior  Subordinated  Notes can be
      redeemed prior to the mandatory redemption date based upon the occurrence of certain
      events, as defined.  DESA is the issuer of the Senior  Subordinated Notes, which are
      fully and unconditionally guaranteed by Holdings.

                                           F-17

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


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 8.03% and 7.85% in
      2000 and 1999, 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 8.52% and 8.27% in
      2000 and 1999, respectively. Once repaid, the Term B Loan may not be reborrowed.

(D)   The Working  Capital  Loan  Commitment  is payable at any time at the option of 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 8.60% and
      7.96% in 2000 and 1999, 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
      February  26,  2000 and  February  27,  1999,  letters of credit of  $1,497,000  and
      $718,000,  respectively, were outstanding under the Working Capital Loan Commitment.
      Borrowings  are  generally  limited  to  specific   percentages  of  eligible  trade
      receivables  and inventory.  Holdings pays commitment fees of 1/2 of 1% per annum on
      the daily unutilized Working Capital Loan Commitment.

(E)   The  Acquisition  Loan is payable in quarterly  installments  commencing in February
      2000 and extending through November 26, 2003 and accrues interest,  which is payable
      quarterly,  at the prime  rate plus 2.25% or LIBOR plus 3.25% at the option of DESA.
      The  weighted  average  interest  rate  was  8.22%  and  8.27%  in  2000  and  1999,
      respectively. Once repaid, the Acquisition Loan may not be reborrowed.

(F)   The Acquisition B Loan is payable in quarterly  installments  commencing in February
      2000 and extending through November 26, 2003 and accrues interest,  which is payable
      quarterly,  at the prime rate plus 2.25% or LIBOR plus 3.25%, at the option of DESA.
      The  weighted  average  interest  rate  was  8.05%  and  8.33%  in  2000  and  1999,
      respectively. Once paid, the Acquisition B Loan may not be reborrowed.


                                          F-18
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



 4. Financing Arrangements (continued)

(G)   The note payable is due on December 31, 2008 and accrues interest,  which is payable
      semi-annually  beginning June 30, 1998, at a rate of 7.5% per annum. DESA may elect,
      upon written notice,  to defer any interest  payments.  Such interest payments shall
      effectively convert to principal and accrue interest at a rate of 7.5% per annum. In
      fiscal  years  2000 and 1999,  $160,000  and  $138,000,  respectively,  of  interest
      payments  were  deferred and were  converted  into  principal.  In fiscal year 2000,
      $456,000 was deducted from the principal balance for certain payments made under the
      terms of the note.
</FN>
</TABLE>

In  accordance  with the terms of the Credit  Facility,  the  ability of DESA to
incur additional indebtedness is limited, as defined. At February 26, 2000, DESA
can incur additional indebtedness of $36.7 million.

Cash  payments  for  interest  for the fiscal  years ended  February  26,  2000,
February  27, 1999 and  February  28,  1998 were  $26,564,000,  $30,514,000  and
$12,890,000, respectively.

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

         Fiscal years ending:
            2001                                  $   23,500
            2002                                      23,500
            2003                                      23,500
            2004                                      60,604
            2005                                      26,400
            Thereafter                               131,842
                                                  ----------
                                                  $  289,346
                                                  ==========

5. Financial Instruments

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

                                      F-19
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


5. Financial Instruments (continued)

The following table summarizes the carrying amounts and estimated fair values of
Holdings' remaining financial  instruments at February 26, 2000 and February 27,
1999 (bracketed amount represents an asset) (in thousands):

                                  February 26, 2000       February 27, 1999
                               -----------------------------------------------
                                 Carrying     Fair       Carrying     Fair
                                  Amount      Value       Amount      Value
                               -----------------------------------------------

Bank debt                       $ 157,504   $ 157,504   $ 166,307   $ 166,307
Senior subordinated notes         130,000      96,850     130,000     102,700
Note payable                        1,842       1,842       2,138       2,138
Interest rate swap agreements          --          --          --        (438)
Foreign exchange contracts             --         473          --         228

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

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

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

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

Interest  Rate Swap  Agreements:  The are no interest  rate swap  agreements  in
effect at February 26, 2000. The fair value of the interest rate swap agreements
reflect the  estimated  amount that DESA would  receive at February  27, 1999 if
such contracts were terminated based on quoted market prices.

