<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                      QUARTERLY REPORT PURSUANT TO SECTION
                         13 OR 15 (D) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

  FOR 26-WEEK PERIOD ENDED JULY 3, 1999             COMMISSION FILE NO. 0-26228

                             MARTIN INDUSTRIES, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>

<S>                                                                                   <C>
                 DELAWARE                                                                    63-0133054
       ------------------------------                                                  --------------------
      (STATE OR OTHER JURISDICTION OF                                                   (I.R.S.  EMPLOYER
       INCORPORATION OR ORGANIZATION)                                                   IDENTIFICATION NO.)


    301 EAST TENNESSEE STREET
           FLORENCE, ALABAMA                                                              35630
----------------------------------------                                               -----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                                (ZIP CODE)
</TABLE>


                                 (256) 767-0330
                              --------------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


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 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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

                     8,561,471 SHARES OF COMMON STOCK, $.01
                        PAR VALUE, AS OF AUGUST 13, 1999


<PAGE>   2

                             MARTIN INDUSTRIES, INC.

                                      INDEX


<TABLE>
<CAPTION>

                                                                                                          PAGE
                                                                                                          ----


<S>                                                                                                       <C>
PART I.         FINANCIAL INFORMATION

                Item 1.       Financial Statements:

                              Unaudited Condensed Consolidated Balance Sheets as of
                              July 3, 1999 and December 31, 1998                                              2

                              Unaudited Condensed Consolidated Statements of
                              Operations and Comprehensive Income for the 13-Week and
                              26-Week Periods Ended July 3, 1999 and June 27, 1998                            4

                              Unaudited Condensed Consolidated Statements of
                              Cash Flows for the 26-Week Periods Ended
                              July 3, 1999 and June 27, 1998                                                  5

                              Notes to Condensed Consolidated Financial Statements                            6

                Item 2.       Management's Discussion and Analysis of Financial
                              Condition and Results of Operations                                            11

                Item 3.       Quantitative and Qualitative Disclosure About
                              Market Risk                                                                    21


PART II.        OTHER INFORMATION

                Item 2.       Changes in Securities and Use of Proceeds                                      22

                Item 4.       Submission of Matters to a Vote of Security Holders                            22

                Item 6.       Exhibits and Reports on Form 8-K                                               23
</TABLE>


                                       1
<PAGE>   3

PART I.    FINANCIAL INFORMATION


ITEM 1.       FINANCIAL STATEMENTS

                            MARTIN INDUSTRIES, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)
                                     ASSETS

<TABLE>
<CAPTION>

                                                                                                July 3,        December 31,
                                                                                                 1999              1998
                                                                                             -----------       -----------


<S>                                                                                          <C>               <C>
Current assets:
   Cash and short-term investments                                                           $ 7,041,000       $ 9,818,000
   Accounts and notes receivable, less
      allowance for doubtful accounts of
      $703,000 and $627,000, respectively                                                     15,679,000        10,712,000
   Inventories                                                                                16,928,000        20,323,000
   Refundable income taxes                                                                     2,108,000         1,712,000
   Deferred tax benefits                                                                       3,871,000         3,924,000
   Prepaid expenses and other assets                                                           1,141,000         1,277,000
                                                                                             -----------       -----------

         Total current assets                                                                 46,768,000        47,766,000
                                                                                             -----------       -----------


   Property, plant and equipment, net                                                         12,310,000        10,004,000
   Deferred tax benefits                                                                         561,000           622,000
   Intangibles, net of accumulated amortization                                                1,829,000         1,773,000
   Other noncurrent assets                                                                     2,945,000         2,214,000
                                                                                             -----------       -----------

                                                                                              17,645,000        14,613,000
                                                                                             -----------       -----------

         Total assets                                                                        $64,413,000       $62,379,000
                                                                                             ===========       ===========
</TABLE>

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


                                       2
<PAGE>   4

                            MARTIN INDUSTRIES, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)
                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                                                               July 3,         December 31,
                                                                                                1999               1998
                                                                                             -----------       -----------
<S>                                                                                          <C>               <C>
 LIABILITIES
   Current liabilities:
     Notes payable                                                                           $   919,000       $   159,000
      Current portion of long-term debt                                                        1,724,000         1,741,000
      Accounts payable                                                                         5,143,000         3,139,000
      Accrued liabilities:
         Payroll and employee benefits                                                         2,608,000         2,348,000
         Product liability                                                                     1,179,000           961,000
         Warranty                                                                                889,000         1,126,000
         Workers' compensation                                                                   744,000           709,000
         Other                                                                                 1,241,000           985,000
                                                                                             -----------       -----------

            Total current liabilities                                                         14,447,000        11,168,000
                                                                                             -----------       -----------

   Long-term debt                                                                              6,010,000         6,864,000
   Deferred compensation                                                                       2,211,000         2,304,000
                                                                                             -----------       -----------

                                                                                               8,221,000         9,168,000
                                                                                             -----------       -----------

                  Total liabilities                                                           22,668,000        20,336,000
                                                                                             -----------       -----------


STOCKHOLDERS' EQUITY
   Preferred stock $.01 par value, 1,000,000
      shares authorized; no shares issued
      and outstanding                                                                                  0                 0
   Common stock, $.01 par value, 20,000,000 shares
      authorized; 9,753,616 shares issued at July 3,
      1999 and 9,752,053 at December 31, 1998                                                     98,000            98,000
   Paid-in capital                                                                            27,220,000        27,397,000
   Retained earnings                                                                          22,945,000        24,229,000
   Foreign currency translation adjustment                                                      (649,000)         (996,000)
                                                                                             -----------       -----------

                                                                                              49,614,000        50,728,000
   Less:
      Treasury stock at cost (1,192,145 shares at July 3,
         1999 and 1,325,170 at December 31, 1998)                                              3,789,000         4,008,000
      Unearned compensation - ESOP                                                             4,080,000         4,677,000
                                                                                             -----------       -----------

            Total stockholders' equity                                                        41,745,000        42,043,000
                                                                                             -----------       -----------

            Total liabilities and stockholders' equity                                       $64,413,000       $62,379,000
                                                                                             ===========       ===========
</TABLE>

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


                                       3
<PAGE>   5

                            MARTIN INDUSTRIES, INC.
                       CONDENSED CONSOLIDATED STATEMENTS
                     OF OPERATIONS AND COMPREHENSIVE INCOME
                                  (Unaudited)
<TABLE>
<CAPTION>

                                                             13-WEEK                                 26-WEEK
                                                          PERIOD ENDED                            PERIOD ENDED
                                                 --------------------------------        --------------------------------
                                                    JULY 3,             JUNE 27,            JULY 3,             JUNE 27,
                                                     1999                 1998               1999                1998
                                                 ------------        ------------        ------------        ------------

