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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|x |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|  |  |                                                                                         
|o |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

|                                       |  |                            
|-------------------------------------- |  | ---------------------------
|For 26-Week Period Ended June 29, 2002 |  | Commission File No. 0-26228

MARTIN INDUSTRIES, INC.




(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 63-0133054                          
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               |  |                                     
|301 East Tennessee Street
Florence, Alabama                    |  | 35630                               
|                                                               |  |                                     
|(Address of principal executive offices)                       |  | (Zip Code)                          

(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   o

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.

8,578,184 shares of Common Stock, $0.01
par value, as of June 29, 2002





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TABLE OF CONTENTS



|                                          |                                                                                               |                                                           |  |  |  |  |  | 
|----------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|PART 1 FINANCIAL INFORMATION             
|                                          | Item 1. Financial Statements                                                                 
|                                          |                                                                                               | CONDENSED BALANCE SHEETS                                 
|                                          |                                                                                               | CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
|                                          |                                                                                               | CONDENSED STATEMENTS OF CASH FLOWS                       
|                                          |                                                                                               | NOTES TO CONDENSED FINANCIAL STATEMENTS                  
|                                          | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                          | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                            
|PART II. OTHER INFORMATION               
|                                          | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                               
|INDEX TO EXHIBITS                        
|LETTER AGREEMENT                         
|$500,000 REVOLVING NOTE                  
|REAL ESTATE MORTGAGE, SECURITY AGREEEMENT
|Section 906 Certification of the CEO     
|Section 906 Certification of the CFO     



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##### Table of Contents



MARTIN INDUSTRIES, INC.

INDEX

|                              |                                                                                               |                                                                                                                        |  |      |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- |  | ---- | - | 
|                              |                                                                                               |                                                                                                                        |  | Page
|                              |                                                                                               |                                                                                                                        |  |     
|PART I. FINANCIAL INFORMATION |                                                                                               |                                                                                                                        |  |     
|                              | Item 1. Financial Statements:                                                                 |                                                                                                                        |  |      |  
|                              |                                                                                               | Unaudited Condensed Balance Sheets as of
June 29, 2002 and December 31, 2001                                           |  |      | 2 | 
|                              |                                                                                               | Unaudited Condensed Statements of Operations for the
13-Week and 26-Week Periods Ended June 29, 2002
and June 30, 2001 |  |      | 4 | 
|                              |                                                                                               | Unaudited Condensed Statements of Cash Flows for the
26-Week Periods Ended June 29, 2002 and June 30, 2001             |  |      | 5 | 
|                              |                                                                                               | Notes to Unaudited Condensed Financial Statements                                                                      |  |      | 6 | 
|                              | Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations |                                                                                                                        |  | 12   |  
|                              | Item 3. Quantitative and Qualitative Disclosure About
Market Risk                             |                                                                                                                        |  | 21   |  
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                                        |  |     
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                        |  | 22   |  