Foreign exchange  contracts:  The fair value of the foreign  exchange  contracts
reflect  the  estimated  amount  that DESA would pay at  February  26,  2000 and
February  27, 1999 if such  contracts  were  terminated  based on quoted  market
prices.

                                      F-20
<PAGE>


                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



5. Financial Instruments (continued)

Derivative Financial Instruments

In fiscal 1999,  DESA 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  without  the  exchange  of the  underlying  principal
amounts.  The interest rate swap agreements  provided for the payment by DESA of
fixed rates of interest based on three month LIBOR.  Notional  principal amounts
of these  agreements  total $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 in February 2000. The notional amounts are used to measure the interest
to be paid or  received  and do not  represent  the amount of exposure to credit
loss.  Net payments of $573,000 and $100,000  were  recorded as  adjustments  to
interest expense in fiscal years 2000 and 1999, respectively.

Foreign Exchange Contracts

At February 26, 2000, DESA had forward exchange foreign currency contracts, with
maturities  ranging from June 2000 to November  2000, to purchase  approximately
$4.9  million  in foreign  currencies  to cover  future  payments  to  component
suppliers.

6. Series C Redeemable Preferred Stock

Holdings is authorized to issue 40,000 shares of $.01 par value  Preferred Stock
which have no voting rights,  except under limited conditions,  as defined. Such
Preferred  Stock has a mandatory  redemption  date on  November  30, 2009 at its
liquidation  value of $1,000 per share plus  accrued and unpaid  dividends.  The
liquidation  value is adjustable  based upon the  occurrence  of certain  future
events,  as  defined.  Such  Preferred  Stock  was  initially  recorded  on  the
consolidated balance sheets at $14,598,000 (this amount is net of the fair value
assigned to the Warrants of $3,002,000  -- see Note 8) and is being  accreted to
its face value of $17,600,000 over its term. The accretion of Preferred Stock is
shown  as a  reduction  to  retained  earnings  (deficit)  on  the  consolidated
statements of stockholders' equity (deficit).


                                      F-21
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



6. Series C Redeemable Preferred Stock (continued)

The holders of Preferred Stock are entitled to receive cumulative dividends at a
rate of 12% per  annum.  Such  dividends  are  payable as and when  declared  by
Holdings' Board of Directors in cash or via the issuance of additional shares of
Preferred  Stock at a value  of  $1,000  per  share  if a cash  dividend  is not
declared prior to any May 31 or November 30 before its  redemption.  In June and
December  1999,  Holdings  issued 1,189 and 1,281  shares of Preferred  Stock as
dividends-in-kind. At February 26, 2000 and February 27, 1999, accrued dividends
(included in other accrued liabilities) on such Preferred Stock were $421,000 or
$18.74 per share and $381,000 or $19.06 per share, respectively.

7. Income Taxes

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

                                              February 26,      February 27,
                                                  2000              1999
                                             -------------------------------
  Deferred tax liabilities:
     Depreciation and amortization            $ 1,167              $ 1,880
     Inventory reserves, including LIFO         1,023                  454
                                              ----------------------------
   Total gross deferred tax liabilities         2,190                2,334
  Deferred tax assets:
     Allowance for doubtful accounts              362                  514
     Accrued expenses                           2,292                2,076
     Net operating loss carryforwards             913                3,002
     Other--net                                   198                   98
                                              ----------------------------
   Total gross deferred tax assets              3,765                5,690
  Valuation allowance                            (621)                (621)
                                              ----------------------------
  Net deferred tax (assets)                   $  (954)             $(2,735)
                                              ============================

Shown in consolidated balance sheets as:

 Current deferred tax (assets)                $(1,743)             $(2,137)
 Noncurrent deferred tax liability (assets)       789                 (598)
                                              ----------------------------
 Net deferred tax (assets)                    $  (954)             $(2,735)
                                              ============================

                                      F-22
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



7. Income Taxes (continued)

Holdings has federal net operating loss carryforwards of approximately  $833,000
available to offset future  taxable  income which expire in 2019.  Holdings also
has $8,000 of Federal minimum tax credit  carryforwards  which have an unlimited
carryforward  period and state net operating loss  carryforwards  of $27 million
which expires in 2001 and 2002.  The Federal net operating  loss and minimum tax
credit  carryforwards  acquired  in the  acquisition  of Heath  are  subject  to
limitations imposed by the Internal Revenue Code.