<S>                                              <C>                 <C>                 <C>                 <C>
NET SALES                                        $ 20,774,000        $ 24,233,000        $ 43,807,000        $ 43,141,000

Cost of sales                                      17,975,000          18,902,000          37,222,000          34,133,000
                                                 ------------        ------------        ------------        ------------

GROSS PROFIT                                        2,799,000           5,331,000           6,585,000           9,008,000
                                                 ------------        ------------        ------------        ------------

Operating expenses:
   Selling                                          2,388,000           2,494,000           4,948,000           5,008,000
   General and administrative                       1,788,000           1,624,000           3,641,000           3,111,000
   Non-cash ESOP compensation expense                 174,000             376,000             354,000             778,000
   Restructure charge                                       0             615,000                   0             615,000
                                                 ------------        ------------        ------------        ------------
                                                    4,350,000           5,109,000           8,943,000           9,512,000
                                                 ------------        ------------        ------------        ------------

OPERATING INCOME (LOSS)                            (1,551,000)            222,000          (2,358,000)           (504,000)

Interest expense                                      202,000             307,000             400,000             547,000

Interest and other income                            (113,000)           (480,000)         (1,392,000)           (697,000)
                                                 ------------        ------------        ------------        ------------

INCOME (LOSS) BEFORE INCOME TAXES                  (1,640,000)            395,000          (1,366,000)           (354,000)

Provision (credit) for income taxes                  (491,000)            245,000            (381,000)            (36,000)
                                                 ------------        ------------        ------------        ------------

NET INCOME (LOSS)                                $ (1,149,000)       $    150,000        $   (985,000)       $   (318,000)
                                                 ============        ============        ============        ============
Other comprehensive income (loss), net of tax:
   Foreign currency translation adjustment            171,000            (321,000)            347,000            (247,000)
                                                 ------------        ------------        ------------        ------------

Comprehensive income (loss)                      $   (978,000)       $   (171,000)       $   (638,000)       $   (565,000)
                                                 ============        ============        ============        ============

BASIC PER SHARE DATA:
   Net income (loss)                             $      (0.16)       $       0.02        $      (0.14)       $      (0.04)
                                                 ============        ============        ============        ============

   Weighted average number of common and
      common equivalent shares outstanding          7,277,975           7,171,765           7,219,051           7,082,582
                                                 ============        ============        ============        ============

DILUTED PER SHARE DATA:
   Net income (loss)                             $      (0.16)       $       0.02        $      (0.14)       $      (0.04)
                                                 ============        ============        ============        ============

   Weighted average number of common and
      common equivalent shares outstanding          7,277,975           7,312,809           7,219,051           7,082,582
                                                 ============        ============        ============        ============

DIVIDENDS DECLARED PER SHARE                     $      0.021        $      0.040        $      0.042        $      0.080
                                                 ============        ============        ============        ============
</TABLE>

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


                                       4
<PAGE>   6


                            MARTIN INDUSTRIES, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                                        26-WEEK
                                                                                                      PERIOD ENDED
                                                                                             -----------------------------
                                                                                               July 3,          June 27,
                                                                                                 1999             1998
                                                                                             -----------       -----------
<S>                                                                                          <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                                  $  (985,000)      $  (318,000)
   Adjustments to reconcile net loss to net cash
   used in operating activities:
      Accrued restructure charge                                                                (106,000)          513,000
      Depreciation and amortization                                                              772,000           823,000
      Gain on sale of assets                                                                     (69,000)         (287,000)
      Gain on sale of division                                                                (1,164,000)                0
      Provision for doubtful accounts and notes receivable                                        76,000            17,000
      Non-cash ESOP compensation expense                                                         354,000           778,000
      Other changes in operating assets and liabilities                                          639,000        (5,671,000)
                                                                                             -----------       -----------

            Net cash used in operating activities                                               (483,000)       (4,145,000)
                                                                                             -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                                       (3,028,000)         (416,000)
   Proceeds from sale of assets                                                                  180,000           160,000
   Proceeds from sale of division                                                                809,000                 0
                                                                                             -----------       -----------

      Net cash used in investing activities                                                   (2,039,000)         (256,000)
                                                                                             -----------       -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net short-term borrowings (repayments)                                                        738,000            (4,000)
   Net repayments of long-term debt                                                             (874,000)         (868,000)
   Purchase of treasury stock                                                                          0          (230,000)
   Exercise of stock options                                                                     105,000           121,000
   Cash dividends paid                                                                          (227,000)         (439,000)
                                                                                             -----------       -----------

      Net cash used in financing activities                                                     (258,000)       (1,420,000)
                                                                                             -----------       -----------

NET DECREASE IN CASH AND SHORT-TERM
   INVESTMENTS                                                                                (2,780,000)       (5,821,000)

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                            3,000           (10,000)

CASH AND SHORT-TERM INVESTMENTS AT THE
   BEGINNING OF THE PERIOD                                                                     9,818,000        15,157,000
                                                                                             -----------       -----------

CASH AND SHORT-TERM INVESTMENTS AT THE
   END OF THE PERIOD                                                                         $ 7,041,000       $ 9,326,000
                                                                                             ===========       ===========

Cash paid during the period for:
   Interest, net                                                                             $   174,000       $   283,000
   Income taxes, net                                                                         $    13,000       $     9,000
</TABLE>

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


                                       5
<PAGE>   7

                            MARTIN INDUSTRIES, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


1.  BASIS OF PRESENTATION

Unaudited Interim Condensed Consolidated Financial Statements

         The accompanying unaudited interim condensed consolidated financial
statements of Martin Industries, Inc. and subsidiary (the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial information and are presented in accordance with the
requirements of Form 10-Q and Article 10 of Regulation S-X. The financial
statements should be read in conjunction with the audited financial statements
and notes thereto for the year ended December 31, 1998 included on Form 10-K,
as filed with the Securities and Exchange Commission on March 31, 1999.

         In the opinion of management, the unaudited interim condensed
consolidated financial statements included herein reflect all adjustments
necessary to present fairly the information set forth therein. The Company's
business is seasonal and cyclical with the potential for significant
fluctuations in quarterly earnings; therefore, the consolidated results of
operations for the periods presented are not necessarily indicative of results
for the full year.

Principles of Consolidation and Fiscal Periods

         The unaudited interim condensed consolidated financial statements
include the accounts and transactions of the Company and its wholly owned
Canadian subsidiary, 1166081 Ontario Inc. All significant intercompany accounts
and transactions have been eliminated in consolidation.

         The Company's fiscal quarters end on the Saturday nearest each
calendar quarter-end. The Company utilizes a December 31 fiscal year-end.

New Accounting Standards and Statements

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

         In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, which amends FASB Statement No. 133 to be effective for all
fiscal years beginning after June 15, 2000 (January 1, 2001 for companies with
calendar-year fiscal years).