1



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##### Table of Contents






PART 1 FINANCIAL INFORMATION




Item 1. Financial Statements




CONDENSED BALANCE SHEETS(Unaudited)
ASSETS

|                                       |                                                                                                      |  |            |            |              |  |            |            | 
|-------------------------------------- | ---------------------------------------------------------------------------------------------------- |  | ---------- | ---------- | ------------ |  | ---------- | ---------- | 
|                                       |                                                                                                      |  | June 29,   |            | December 31,
|                                       |                                                                                                      |  | 2002       |            | 2001        
|                                       |                                                                                                      |  |            |            |             
|Current Assets:                        |                                                                                                      |  |            |            |              |  |            |           
|                                       | Cash                                                                                                 |  | $          | 3,000      |              |  | $          | 0          | 
|                                       | Accounts receivable, less allowance for doubtful
accounts of $1,126,000 and $1,278,000, respectively |  |            | 4,448,000  |              |  |            | 3,654,000  | 
|                                       | Inventories                                                                                          |  |            | 5,139,000  |              |  |            | 6,414,000  | 
|                                       | Refundable income taxes                                                                              |  |            | 392,000    |              |  |            | 0          | 
|                                       | Prepaid expenses and other assets                                                                    |  |            | 236,000    |              |  |            | 305,000    | 
|                                       |                                                                                                      |  |            |            |              |  |            |           
|                                       |                                                                                                      |  | 10,218,000 |            |              |  | 10,373,000 |           
|                                       |                                                                                                      |  |            |            |              |  |            |           
|Property, plant and equipment, net     |                                                                                                      |  | 7,302,000  |            |              |  | 8,189,000  |           
|                                       |                                                                                                      |  |            |            |              |  |            |           
|Cash surrender value of life insurance |                                                                                                      |  | 0          |            |              |  | 1,344,000  |           
|Other                                  |                                                                                                      |  | 200,000    |            |              |  | 300,000    |           
|                                       |                                                                                                      |  |            |            |              |  |            |           
|                                       | Total other non-current assets                                                                       |  |            | 200,000    |              |  |            | 1,644,000  | 
|                                       |                                                                                                      |  |            |            |              |  |            |           
|                                       | Total assets                                                                                         |  | $          | 17,720,000 |              |  | $          | 20,206,000 | 
|                                       |                                                                                                      |  |            |            |              |  |            |           

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

2



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CONDENSED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS EQUITY

|                        |                                                                                  |                                                                                                                                         |                                            |             |           |            |              |             |           |            | 
|----------------------- | -------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | --------- | ---------- | ------------ | ----------- | --------- | ---------- | 
|                        |                                                                                  |                                                                                                                                         |                                            |             | June 29,  |            | December 31,
|                        |                                                                                  |                                                                                                                                         |                                            |             | 2002      |            | 2001        
|                        |                                                                                  |                                                                                                                                         |                                            |             |           |            |             
|LIABILITIES:            |                                                                                  |                                                                                                                                         |                                            |             |           |            |              |            
|Current Liabilities:    |                                                                                  |                                                                                                                                         |                                            |             |           |            |              |            
|                        |                                                                                  | Short-term borrowings                                                                                                                   |                                            | $           | 8,920,000 |            |              | $           | 5,567,000 |           
|                        |                                                                                  | Capital lease obligations                                                                                                               |                                            |             | 40,000    |            |              |             | 52,000    |           
|                        |                                                                                  | Accounts payable                                                                                                                        |                                            |             | 4,341,000 |            |              |             | 5,491,000 |           
|                        |                                                                                  | Accrued liabilities:                                                                                                                    |                                            |             |           |            |              |             |           |           