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

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

                                                Fiscal Year
                                    2000           1999            1998
                                 ---------------------------------------
        Current:
          Federal                 $ 2,367       $   438         $ 2,530
          State and local             936            --             648
          Foreign                     451           457             908
                                  -------------------------------------
                                    3,754           895           4,086
        Deferred:
          Federal                   1,731           215             (38)
          State and local              51            56               2
                                  -------------------------------------
                                    1,782           271             (36)
                                  -------------------------------------
                                  $ 5,536       $ 1,166         $ 4,050
                                  =====================================

                                      F-23
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



7. Income Taxes (continued)

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

                                                  Fiscal Year
                                       2000          1999          1998
                                     ------------------------------------

Income tax expense attributable to
   continuing operations             $ 5,536       $ 1,166       $ 5,545
Extraordinary item                        --            --        (1,495)
                                     -----------------------------------
                                     $ 5,536       $ 1,166       $ 4,050
                                     ===================================

Included in earnings  before income tax expense and  extraordinary  item for the
years ended  February  26,  2000,  February  27, 1999 and  February 28, 1998 are
foreign earnings of $706,000, $2,739,000 and $1,249,000, respectively.

Undistributed   earnings  of   Holdings'   foreign   subsidiaries   amounted  to
approximately  $7,207,000  and  $6,860,000 at February 26, 2000 and February 27,
1999, respectively. Approximately $6,468,000 of those earnings are considered to
be permanently  reinvested and,  accordingly,  no provision for U.S. federal and
state  income  taxes  has been  provided  thereon.  Upon  distribution  of those
earnings in the form of dividends  or  otherwise,  Holdings  would be subject to
both U.S.  income  taxes (net of foreign  tax  credits)  and  withholding  taxes
payable to the various foreign  countries.  In the event that these  permanently
reinvested earnings are distributed, it is estimated that U.S. federal and state
income taxes, net of foreign tax credits,  of approximately  $2,052,000 would be
due.

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

                                                        Fiscal Year
                                             2000          1999          1998
                                           ------------------------------------

Federal income tax at statutory rate       $ 3,685       $   876        $ 3,908
State income tax, net of federal benefit       663            36            591
Foreign income taxes (benefit)                 204          (502)           471
Goodwill amortization                          787           599            387
Other--net                                     197           157            188
                                           ------------------------------------
Provision for income taxes                 $ 5,536       $ 1,166        $ 5,545
                                           ====================================

                                      F-24
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



7. Income Taxes (continued)

Cash payments for income taxes for the years ended  February 26, 2000,  February
27, 1999 and  February  28, 1998 were  $2,914,112,  $1,883,000  and  $5,154,000,
respectively.


8. Stockholders' Equity (Deficit)

Warrants Issued with Series C Redeemable Preferred Stock

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

Stock Option Plan

In  March  1998,  Holdings  adopted  the  1998  Stock  Option  Plan,  which  was
subsequently  amended and restated in September 1998. The 1998 Stock Option Plan
terminates in ten years from its date of inception and provides for the issuance
of incentive  options or  nonqualified  stock  options for  1,462,222  shares of
common stock. The stock options may be granted to key employees,  as defined, as
determined by the Compensation Committee of the Board of Directors, and the term
of the options cannot exceed ten years from the grant date, except for employees
who own stock  possessing  more  than 10% of the  combined  voting  power of all
classes of stock of  Holdings,  for whom the term of the  options is five years.
Certain options

                                      F-25
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



8. Stockholders' Equity (Deficit) (continued)

vest as follows:  5% at the end of year one,  10% at the end of year two, 60% at
the end of year  three,  80% at the end of year four and 100% at the end of year
five. The other options vest in nine years and six months from the date of grant
and are subject to acceleration  provisions based upon the attainment of certain
future financial performance goals as defined in the agreements.