         In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. The SOP requires
capitalization of certain costs of internal-use software. The Company adopted
this statement on January 1, 1999 with no significant impact on the
consolidated financial statements.


                                       6
<PAGE>   8


Prior Year Reclassification

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


2.  INVENTORIES

         The Company's inventories are primarily valued at last-in, first-out
("LIFO") cost, which is not in excess of market. Inventory costs include
material, labor and overhead. The Company evaluates raw materials, purchase
parts, work-in-process and finished goods to ensure that inventory is valued at
the estimated net realizable value. Inherent in the estimates of net realizable
value are management's estimates related to the Company's future customer
demand, product mix and salvage value. At December 31, 1998, the Company
recorded a reserve for excess and obsolete inventory of $1,716,000. At July 3,
1999, the reserve for excess and obsolete inventory was $1,248,000. An analysis
of inventories at July 3, 1999 and December 31, 1998 follows:
<TABLE>
<CAPTION>

                                                                               July 3,              December 31,
                                                                                1999                   1998
                                                                             --------------     --------------
                                                                                        (Unaudited)
         <S>                                                                 <C>                <C>
         Inventories valued at first-in, first-out ("FIFO") cost:
              Raw materials and purchased parts                              $ 9,525,000           $10,644,000
              Work-in-process                                                  4,213,000             4,797,000
              Finished goods                                                   8,640,000            10,347,000
                                                                             -----------           -----------
                                                                              22,378,000            25,788,000
              Less excess of FIFO over LIFO cost                               5,450,000             5,465,000
                                                                             -----------           -----------
                                                                             $16,928,000           $20,323,000
                                                                             ===========           ===========
</TABLE>



3.  EARNINGS PER SHARE

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


                                       7
<PAGE>   9

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


<TABLE>
<CAPTION>
                                                       13-Week Period Ended                    26-Week Period Ended
                                                 --------------------------------        --------------------------------
                                                     July 3,           June 27,             July 3,            June 27,
                                                      1999               1998                1999                1998
                                                 ------------        ------------        ------------        ------------
       <S>                                       <C>                 <C>                 <C>                 <C>
       Weighted average shares-basic,
           excluding ESOP and stock
           option effects                           5,405,381           5,421,661           5,389,875           5,375,896

       Weighted average effect of ESOP
           shares committed to be
           released                                 1,872,594           1,750,104           1,829,176           1,706,686
                                                 ------------        ------------        ------------        ------------

       Weighted average shares-basic                7,277,975           7,171,765           7,219,051           7,082,582

       Dilutive effect of stock options                     0             141,044                   0                   0
                                                 ------------        ------------        ------------        ------------

       Weighted average number of
           common and common
           equivalent shares
           outstanding-diluted                      7,277,975           7,312,809           7,219,051           7,082,582
                                                 ============        ============        ============        ============
</TABLE>

         Options outstanding of 485,708 and 564,529 for the 13-week periods
ended July 3, 1999 and June 27, 1998, respectively, were not included in the
table above as they were anti-dilutive. Options outstanding of 485,708 and
705,573 for the 26-week period ended July 3, 1999 and June 27, 1998,
respectively, were not included in the table above as they were anti-dilutive.


4.  COMMITMENTS AND CONTINGENCIES

Product Contingency

         The Company has experienced production and design problems with
certain products manufactured by Hunter Technology Inc. ("Hunter"), a
wholly-owned subsidiary of 1166081 Ontario Inc. These product problems, in some
cases, caused the production to be suspended and, therefore, shipments were
also suspended. Corrections have been implemented and all but one of the
affected products are back in production. The Company has completed its
evaluation of the potential exposure to deal with problems related to products
shipped prior to these corrections, and it currently believes that the ultimate
liability will not have a material adverse effect on the Company.

Legal

         On February 1, 1996, 1166081 Ontario Inc. acquired all of the capital
stock of Hunter for a purchase price of approximately $1,943,000 that included
$850,000 in cash, $729,000 in promissory notes payable and $364,000 paid into
escrow. The escrow fund was established at the closing to make funds available
to meet the sellers' indemnification obligations to the Company. During the
first quarter


                                       8
<PAGE>   10

of 1997, the Company notified certain of the sellers that it was withholding
payment on the promissory notes held by them pending resolution of certain
issues with the holders of the notes arising out of the purchase transaction.
The Company also claimed the entire amount in escrow and instituted litigation
to recover these amounts and additional amounts from certain sellers in the
purchase transaction, and certain of the sellers sued to enforce collection of
their notes.

         During 1998, the Company effected a settlement with all but two of the
former shareholders, and a contingent settlement with these two. Pursuant to
the settlement, the Company has received approximately $315,000 (including
interest) of funds held in escrow, an additional payment of $32,000, and
cancellation of promissory notes and accrued interest totaling approximately
$364,000. The contingent settlement will result (if the contingency is
satisfied and that portion of the settlement effectuated) in receipt by the
Company of an additional $97,000, and cancellation of notes and accrued
interest totaling approximately $217,000. No further action is contemplated as
to the Company's claims against these two former shareholders, or as to their
claims asserted in Canada against the Company, until such time as it is
determined that the condition for completion of the settlement has been
satisfied, which event will possibly occur during 1999.

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


5.  RESTRUCTURE CHARGE

         As part of the continuing effort to reduce operating costs and improve
manufacturing efficiencies, the Company made the decision to close its
Washington Park, Illinois facility. The Company initiated the closing and the
transfer of the gas grill, gas log and freestanding vent-free stove production
into the Athens, Alabama and Huntsville, Alabama locations during the second
quarter of 1998. The Company recorded a non-recurring charge of $615,000,
before tax, in connection with the closing. The non-recurring charge includes
plant closing costs of $590,000 (primarily payroll, severance and payroll taxes
of $234,000 and group insurance of $255,000) and a property, plant and
equipment valuation charge of $25,000. The estimated reserve remaining as of
July 3, 1999 and December 31, 1998 totaled $145,000 and $251,000, respectively.


6.  SALE OF CERTAIN ASSETS

         On March 31, 1999, the Company completed the sale of all of the assets
of its Ashley solid fuel division to United States Stove Company. The Company
recorded a gain on the sale of the Ashley division of $1,164,000 which is
included in interest and other income in the Condensed Consolidated Statements
of Operations and Comprehensive Income.