|                        |                                                                                  |                                                                                                                                         | Payroll and employee benefits              |             |           | 1,651,000  |              |             |           | 1,635,000  | 
|                        |                                                                                  |                                                                                                                                         | Product liability                          |             |           | 960,000    |              |             |           | 1,036,000  | 
|                        |                                                                                  |                                                                                                                                         | Warranty                                   |             |           | 206,000    |              |             |           | 218,000    | 
|                        |                                                                                  |                                                                                                                                         | Workers compensation                      |             |           | 793,000    |              |             |           | 819,000    | 
|                        |                                                                                  |                                                                                                                                         | Other                                      |             |           | 886,000    |              |             |           | 931,000    | 
|                        |                                                                                  |                                                                                                                                         |                                            |             |           |            |              |            
|                        |                                                                                  |                                                                                                                                         | Total current liabilities                  |             |           | 17,797,000 |              |             |           | 15,749,000 | 
|Noncurrent Liabilities: |                                                                                  |                                                                                                                                         |                                            |             |           |            |              |            
|                        |                                                                                  | Deferred compensation, net of present value discount
of $405,000 and $450,000, respectively                                             |                                            |             | 1,707,000 |            |              |             | 1,745,000 |           
|                        |                                                                                  | Life insurance policy loans                                                                                                             |                                            |             | 0         |            |              |             | 1,305,000 |           
|                        |                                                                                  |                                                                                                                                         |                                            |             |           |            |              |            
|                        |                                                                                  |                                                                                                                                         | Total non-current liabilities              |             |           | 1,707,000  |              |             |           | 3,050,000  | 
|                        |                                                                                  |                                                                                                                                         |                                            |             |           |            |              |            
|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; 9,770,329 at June 29, 2002 and
9,768,500 shares issued at December 31, 2001 |                                            |             | 98,000    |            |              |             | 98,000    |           
|                        | Paid-in capital                                                                  |                                                                                                                                         |                                            | 24,580,000  |           |            |              | 24,580,000  |          
|                        | Accumulated deficit                                                              |                                                                                                                                         |                                            | (22,673,000 | )         |            |              | (19,482,000 | )        
|                        |                                                                                  |                                                                                                                                         |                                            |             |           |            |              |            
|                        |                                                                                  |                                                                                                                                         | 2,005,000                                  |             |           |            | 5,196,000    |            
|                        | Less:                                                                            |                                                                                                                                         |                                            |             |           |            |              |             |          
|                        | Treasury stock at cost (1,192,145 shares at
June 29, 2002 and December 31, 2001) |                                                                                                                                         |                                            | 3,789,000   |           |            |              | 3,789,000   |          
|                        |                                                                                  |                                                                                                                                         |                                            |             |           |            |              |            
|                        |                                                                                  |                                                                                                                                         | Total stockholders equity                 |             |           | (1,784,000 | )            |             |           | 1,407,000  | 
|                        |                                                                                  |                                                                                                                                         |                                            |             |           |            |              |            
|                        |                                                                                  |                                                                                                                                         | Total liabilities and stockholders equity |             | $         | 17,720,000 |              |             | $         | 20,206,000 | 
|                        |                                                                                  |                                                                                                                                         |                                            |             |           |            |              |            