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

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

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

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

     Outstanding at February 28, 1998                               --

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

     Outstanding at February 27, 1999                        1,354,527

     Granted on April 13, 1999 at $6.50 per share               10,000
     Granted on July 17, 1999 at $6.50 per share                81,750
     Cancelled in fiscal 2000                                 (619,133)
                                                            ----------
     Outstanding at February 26, 2000                          827,144
                                                            ==========

10,946 of the options were exercisable at February 26, 2000.

                                      F-26
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


8. Stockholders' Equity (Deficit) (continued)

Of these above options issued, 214,000 options vest as follows: 5% at the end of
year one, 10% at the end of year two,  60% at the end of year three,  80% at the
end of year four and 100% at the end of year  five.  The other  options  vest in
nine years and six months from the date of grant and are subject to acceleration
provisions  based upon the  attainment of certain future  financial  performance
goals. As of February 26, 2000, the performance goals for certain of the options
have been met and, as such, 6,308  performance  based options vested on February
26, 2000.

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

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

                                                Fiscal Year
                                     2000           1999          1998
                                   ---------------------------------------

     Risk-free interest rate        5.94%           5.32%          6.31%
     Average life                   6 years         5 years        3 years
     Dividend yield                 0%              0%             0%


                                      F-27
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



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.  Holdings' pro forma
net income is as follows (in thousands):

                                                          Fiscal Year
                                                 2000        1999        1998
                                                -------------------------------

     Pro forma net (loss) income available
       for common stockholders                  $2,148     $(1,280)     $2,700

Shares Reserved for Issuance

At February  26,  2000,  635,078  shares of common  stock were  reserved for the
exercise  and future grant of stock  options.  At February 26, 2000 and February
27,  1999,  90,604  shares of common  stock  were  reserved  for  issuance  upon
conversion of the nonvoting  common stock. At February 26, 2000 and February 27,
1999,  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,  Holdings
contributes  2 1/2% of their  salary (2% of salary  prior to September 1, 1999).
Holdings matches an additional 50% of participant  contributions up to a maximum
contribution   of  3%  (Holdings   matched  an  additional  50%  of  participant
contributions  up to a maximum  contribution  of 1% prior to September 1, 1999).
The cost of this plan was  $632,000,  $366,000 and $325,000 for the fiscal years
ended February 26, 2000, February 27, 1999 and February 28, 1998, respectively.

Holdings has a defined  benefit pension plan 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.  Holdings'  funding  policy is  consistent  with the
requirements of federal laws and regulations.

                                      F-28
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



9. Pension Plans (continued)

Assets of the 401k and deferred 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 Holdings'  defined  benefit
plan and the amount  recognized in Holdings'  consolidated  balance sheets as of
February 26, 2000 and February 27, 1999 (in thousands):

                                                   2000           1999
                                                ------------------------
Change in benefit obligation
Benefit obligation at beginning of year          $ 2,805        $ 2,217
 Service cost                                        130            120
 Interest cost                                       201            170
 Amendments                                           --            194
 Actuarial loss                                       73            161
 Benefits paid                                       (63)           (57)
                                                 ----------------------
Benefit obligation at end of year                  3,146          2,805
                                                 ----------------------

Change in plan assets
Fair value of plan assets at beginning of year     2,983          2,665
Actual return on plan assets                          89            210
Employer contributions                               150            165
Benefits paid                                        (63)           (57)
                                                 ----------------------
Fair value of plan assets at end of year           3,159          2,983

Reconciliation of funded status of the plan
Funded status of the Plan                             13            178
 Unrecognized net actuarial loss                     434            198
 Unrecognized net transition liability                12             18
 Unrecognized prior service cost                     268            306
                                                 ----------------------
Net prepaid asset                                $   727        $   700
                                                 ======================

                                      F-29
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)




9. Pension Plans (continued)

                                                         Fiscal Year
                                                2000       1999         1998
                                             --------------------------------