                                       9
<PAGE>   11

7.  INDUSTRY SEGMENT INFORMATION

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

<TABLE>
<CAPTION>

                                                                          Segment Information
                                                      ------------------------------------------------------------
                                                         13-Week Period Ended               26-Week Period Ended
                                                      -------------------------          -------------------------
                                                       July 3,          June 27,          July 3,         June 27,
                                                        1999              1998             1999             1998
                                                      --------         --------          --------         --------
                                                                             (In Thousands)
         <S>                                          <C>              <C>               <C>              <C>
         Net sales:
            Home heating products                     $ 13,788         $ 16,504          $ 25,864         $ 27,242
            Leisure and other products                   6,986            7,729            17,943           15,899
                                                      --------         --------          --------         --------
                                                      $ 20,774         $ 24,233          $ 43,807         $ 43,141
                                                      ========         ========          ========         ========

         Gross profit:
            Home heating products                     $  1,521         $  3,710          $  3,069         $  5,388
            Leisure and other products                   1,278            1,621             3,516            3,620
                                                      --------         --------          --------         --------
                                                      $  2,799         $  5,331          $  6,585         $  9,008
                                                      ========         ========          ========         ========

         Segment contribution (loss): (1)
            Home heating products                     $     46         $  2,186          $     (8)        $  2,231
            Leisure and other products                     365              651             1,645            1,769
                                                      --------         --------          --------         --------
                                                      $    411         $  2,837          $  1,637         $  4,000
                                                      ========         ========          ========         ========

                                                       July 3,          Dec. 31
                                                        1999             1998
                                                      --------         --------
         Identifiable net assets:     (2)
            Home heating products                     $ 19,047         $ 21,778
            Leisure and other products                   7,468            6,868
            Other                     (3)                2,723            1,681
                                                      --------         --------
                                                      $ 29,238         $ 30,327
                                                      ========         ========
</TABLE>

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

         (2)      Represents property, plant and equipment and inventory (each
                  net of respective reserves).

         (3)      Represents amounts attributable to the Company's corporate
                  administration.


                                      10
<PAGE>   12


ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS


         The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the unaudited
interim condensed consolidated financial statements of the Company and notes
thereto appearing elsewhere in this Form 10-Q. All references to the second
quarter of 1999 and the second quarter of 1998 are referring to the 13-week
periods ended July 3, 1999 and June 27, 1998, respectively. All references to
the 1999 year-to-date period and the 1998 year-to-date period are referring to
the 26-week periods ended July 3, 1999 and June 27, 1998, respectively.


OVERVIEW

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

         On March 31, 1999, the Company completed the sale of all of the assets
of its Ashley solid fuel division to United States Stove Company. The Company
recorded a gain on the sale of the Ashley division of $1,164,000. See Note 6 to
Notes to Condensed Consolidated Financial Statements.

         As part of the continuing effort to reduce operating costs and improve
manufacturing efficiencies, the Company made the decision to close its
Washington Park, Illinois facility. The Company initiated the closing and the
transfer of the gas grill, gas log and freestanding vent-free stove production
into the Athens, Alabama and Huntsville, Alabama locations during the second
quarter of 1998. The Company recorded a non-recurring charge of $615,000,
before tax, in connection with the closing. The non-recurring charge includes
plant closing costs of $590,000 (primarily payroll, severance and payroll taxes
of $234,000 and group insurance of $255,000) and a property, plant and
equipment valuation charge of $25,000. The estimated reserve remaining as of
July 3, 1999 and December 31, 1998 totaled $145,000 and $251,000, respectively.
See Note 5 to Notes to Condensed Consolidated Financial Statements.

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


                                      11
<PAGE>   13

additional amounts from certain sellers in the purchase transaction, and
certain of the sellers sued to enforce collection of their notes.

         During 1998, the Company effected a settlement with all but two of the
sellers, and a contingent settlement with these two. Pursuant to the settlement,
the Company has received approximately $315,000 (including interest) of funds,
held in escrow, an additional payment of $32,000, and cancellation of notes and
accrued interest totaling approximately $364,000. Consequently, in 1998, the
Company recorded a gain on the settlement of litigation of $422,000. The
contingent settlement will result (if the contingency is satisfied and that
portion of the settlement effectuated) in receipt by the Company of an
additional $97,000, and cancellation of notes and accrued interest totaling
approximately $217,000. No further action is contemplated as to the Company's
claims against those certain sellers, or as to their claims asserted in Canada
against the Company, until such time as it is determined that the condition for
completion of the settlement has been satisfied, which event will possibly occur
during 1999.

         Sales of home heating products and, in particular, gas heaters (other
than fireplaces), historically have been seasonal in nature, with sales being
directly affected by weather conditions. In an effort to better control its
production schedule and inventory of finished products in light of this
seasonality, the Company utilizes early booking programs, which allow the
Company to project sales early in the year and plan production accordingly. In
general, the Company takes early booking orders for its heating products in the
first and second quarters and fills the majority of these orders in the second
and third quarters, with fill-in orders being shipped in the fourth quarter and
to a lesser degree in the ensuing first quarter. Unseasonably warm weather
results in higher customer inventories that in turn result in fewer fourth
quarter customer fill-in orders and lower response to the Company's early
booking programs for the following year.

         Notwithstanding the early booking programs, sales are recognized by
the Company when the product is shipped. A majority of sales of gas heaters
under the Company's early booking programs historically have occurred in the
second and third quarters, with products being shipped throughout this period.
Orders under the Company's early booking programs have historically represented
up to 60% of customers' projected annual requirements and, because of program
terms, the shipping period often extends over several months. Customer orders
for products other than orders placed under the early booking programs are
accepted and filled by the Company as received and shipped at the customer's
request. As used in the following discussion and elsewhere in this Form 10Q,
the term "gross sales" reflects total customer invoices billed by the Company
for the applicable period, net of any customer sales credits issued. The term
"net sales" as used herein and elsewhere in this Form 10Q, reflects gross sales
less deductions for cash discounts, freight and special program credits allowed
by the Company.


YEAR 2000 COMPLIANCE

         The efficient operation of the Company's business is dependent in part
on its computer software programs and operating systems (collectively, "Programs
and Systems"). These Programs and Systems are used in several key areas of the
Company's business, including inventory management, pricing, sales, and
financial reporting, as well as in various administrative functions. Many of the
Company's Programs and Systems, as well as the programs and systems of third
parties doing business with the Company, are subject to the "Year 2000" issue,
which is the inability of a computer to correctly process dates after December
31, 1999. This inability could potentially cause affected computers to shut down
or perform incorrect calculations, ultimately resulting in a system failure,
disruption of operations, and the inability


                                      12
<PAGE>   14

to engage in normal business activities. This issue also affects products or
systems which contain embedded computer chips with date sensitive programming,
such as manufacturing equipment, security systems, telephone equipment and
office equipment ("non-IT systems"). As a result, many companies' software and
computer systems need to be upgraded or replaced in order to address the Year
2000 issue.

         The Company has evaluated its Programs and Systems to identify and
address potential Year 2000 compliance problems. As a result, the Company has
purchased Year 2000 compliant versions of its packaged Programs and Systems and
has decided to modify its custom Programs and Systems. The Company has incurred
approximately $135,000 during 1997, 1998 and 1999 and expects to incur an
additional $20,000 during 1999 to modify or make selective improvements to its
Programs and Systems. The Company plans to complete the replacement and
modification of its IT Programs and Systems by the end of 1999. While some
non-critical systems may not be addressed until after December 1999, the
Company believes such systems will not disrupt its operations in a material
manner. With respect to the Company's non-IT systems, the Company has partially
completed its evaluation, but currently believes the significant non-IT systems
are not date dependent.