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

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CONDENSED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS(Unaudited)

|                                                     |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |           | 
|---------------------------------------------------- | --------------------------------- | - | -------------------- | ------- | -------------------- | - | ---------- | --------- | -------- | - | ---------- | --------- |  | - | ----------- | --------- | 
|                                                     |                                   |   | 13-Week Period Ended |         | 26-Week Period Ended
|                                                     |                                   |   |                      |         |                     
|                                                     |                                   |   | June 29,             |         | June 30,             |   | June 29,   |           | June 30,
|                                                     |                                   |   | 2002                 |         | 2001                 |   | 2002       |           | 2001    
|                                                     |                                   |   |                      |         |                      |   |            |           |         
|Net sales                                            |                                   | $ | 8,216,000            |         |                      | $ | 9,556,000  |           |          | $ | 15,308,000 |           |  | $ | 16,782,000  |          
|Cost of sales                                        |                                   |   | 7,841,000            |         |                      |   | 9,703,000  |           |          |   | 14,661,000 |           |  |   | 17,438,000  |          
|                                                     |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |          
|Gross profit (loss)                                  |                                   |   | 375,000              |         |                      |   | (147,000   | )         |          |   | 647,000    |           |  |   | (656,000    | )        
|                                                     |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |          
|Operating expenses:                                  |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |          
|                                                     | Selling                           |   |                      | 889,000 |                      |   |            | 1,457,000 |          |   |            | 1,751,000 |  |   |             | 3,199,000 | 
|                                                     | General and administrative        |   |                      | 971,000 |                      |   |            | 1,474,000 |          |   |            | 2,228,000 |  |   |             | 2,799,000 | 
|                                                     | Non-cash ESOP compensation        |   |                      | 0       |                      |   |            | 32,000    |          |   |            | 0         |  |   |             | 95,000    | 
|                                                     | Loss on abandonment of subsidiary |   |                      | 0       |                      |   |            | 0         |          |   |            | 0         |  |   |             | 6,055,000 | 
|                                                     |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |          
|                                                     |                                   |   | 1,860,000            |         |                      |   | 2,963,000  |           |          |   | 3,979,000  |           |  |   | 12,148,000  |          
|Operating loss                                       |                                   |   | (1,485,000           | )       |                      |   | (3,110,000 | )         |          |   | (3,332,000 | )         |  |   | (12,804,000 | )        
|Gain on sales of assets                              |                                   |   | (46,000              | )       |                      |   | 0          |           |          |   | (184,000   | )         |  |   | 0           |          
|Interest expense                                     |                                   |   | 286,000              |         |                      |   | 266,000    |           |          |   | 435,000    |           |  |   | 528,000     |          
|Interest and other income                            |                                   |   | 0                    |         |                      |   | (15,000    | )         |          |   | 0          |           |  |   | (39,000     | )        
|                                                     |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |          
|Loss before income taxes                             |                                   |   | (1,725,000           | )       |                      |   | (3,361,000 | )         |          |   | (3,583,000 | )         |  |   | (13,293,000 | )        
|Credit for income taxes                              |                                   |   | (42,000              | )       |                      |   | 0          |           |          |   | (392,000   | )         |  |   | 0           |          
|                                                     |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |          
|Loss from continuing operations                      |                                   |   | (1,683,000           | )       |                      |   | (3,361,000 | )         |          |   | (3,191,000 | )         |  |   | (13,293,000 | )        
|Gain (loss) from discontinued operations,
net of tax |                                   |   | 0                    |         |                      |   | 248,000    |           |          |   | 0          |           |  |   | 1,711,000   |          
|                                                     |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |          
|Net loss                                             |                                   | $ | (1,683,000           | )       |                      | $ | (3,113,000 | )         |          | $ | (3,191,000 | )         |  | $ | (11,582,000 | )        
|                                                     |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |          
|Basic and diluted per share data:                    |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |          
|Income (loss) from continuing operations             |                                   | $ | (.20                 | )       |                      | $ | (.39       | )         |          | $ | (.37       | )         |  | $ | (1.45       | )        
|Income (loss) from discontinued operations           |                                   |   | .00                  |         |                      |   | .03        |           |          |   | .00        |           |  |   | .21         |          
|                                                     |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |          
|Net loss                                             |                                   | $ | (.20                 | )       |                      | $ | (.36       | )         |          | $ | (.37       | )         |  | $ | (1.24       | )        
|                                                     |                                   |   |                      |         |                      |   |            |           |          |   |            |           |  |   |             |          
|Weighted average number of common
shares outstanding |                                   |   | 8,577,831            |         |                      |   | 8,008,928  |           |          |   | 8,577,373  |           |  |   | 7,965,178   |          

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

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CONDENSED STATEMENTS OF CASH FLOWS(Unaudited)