     Weighted average assumptions
     Discount rate                              7.75%      7.25%        7.50%
     Expected return on plan assets             9.00       9.00         9.00

A summary of Holdings' net periodic  pension cost related to the defined benefit
plan for fiscal years 2000, 1999 and 1998 is as follows (in thousands):

                                                         Fiscal Year
                                                    2000     1999     1998
                                                   ------------------------

   Service cost--benefits earned during the year   $ 130    $ 120    $  94
   Interest cost on projected benefit obligation     201      170      149
   Expected return on plan assets                   (253)    (218)    (181)
   Net amortization and deferral                      44       33       25
                                                   -----------------------
   Net pension cost                                $ 122    $ 105    $  87
                                                   =======================

10. Extraordinary Item

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

11. Lease Commitments

Holdings  leases  certain  machinery and equipment for periods up to five years,
expiring  between 2001 and 2005,  and office and  manufacturing  facilities  for
periods up to ten years,  expiring  between 2001 and 2010, under operating lease
agreements.  Total  rent  expense  for  fiscal  years  2000,  1999  and 1998 was
approximately $4,808,000,  $3,299,000 and $2,718,000,  respectively.  Certain of
the leases contain  renewal and  escalation  options for periods up to ten years
after the initial term of the lease.

                                      F-30
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



11. Lease Commitments (continued)

Future  minimum lease  payments  under all  noncancellable  operating  leases at
February 26, 2000 are as follows (in thousands):

                Fiscal years ending:
                   2001                                   $    4,041
                   2002                                        3,408
                   2003                                        2,795
                   2004                                        2,492
                   2005                                        2,282
                   Thereafter                                  7,587
                                                          ----------
                Total minimum lease payments               $  22,605
                                                          ==========

12. Other Assets

Other  assets as of February  26,  2000 and  February  27,  1999  consist of the
following, net of related amortization (in thousands).  Accumulated amortization
at February 26, 2000 and February 27, 1999 was $7,777 and $4,017, respectively:

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

     Non-compete agreements                        $    2,797     $    4,219
     Trademarks and intellectual property               9,205          9,903
     Deferred financing costs                           9,310         10,230
     Other                                                954            898
                                                   -------------------------
                                                   $   22,266     $   25,250
                                                   =========================
                                      F-31

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



13. Segment Information


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

Holdings evaluates  performance and allocates  resources based on the reportable
segments  operating  profit or loss. The  accounting  policies of the reportable
segments  are  the  same  as  those  described  in the  summary  of  significant
accounting policies (see Note 1).

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

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

                                      F-32

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



13. Segment Information (continued)

Operational  results and other financial data for the two business  segments for
the years ended  February 26, 2000,  February 27, 1999 and February 28, 1998 are
presented below (in thousands):

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

 Year ended February 26, 2000
Net sales                          $218,820   $175,104   $     --    $393,924
Operating profit (loss)              27,195     17,373     (5,185)     39,383
Depreciation and amortization         6,185      2,642      1,648      10,475
Segment assets                      121,359     95,993     12,425     229,777
Capital expenditures                  4,033      1,468         28       5,529

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

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

   (1)--Reflects  acquisition of home security  business,  which was acquired on
        February 4, 1998--see Note 2.

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

                                      F-33

<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



13. Segment Information (continued)

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

                                                 Net Sales
                              ------------------------------------------------
                                             Fiscal Year Ended
                              February 26,       February 27,     February 28,
                                 2000               1999              1998
                              ------------------------------------------------

United States                   $374,419          $294,581          $206,194
Foreign                           19,505            22,656            17,975
                                --------------------------------------------
Consolidated                    $393,924          $317,237          $224,169
                                ============================================


                                             Long-Lived Assets
                              ------------------------------------------------
                                             Fiscal Year Ended
                              February 26,       February 27,     February 28,
                                 2000               1999              1998
                              ------------------------------------------------
United States                   $132,134          $122,086          $ 87,878
Foreign                              646               679               600
                                --------------------------------------------
Consolidated                    $132,780          $122,765          $ 88,478
                                ============================================


14. Related Party Transactions

Pursuant  to  the  1998  Recapitalization,   Holdings  entered  into  management
agreements with J.W. Childs Associates L.P. and UBS Capital Management Inc. (the
"Advisors")  which provide for aggregate  annual  management fees of $240,000 as
consideration for ongoing  consulting and management  advisory  services.  Under
these agreements,  the Advisors were paid an aggregate of $88,000,  $284,000 and
$81,000 in fiscal years 2000, 1999 and 1998, respectively.  Payments may be made
to the extent  permitted by the Credit  Facility and  Indenture.  The agreements
extend for a period of five years upon which they shall automatically extend for
successive  periods of one year  each,  unless  terminated  by  Holdings  or the
Advisors.