         The Company has also initiated communication with suppliers, financial
institutions and other third parties with which it does business to evaluate
their Year 2000 compliance. The Company has reviewed responses from such
parties and has not identified any compliance issues at this time.

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

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

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


                                      13
<PAGE>   15

         The Company is in the process of developing a contingency plan for
Year 2000 issues, which is scheduled to be completed during the fourth quarter
of 1999.

         The Company, in the normal course of its business, has evaluated the
need for a system-wide replacement of its Programs and Systems without regard
to the Year 2000 compliance issue. As a result of the evaluation and as part of
the Company's long-term strategic plan, the Company made the decision to
purchase fully integrated Enterprise Resource Planning ("ERP") Programs and
Systems that will replace its current Program and Systems. Such ERP Programs
and Systems are Year 2000 compliant. The Company has incurred approximately
$1.1 million through July 3, 1999 and expects to incur an additional $1.9
million during 1999 and 2000 to complete the installation of the new Programs
and Systems.

         Many of the statements in this section constitute forward-looking
statements and are subject to a number of assumptions, risks and uncertainties
that could cause actual results to differ materially from those expressed or
contemplated by these statements. See "Safe Harbor' Statement under the Private
Securities Litigation Reform Act of 1995" appearing on page 24 of this report.


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                      13-Week Period Ended                  26-Week Period Ended
                                                 ----------------------------            ---------------------------
                                                  July 3,            June 27,             July 3,            June 27,
                                                   1999                1998                1999                1998
                                                 --------            --------            --------            --------

         <S>                                     <C>                 <C>                 <C>                 <C>
         Net sales                                  100.0 %             100.0 %             100.0 %             100.0 %
         Cost of sales                               86.5                78.0                85.0                79.1
                                                 --------            --------            --------            --------
         Gross profit                                13.5                22.0                15.0                20.9

         Operating expenses:
            Selling                                  11.5                10.3                11.3                11.6
            General and administrative                8.6                 6.7                 8.3                 7.2
            Non-cash ESOP compensation expense        0.8                 1.6                 0.8                 1.8
            Restructure charge                        0.0                 2.5                 0.0                 1.4
                                                 --------            --------            --------            --------
                                                     20.9                21.1                20.4                22.0
                                                 --------            --------            --------            --------

         Operating income (loss)                     (7.4)                0.9                (5.4)               (1.1)
         Interest expense                             1.0                 1.2                 0.9                 1.3
         Interest and other income                   (0.5)               (2.0)               (3.2)               (1.6)
                                                 --------            --------            --------            --------

         Income (loss) before income taxes           (7.9)                1.7                (3.1)               (0.8)
         Provision (credit) for income taxes         (2.4)                1.0                (0.9)               (0.1)
                                                 --------            --------            --------            --------

         Net income (loss)                           (5.5)%               0.7 %              (2.2)%              (0.7)%
                                                 ========            ========            ========            ========
</TABLE>


                                      14
<PAGE>   16

13-WEEK PERIOD ENDED JULY 3, 1999 COMPARED TO 13-WEEK PERIOD ENDED JUNE 27, 1998

Net Sales

         Net sales in the 13-week period ended July 3, 1999 decreased to $20.8
million from $24.2 million in the 13-week period ended June 27, 1998, a
decrease of $3.5 million, or 14.3%.

Home Heating Products. Net sales of home heating products decreased to $13.8
million in the second quarter of 1999 from $16.5 million in the second quarter
of 1998, a decrease of $2.7 million, or 16.5%. The decrease in net sales of
home heating products was primarily the result of a 37.0% decrease in gas
heating net sales to $4.6 million. Gas heating sales were negatively impacted
by customers deferring delivery of heating product orders into the second half
of the year. The decrease in gas heating net sales was partially offset by a
4.0% increase in Martin Fireplace net sales to $8.1 million. Martin Fireplace
shipments benefited from a strong housing market, expanded distribution and
aggressive sales programs.

Leisure and Other Products. Net sales of leisure and other products decreased
$743,000, or 9.6%, in the second quarter of 1999 to $7.0 million, as compared
to $7.7 million in the second quarter of 1998. Net sales of barbecue gas grills
were $4.6 million in the second quarter of 1999 compared with $4.9 million in
the same period of 1998. The grill selling season was delayed by cooler weather
early in the quarter. As a result, orders normally shipped in the second
quarter were deferred into the third quarter. Net sales of NuWay utility
trailers decreased $481,000 to $2.2 million in the second quarter of 1999.
Trailer sales were adversely affected by the introduction of new products by
competitors.

Gross Profit

         Gross profit in the second quarter of 1999 was $2.8 million as
compared to $5.3 million in the second quarter of 1998, a decrease of $2.5
million, or 47.5%. Gross margin, defined as gross profit as a percentage of net
sales, decreased to 13.5% in the second quarter of 1999 from 22.0% in the
second quarter of 1998.

Home Heating Products. Gross profit on net sales of home heating products in
the second quarter of 1999 was $1.5 million as compared to $3.7 million in the
second quarter of 1998, a decrease of $2.2 million, or 59.0%. The decrease in
gross profit was primarily the result of the reduced sales volume of gas
heating products, competitive pressures on selling prices for gas heaters, and
increased manufacturing costs as a result of manufacturing investments in
quality improvement, training, and start-up costs associated with new product
introductions. Gross margin was 11.0% in the second quarter of 1999 as compared
to 22.5% in the second quarter of 1998.

Leisure and Other Products. Gross profit on net sales of leisure and other
products in the second quarter of 1999 was $1.3 million as compared to $1.6
million in the second quarter of 1998, a decrease of $343,000, or 21.2%. Gross
profit was negatively impacted by lower sales and the increased manufacturing
costs previously discussed in the preceding paragraph. Gross margin was 18.3%
in the second quarter of 1999 as compared to 21.0% in the second quarter of
1998.


                                      15
<PAGE>   17

Selling Expenses

         Selling expenses in the second quarter of 1999 decreased to $2.4
million from $2.5 million in the second quarter of 1998, a decrease of
$106,000, or 4.3%, primarily the result of decreases in co-op advertising and
the reclassification of certain administrative expenses. Selling expenses as a
percent of net sales increased to 11.5% in the second quarter of 1999 from
10.3% in the second quarter of 1998.

Segment Contribution

         Total segment contribution, defined as gross profit less selling
expenses, decreased $2.4 million, or 85.5%, to $411,000 in the second quarter
of 1999. The decrease was the result of the 47.5% decrease in gross profit,
offset by the 4.3% decrease in selling expenses.