|                                                  |                                               |                                                               |       |                      |            |          |        |             |            |  
|------------------------------------------------- | --------------------------------------------- | ------------------------------------------------------------- | ----- | -------------------- | ---------- | -------- | ------ | ----------- | ---------- | -
|                                                  |                                               |                                                               |       | 26-Week Period Ended
|                                                  |                                               |                                                               |       |                     
|                                                  |                                               |                                                               |       | June 29,             |            | June 30,
|                                                  |                                               |                                                               |       | 2002                 |            | 2001    
|                                                  |                                               |                                                               |       |                      |            |         
|CASH FLOWS FROM OPERATING ACTIVITIES:             |                                               |                                                               |       |                      |            |          |        |            
|                                                  | Net loss                                      |                                                               | $     | (3,191,000           | )          |          | $      | (11,582,000 | )         
|                                                  | Adjustments to reconcile net loss to net cash |                                                               |       |                      |            |          |        |             |           
|                                                  | Used in operating activities:                 |                                                               |       |                      |            |          |        |             |           
|                                                  |                                               | Loss on abandonment of subsidiary                             |       |                      | 0          |          |        |             | 6,055,000  |  
|                                                  |                                               | Depreciation and amortization                                 |       |                      | 941,000    |          |        |             | 1,214,000  |  
|                                                  |                                               | Gain on sales of assets                                       |       |                      | (3,000     | )        |        |             | 0          |  
|                                                  |                                               | Provision (credit) for doubtful accounts and notes receivable |       |                      | 15,000     |          |        |             | (135,000   | )
|                                                  |                                               | Increase in refundable income taxes                           |       |                      | (392,000   | )        |        |             | 0          |  
|                                                  |                                               | Non-cash ESOP compensation                                    |       |                      | 0          |          |        |             | 95,000     |  
|                                                  |                                               | Other changes in operating assets and liabilities             |       |                      | (656,000   | )        |        |             | 1,995,000  |  
|                                                  |                                               |                                                               |       |                      |            |          |        |            
|                                                  |                                               | Net cash used in operating activities                         |       |                      | (3,286,000 | )        |        |             | (2,358,000 | )
|                                                  |                                               |                                                               |       |                      |            |          |        |            
|CASH FLOWS FROM INVESTING ACTIVITIES:             |                                               |                                                               |       |                      |            |          |        |            
|                                                  | Capital expenditures                          |                                                               |       | (54,000              | )          |          |        | (196,000    | )         
|                                                  | Proceeds from sales of assets                 |                                                               |       | 3,000                |            |          |        | 5,000       |           
|                                                  |                                               |                                                               |       |                      |            |          |        |            
|                                                  |                                               | Net cash used in investing activities                         |       |                      | (51,000    | )        |        |             | (191,000   | )
|                                                  |                                               |                                                               |       |                      |            |          |        |            
|CASH FLOWS FROM FINANCING ACTIVITIES:             |                                               |                                                               |       |                      |            |          |        |            
|                                                  | Net short-term borrowings                     |                                                               |       | 3,352,000            |            |          |        | 2,554,000   |           
|                                                  | Payments on capital lease obligations         |                                                               |       | (12,000              | )          |          |        | (11,000     | )         
|                                                  |                                               |                                                               |       |                      |            |          |        |            
|                                                  |                                               | Net cash provided by financing activities                     |       |                      | 3,340,000  |          |        |             | 2,543,000  |  
|                                                  |                                               |                                                               |       |                      |            |          |        |            
|NET INCREASE (DECREASE) IN CASH                   |                                               |                                                               | 3,000 |                      |            |          | (6,000 | )          
|CASH AT THE BEGINNING OF THE PERIOD               |                                               |                                                               | 0     |                      |            |          | 9,000  |            
|                                                  |                                               |                                                               |       |                      |            |          |        |            
|CASH AT THE END OF THE PERIOD                     |                                               | $                                                             | 3,000 |                      |            | $        | 3,000  |            
|                                                  |                                               |                                                               |       |                      |            |          |        |            
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |                                               |                                                               |       |                      |            |          |        |            
|                                                  | Cash paid during the period for:              |                                                               |       |                      |            |          |        |             |           
|                                                  |                                               | Interest                                                      |       | $                    | 311,000    |          |        | $           | 500,000    |  
|                                                  |                                               | Income taxes                                                  |       | $                    | 0          |          |        | $           | 0          |  

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

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

1. BASIS OF PRESENTATION

Unaudited Interim Condensed Financial Statements

The accompanying unaudited interim condensed financial statements of
Martin Industries, Inc. (the Company) have been prepared in accordance with
accounting principles generally accepted in the U.S. for interim financial
information and are presented in accordance with the requirements of Form 10-Q
and Article 10 of Regulation S-X. However, the interim condensed financial
statements of the Company have not been reviewed by an independent public
accountant prior to filing with the Securities and Exchange Commission as
required by Rule 10-01(d) of Regulation S-X. On July 11, 2002, the Company
dismissed its independent accountants, Arthur Andersen LLP, effective
immediately. As of the date of this filing, no replacement independent
accountant has been engaged. The financial statements should be read in
conjunction with the audited financial statements and notes thereto for the
year ended December 31, 2001 included on Form 10-K, as filed with the
Securities and Exchange Commission on April 1, 2002.

In the opinion of management, the unaudited interim condensed 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 results of operations for the interim periods presented are not
necessarily indicative of results for the full year.

Fiscal Periods

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

Basis of Presentation

Due to the transfer of shares of the Companys Canadian subsidiary to the
subsidiarys manager and sole director effective January 1, 2001, certain prior
year amounts have been reclassified to conform with the current years
presentation.