                                      F-34
<PAGE>

                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)


15. Litigation

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

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

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

The following summarized  consolidated  financial  information is being provided
for DESA  International,  Inc. as of February 26, 2000 and February 27, 1999 and
for the fiscal years ended February 26, 2000, February 27, 1999 and February 28,
1998.

Summarized consolidated balance sheet information (in thousands):


                                     February 26,        February 27,
                                         2000                1999
                                     --------------------------------

Assets
Current assets                         $205,265            $187,892
Net fixed assets                         16,696              15,633
Goodwill, net                            92,713              80,744
Deferred tax assets                          --                 598
Other assets                             22,266              25,250
                                       ----------------------------
                                       $336,940            $310,117
                                       ============================

                                      F-35

<PAGE>


                            DESA Holdings Corporation

             Notes to Consolidated Financial Statements (continued)



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

Liabilities and stockholders' equity (deficit)
Current liabilities                              $  78,554    $  51,939
Long-term debt                                     134,004      153,000
9 7/8% Senior Subordinated Notes                   130,000      130,000
Deferred tax liabilities                               789           --
Other liabilities                                   14,840          599
Stockholders' equity (deficit)                     (21,247)     (25,421)
                                                 ----------------------
                                                 $ 336,940    $ 310,117
                                                 ======================

Summarized consolidated statements of operations information (in thousands):

                                             Fiscal Year Ended
                              February 26,       February 27,     February 28,
                                 2000               1999              1998
                              ------------------------------------------------



Net sales                      $393,924           $317,237          $224,169
Income before income taxes       10,719              2,698            11,198
Net income                        5,182              1,532             3,345 (1)

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

17. Subsequent Events

Subsequent Acquisition

On April 3, 2000, DESA acquired the assets of Trine Products  Company  ("Trine")
located in Bronx, New York for an aggregate  purchase price of $11,097,000.  The
acquisition  was financed  through the issuance by Holdings of 769,231 shares of
its common stock to certain of the Investors and borrowings of $6,000,000  under
the Credit  Facility as amended  (Acquisition  Loan C). Trine's annual sales for
their most recent  year-end were  approximately  $25 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.


                                      F-36
<PAGE>
<TABLE>
<CAPTION>


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

              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 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


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




---------------------------
<FN>
(1)   Uncollectible accounts written off, net of recovery.

(2)   Part of net assets acquired from FMI.

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

<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:      W. Michael Clevy /s/
                                 Name:    W. Michael Clevy
                                 Title:   Chief Executive Officer
                                          and President and Director
                                 Dated:   May 26, 2000

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

                           Chief Executive Officer and
W. Micheal Clevy /s/       President and Director                   May 26, 2000
W. Michael Clevy           (Principal Executive Officer)

Raymond B. Rudy /s/        Chairman                                 May 26, 2000
Raymond B. Rudy

John W. Childs /s/         Director                                 May 26, 2000
John W. Childs

Adam L. Suttn /s/          Director                                 May 26, 2000
Adam L. Suttin

Michael Greene /s/         Director                                 May 26, 2000
Michael Greene

Joseph J. Incadela /s/     Director                                 May 26, 2000
Joseph J. Incandela

James E. Ashton /s/        Director                                 May 26, 2000
James E. Ashton

Terry G. Scariot /s/       Director                                 May 26, 2000
Terry G. Scariot

                           Senior Vice President, Chief
                           Financial Officer
Stephen L. Clanton /s/     (Principal Accounting and                May 26, 2000
Stephen L. Clanton         Financial Officer)