General and Administrative Expenses

         General and administrative expenses increased $164,000, or 10.1%, in
the second quarter of 1999 as compared to the second quarter of 1998. The
increase was primarily the result of the reclassification of certain expenses
previously classified as selling expenses, increased payroll, employee and
relocation benefits, travel, supplies, depreciation and training expenses in
the administration, data processing and design and development departments.

Non-cash ESOP Compensation Expense

         Non-cash ESOP compensation expense was $174,000 in the second quarter
of 1999 as compared to $376,000 in the second quarter of 1998, a decrease of
$202,000, or 53.7%. In the second quarter of 1999, 72,432 shares of unallocated
ESOP stock were committed to be released as compensation at an average fair
value of $2.40 per share as compared to 75,516 shares committed to be released
as compensation at an average fair value of $4.98 per share in the second
quarter of 1998.

Restructure Charge

         As reported in the Company's Form 10-Q for the 13-week period ended
March 28, 1998, the Company made the decision to close its Washington Park,
Illinois facility. The Company initiated the closing and the transfer of the
gas grill, gas log and freestanding vent-free stove production into the Athens,
Alabama and Huntsville, Alabama locations during the second quarter of 1998.
The Company recorded a non-recurring charge of $615,000, before tax, in
connection with the closing. The non-recurring charge includes plant closing
costs of $590,000 (primarily payroll, severance and payroll taxes of $234,000
and group insurance of $255,000) and a property, plant and equipment valuation
charge of $25,000. The estimated reserve remaining as of July 3, 1999 and
December 31, 1998 totaled $145,000 and $251,000, respectively.

Interest Expense

         Interest expense in the second quarter of 1999 was $202,000 as
compared to $307,000 in the second quarter of 1998, a decrease of $105,000, or
34.2%. The decrease was primarily attributable to a decrease in average
outstanding debt.


                                      16
<PAGE>   18

Interest and Other Income

         Interest and other income in the second quarter of 1999 was $113,000
as compared to $480,000 in the second quarter of 1998, a decrease of $367,000.
The decrease was primarily the result of a $288,000 gain on the sale of
marketable securities during the second quarter of 1998 and a decrease in the
average amount of short-term investments.

Credit for Income Taxes

         The credit for income taxes was $491,000 in the second quarter of 1999
as compared to a provision for income taxes of $245,000 in the second quarter
of 1998. The effective tax rate was (29.9%) in the second quarter of 1999 as
compared to 62.0% in the second quarter of 1998. The effective tax rate differs
from the amount computed by applying the federal statutory rate primarily due
to the non-recognition of a tax benefit on the pre-tax loss of Hunter during
the periods presented as realization of any additional tax benefit was not
assured.

Net Loss and Net Loss Per Share

         The net loss in the second quarter of 1999 was $1.1 million as
compared to the net income of $150,000 in the second quarter of 1998. The
change was primarily the result of the factors discussed above.

         The net loss per share-basic was $0.16 in the second quarter of 1999
as compared to the net income per share-basic of $0.02 in the second quarter of
1998. The change in net loss per share-basic was primarily the result of the
change in net loss to $1.1 million from a net income of $150,000, partially
offset by the increase in the weighted average shares outstanding. The increase
in the weighted average shares outstanding was primarily the result of stock
options exercised and ESOP shares released and committed to be released to
participants.

         The net loss per share-diluted was $0.16 in the second quarter of 1999
as compared to the net income per share-diluted of $0.02 in the second quarter
of 1998. The dilutive effect of stock options did not have an effect on the net
loss per share on a diluted basis.


26-WEEK PERIOD ENDED JULY 3, 1999 COMPARED TO 26-WEEK PERIOD ENDED JUNE 27, 1998

Net Sales

         Net sales in the 26-week period ended July 3, 1999 increased to $43.8
million as compared to $43.1 million in the 26-week period ended June 27, 1998,
an increase of $666,000, or 1.5%.

Home Heating Products. Net sales of home heating products decreased to $25.9
million in the 1999 year-to-date period as compared to $27.2 million in the
1998 year-to-date period, a decrease of $1.4 million, or 5.1%. The decrease in
net sales of home heating products was primarily the result of a decrease in
gas and solid fuel heating products net sales of $2.8 million, offset by an
increase in Martin Fireplace net sales of $1.4 million.


                                      17
<PAGE>   19

Leisure and Other Products. Net sales of leisure and other products increased
$2.0 million, or 12.9%, in the 1999 year-to-date period to $17.9 million as
compared to $15.9 million in the 1998 year-to-date period. The increase was
primarily the result of a $1.7 million, or 14.5%, increase in net sales of
barbecue gas grills. Net sales of utility trailer kits increased $158,000, or
4.0%, in the 1999 year-to-date period to $4.1 million as compared to $3.9
million in the 1998 year-to-date period.

Gross Profit

         Gross profit in the 1999 year-to-date period was $6.6 million as
compared to $9.0 million in the 1998 year-to-date period, a decrease of $2.4
million, or 26.9%. Gross margin decreased to 15.0% in the 1999 year-to-date
period from 20.9% in the 1998 year-to-date period.

Home Heating Products. Gross profit on net sales of home heating products was
$3.1 million in the 1999 year-to-date period as compared to $5.4 million in the
1998 year-to-date period, a decrease of $2.3 million or 43.0%. Gross margin
decreased to 11.9% in the 1999 year-to-date period from 19.8% in the 1998
year-to-date period. The decrease in gross margin was primarily the result of
increased manufacturing costs, reduced sales volume of gas heating products and
competitive pressures on sales prices.

Leisure and Other Products. Gross profit on net sales of leisure and other
products decreased $104,000, or 2.9%, in the 1999 year-to-date period to $3.5
million as compared to $3.6 million in the 1998 year-to-date period. Gross
margin decreased to 19.6% in the 1999 year-to-date period from 22.8% in the
1998 year-to-date period. The decrease was primarily the result of increased
manufacturing costs due to quality improvement initiatives associated with the
gas grill production line.

Selling Expenses

         Selling expenses in the 1999 year-to-date period were $4.9 million as
compared to $5.0 million in the 1998 year-to-date period, a decrease of
$60,000, or 1.2%. The decrease was primarily due to decreases in co-op
advertising and the reclassification of certain administrative expenses.
Selling expenses as a percentage of net sales decreased to 11.3% in the 1999
year-to-date period from 11.6% in the 1998 year-to-date period.

Segment Contribution

         Total segment contribution was $1.6 million in the 1999 year-to-date
period compared to $4.0 million in the 1998 year-to-date period. The $2.4
million decrease was primarily the result of the decrease in gross profit
offset by decreased selling expenses discussed above.

General and Administrative Expenses

         General and administrative expenses increased $530,000, or 17.0%, in
the 1999 year-to-date period as compared to the 1998 year-to-date period. The
increase was primarily the result of the reclassification of certain expenses
previously classified as selling, increased payroll, employee and relocation
benefits, travel, supplies, depreciation and training expenses in
administration, data processing and design and development departments.


                                      18
<PAGE>   20

Non-cash ESOP Compensation Expense

         Non-cash ESOP compensation expense decreased $424,000, or 54.5%, in
the 1999 year-to-date period to $354,000, as compared to $778,000 in the 1998
year-to-date period. In the 1999 year-to-date period, 143,094 shares of
unallocated ESOP stock were committed to be released as compensation at an
average fair value of $2.47 per share, as compared to 150,528 shares committed
to be released as compensation at an average fair value of $5.17 per share in
the 1998 year-to-date period.

Restructure Charge

         As reported in the Company's Form 10-Q for the 13-week period ended
March 28, 1998, the Company made the decision to close its Washington Park,
Illinois facility. The Company initiated the closing and the transfer of the
gas grill, gas log and freestanding vent-free stove production into the Athens,
Alabama and Huntsville, Alabama locations during the second quarter of 1998.
See "13-Week Period Ended July 3, 1999 Compared to 13-Week Period Ended June
27, 1998 -- Restructure Charge."

Interest Expense

         Interest expense decreased $147,000, or 26.9%, in the 1999
year-to-date period to $400,000, as compared to $547,000 in the 1998
year-to-date period. The decrease was primarily attributable to a decrease in
average outstanding debt during the year-to-date period.

Interest and Other Income

         Interest and other income increased $695,000, or 99.7%, in the 1999
year-to-date period to $1.4 million, as compared to $697,000 in the 1998
year-to-date period. The increase was primarily the result of the $1.2 million
gain on the sale of the Ashley division recorded in the first quarter of 1999,
offset by the $288,000 gain on sale of marketable securities during the second
quarter of 1998 and a decrease in interest income on short-term investments.

Credit for Income Taxes

         The credit for income taxes was $381,000 in the 1999 year-to-date
period as compared to a credit of $36,000 in the 1998 year-to-date period. The
effective tax rate was 27.9% in the 1999 year-to-date period as compared to
10.2% in the 1998 year-to-date period. The effective tax rate differs from the
amount computed by applying the federal statutory rate primarily due to the
non-recognition of a tax benefit on the net loss of Hunter during the periods
presented as realization of any additional tax benefit was not assured.

Net Loss and Net Loss Per Share

         The net loss in the 1999 year-to-date period was $985,000 as compared
to the net loss of $318,000 in the 1998 year-to-date period. The change was
primarily the result of the factors discussed above.

         The net loss per share-basic was $0.14 in the 1999 year-to-date period
as compared to $0.04 in the 1998 year-to-date period. The change in net loss
per share-basic was primarily the result of the change in net loss to $985,000
from a net loss of $318,000, partially offset by the increase in the weighted
average


                                      19
<PAGE>   21

shares outstanding. The increase in weighted average shares outstanding was
primarily the result of stock options exercised and ESOP shares released and
committed to be released to participants.

         The net loss per share on a diluted basis was the same as the net loss
per share on a basic basis for the 1999 year-to-date period and the 1998
year-to-date period as the dilutive effect of outstanding stock options did not
have an effect on the net loss per share on a diluted basis.


LIQUIDITY AND CAPITAL RESOURCES

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

         The Company's operations in the 26-week period ended July 3, 1999 used
$483,000 in cash primarily to finance increases in extended term ("dating")
receivables. The Company's initial public offering investments and proceeds
from the sales of certain assets were also utilized to provide the funds needed
for capital expenditures, long-term debt repayments and dividends for the
period.

         As discussed above, the Company finances temporary working capital
requirements under a bank line of credit with its principal lender. The credit
agreement provides a line of $20 million for a term expiring July 31, 2000. The
line of credit is secured by a blanket lien on the Company's receivables and
inventory. Interest on the line of credit is payable monthly at a variable rate
equivalent to 30-day London Interbank Offered Rate ("LIBOR") plus 1.25%, which
at August 13, 1999 was 6.4525%. As of July 3, 1999, there was no outstanding
balance on the line of credit.

         During 1998, Hunter established a bank line of credit with a Canadian
financial institution. The credit agreement provides a line of $2,250,000
(Canadian). The credit line is subject to an annual review on April 30 each
year. The financial institution's review could result in the cancellation of the
line or a revision of its terms. As of August 13, 1999, the financial
institution has not communicated the results of the review. The line of credit
is secured by Hunter's receivables, inventory and equipment. Interest on the
line of credit is payable monthly at a variable rate equivalent to the financial
institution's prime lending rate plus one-half of one percent, which at August
13, 1999 was 6.75%. As of July 3, 1999, the outstanding balance on the line of
credit was $1.1 million (Canadian).

FINANCIAL POSITION

         Cash and short-term investments in the 1999 year-to-date period
decreased $2.8 million as a result of the factors discussed above. Accounts
receivable increased $5.0 million in the 1999 year-to-date period. Inventory
decreased $3.4 million in the 1999 year-to-date period. The increase in
accounts receivable was primarily the result of a $4.3 million increase in
dating receivables. In an effort to better control its production schedule in
light of the seasonal nature of its home heating products and barbecue gas
grill business, the Company utilizes early booking programs under which
customers receive favorable dating terms for placing their orders early and
permitting the Company to ship the products at "factory convenience."

         The decrease in inventories was primarily attributable to the
Company's plan to improve inventory turns and reduce inventory levels, and the
sale of the Ashley solid fuel heating division.

         During the 1999 year-to-date period, net property, plant and equipment
increased $2.3 million. The increase was the result of $3.0 million in capital
expenditures during the 1999 year-to-date period offset by depreciation expense
of $748,000.


                                      20
<PAGE>   22

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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


FOREIGN CURRENCY EXCHANGE RATE RISK

         Due to its Canadian operations, the Company has assets, liabilities,
operations and cash flows in the Canadian currency. Fluctuations in foreign
currency exchange rates impact the U.S. dollar value of Canadian dollar assets,
liabilities, operations and cash flows. The Company translates the Canadian
dollar income statement to U.S. dollars using the average rate of exchange and
translates the Canadian dollar balance sheet to U.S. dollars using the closing
rate of exchange. Certain accounts (e.g., capital stock) are translated using
an historical exchange rate. Consequently, unrealized foreign currency
translation adjustments are reported as a separate component of stockholders'
equity. To illustrate the potential impact of changes in foreign currency
exchange rates on the unrealized foreign currency translation adjustment, a
hypothetical 10% change (decrease) in the average and closing exchange rates
for the six-month period ended July 3, 1999 would have increased the unrealized
foreign currency translation adjustment (a loss) by $796,000.


INTEREST RATE RISK

         To manage its exposure to changes in interest rates, the Company uses
both fixed and variable rate debt. At July 3, 1999, the Company had $4,177,000
of debt outstanding at a variable interest rate of 79.5% of prime plus 1.35%.
However, the Company is also a party to an interest rate swap which effectively
converts the interest rate on the debt to a fixed rate of 8.21%. The debt is
scheduled to mature in September 2002. The interest rate swap is scheduled to
expire in January 2000. Therefore, the Company would be exposed to interest
rate fluctuations on the January 2000 debt balance upon expiration of the
interest rate swap. A hypothetical increase of 10% in the prime lending rate
would not cause the Company's interest expense to increase significantly.

         In addition, the Company maintains a secured bank line of credit of up
to a maximum of $20,000,000 which is to be utilized to finance inventories,
receivables and operations on an interim basis. Interest on the line of credit
is payable monthly at a variable rate based on the 30-day LIBOR plus 1.25%. A
hypothetical increase of 10% in the LIBOR rate would not cause the Company's
interest expense to increase significantly.

         Further, Hunter maintains a secured bank line of credit of up to a
maximum of $2,250,000 (Canadian) which is to be utilized to finance inventories,
receivables and operations on an interim basis. Interest on the line of credit
is payable monthly at a variable rate based on the lender's prime rate plus
one-half of one percent. A hypothetical increase of 10% in the prime lending
rate would not cause the Company's interest expense to increase significantly.

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


                                      21
<PAGE>   23

PART II.     OTHER INFORMATION


ITEM 2.      CHANGES IN SECURITIES AND USE OF PROCEEDS

         On July 18, 1995, the Company closed the sale of 2,300,000 shares of
common stock at a price of $9.50 per share in connection with the initial
public offering of its stock. The proceeds of the offering, net of an
underwriting discount of $1,530,000 and expenses of $923,000, were $19,397,000.
Through the date of this Quarterly Report, the Company has used approximately
$12.4 million of the proceeds to fund capital expenditures, acquire Hunter
Technology Inc., repay outstanding indebtedness, acquire shares of its Common
Stock in accordance with the Company's share repurchase program, and for
working capital and other general corporate purposes. During the 1999
year-to-date period, the Company used approximately $2.8 million to repay
outstanding indebtedness and for working capital and other general corporate
purposes. See "Condensed Consolidated Balance Sheets," "Condensed Consolidated
Statements of Cash Flows," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources and -- Financial Position," appearing elsewhere in this report.


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

         The annual meeting of stockholders of Martin Industries, Inc. was held
on May 21, 1999. At the annual meeting, the stockholders elected three members
to the board of directors of the Company to serve as a class until the annual
meeting to be held in 2002 and one director to serve until the annual meeting
to be held in 2000. The nominees to the board of directors to serve until the
annual meeting to be held in 2002 received the following number of votes:
<TABLE>
<CAPTION>

                                       Shares Voted      Shares           Abstentions
                                           For          Withheld         and Non-Votes
                                       ------------     --------         -------------
         <S>                           <C>              <C>              <C>
         John L. Duncan                 7,773,507        114,634                0
         Robert L. Goucher              7,852,602         35,539                0
         William H. Martin, III         7,629,439        258,702                0
</TABLE>

         The nominee to the board of directors to serve until the annual meeting
to be held in 2000 received the following number of votes:
<TABLE>
<CAPTION>

                                       Shares Voted      Shares           Abstentions
                                           For          Withheld         and Non-Votes
                                       ------------     --------         -------------
         <S>                           <C>              <C>              <C>
         Herbert J. Dickson             7,630,515        257,626                0
</TABLE>


                                      22
<PAGE>   24

         At the annual meeting, the stockholders also considered the selection
of the Company's independent auditors for the fiscal year ending December 31,
1999. The stockholders approved the selection by the board of directors of the
accounting firm of Arthur Andersen LLP as independent auditors for the Company
for said fiscal year by the following number of votes:
<TABLE>
<CAPTION>

                                       Shares Voted          Shares Voted           Abstentions
                                           For                  Against            and Non-Votes
                                       ------------          ------------          -------------
                                       <S>                   <C>                   <C>
                                         7,822,396              21,212                44,533
</TABLE>

         No other matters were considered or voted upon at the annual meeting.


ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

                  *3(a)    Form of Restated Certificate of Incorporation of
                           Martin Industries, Inc. which was filed as Exhibit
                           3(a) to the Registrant's Registration Statement on
                           Form S-1 filed with the Commission on July 10, 1995
                           (Registration No. 33-90432).

                  *3(b)    Bylaws of Martin Industries, Inc. as amended and
                           restated on May 16, 1997 which were filed as Exhibit
                           3(b) to the Registrant's Quarterly statement on Form
                           10-Q for the 26-week period ended June 28, 1997
                           (Commission File No. 0-26228).

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

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

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

                  10(a)    Salary Continuation Letter Agreement dated July 12,
                           1999 between Martin Industries, Inc. and Robert
                           Kevin Caldwell.

                  **27     Financial Data Schedule.

         (b)      Reports on Form 8-K

                  No reports were filed on Form 8-K during the period.

-----------------------------------
 *Incorporated by reference
**Filed with electronic filing only


                                      23
<PAGE>   25

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

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


                                      24
<PAGE>   26


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>

         <S>                                         <C>
         MARTIN INDUSTRIES, INC.
         Date:    August 17, 1999                    By     /s/ Roderick V. Schlosser
                                                         --------------------------------------------
                                                                        Roderick V. Schlosser
                                                                        Vice President and Chief Financial Officer
                                                                        and Secretary
                                                                        (Executed on behalf of Registrant and
                                                                         as Principal Financial Officer)
</TABLE>


                                      25
<PAGE>   27


                               INDEX TO EXHIBITS
<TABLE>
<CAPTION>


         Exhibit

         <S>      <C>                                                                       <C>
         Number   Description of Exhibits                                                   Page No.

         *3(a)    Form of Restated Certificate of Incorporation of Martin
                  Industries, Inc. which was filed as Exhibit 3(a) to the
                  Registrant's Registration Statement on Form S-1 filed with
                  the Commission on July 10, 1995 (Registration No. 33-90432).

         *3(b)    By-laws of Martin Industries, Inc. as amended and restated on
                  May 16, 1997 which were filed as Exhibit 3(b) to the
                  Registrant's Quarterly Statement on Form 10-Q for the 26-week
                  period ended June 28, 1997 (Commission File No. 0-26228).

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

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

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

         10(a)    Salary Continuation Letter Agreement dated July 12, 1999
                  between Martin Industries, Inc. and Robert Kevin Caldwell.

         **27     Financial Data Schedule (for SEC use only).
</TABLE>

         --------------------------
          *Incorporated by reference
         **Filed with electronic filing only