2. INVENTORIES

The Company uses the first in, first out (FIFO) method of accounting for
its inventories. Management believes the FIFO method provides an accurate
measurement of inventory valuation and operating results. Inventory costs
include material, labor and overhead, and the Company evaluates raw materials,
purchased parts, work-in-process and finished goods to ensure that inventory is
not recorded at amounts in excess of estimated net realizable value. Inherent
in the estimates of net realizable value are managements estimates related to
the Companys customer demand, product mix and salvage value. At June 29, 2002
and December 31, 2001, the reserve for excess and obsolete inventory was
$727,000 and $1,058,000, respectively. An analysis of inventories at June
29, 2002 and December 31, 2001 follows:

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|                                                         |                                   |   |           |           |              |   |           |           | 
|-------------------------------------------------------- | --------------------------------- | - | --------- | --------- | ------------ | - | --------- | --------- | 
|                                                         |                                   |   | June 29,  |           | December 31,
|                                                         |                                   |   | 2002      |           | 2001        
|                                                         |                                   |   |           |           |             
|Inventories valued at first-in, first-out (FIFO) cost: |                                   |   |           |           |              |   |           |          
|                                                         | Raw materials and purchased parts |   | $         | 2,981,000 |              |   | $         | 3,157,000 | 
|                                                         | Work-in-process                   |   |           | 734,000   |              |   |           | 778,000   | 
|                                                         | Finished goods                    |   |           | 1,424,000 |              |   |           | 2,479,000 | 
|                                                         |                                   |   |           |           |              |   |           |          
|                                                         |                                   | $ | 5,139,000 |           |              | $ | 6,414,000 |          
|                                                         |                                   |   |           |           |              |   |           |          

3. INCOME TAXES

The Company has net deferred tax assets resulting primarily from net
operating loss (NOL) carryforwards in United States jurisdictions of
approximately $39 million expiring in fiscal years 2019 through 2021.

The Company establishes valuation allowances in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes, and will continually review the adequacy of the valuation allowance.

In assessing the valuation allowance established at December 31, 2001, the
Company concluded that it should fully reserve its net deferred tax assets as a
result of continuing losses from operations and realization of the assets was
not considered more likely than not. At June 29, 2002 and December 31, 2001,
the valuation allowance for deferred taxes was approximately $18 million and
$17 million, respectively.

Congress passed and President Bush signed the Job Creation and Worker
Assistance Act of 2002 into law in March, 2002. The tax provisions in the new
law extend the NOL carryback period to five years for NOLs arising in tax years
ending in 2001 and 2002. As a result of the new law, the Company has filed an
amended 1996 corporate income tax return and expects to obtain an income tax
refund of approximately $392,000 from the Internal Revenue Service.

4. EARNINGS PER SHARE

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

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|                                                                                      |  |  |                      |  |                      |  |           |  |          |  |           |  |  |  |           |  | 
|------------------------------------------------------------------------------------- |  |  | -------------------- |  | -------------------- |  | --------- |  | -------- |  | --------- |  |  |  | --------- |  | 
|                                                                                      |  |  | 13-Week Period Ended |  | 26-Week Period Ended
|                                                                                      |  |  |                      |  |                     
|                                                                                      |  |  | June 29,             |  | June 30,             |  | June 29,  |  | June 30,
|                                                                                      |  |  | 2002                 |  | 2001                 |  | 2002      |  | 2001    
|                                                                                      |  |  |                      |  |                      |  |           |  |         
|Weighted average shares  basic and diluted, excluding ESOP and stock
options effects |  |  | 5,890,602            |  |                      |  | 5,756,047 |  |          |  | 5,890,144 |  |  |  | 5,755,714 | 
|Weighted average effect of ESOP shares committed to be released                       |  |  | 2,687,229            |  |                      |  | 2,252,881 |  |          |  | 2,687,229 |  |  |  | 2,209,464 | 
|                                                                                      |  |  |                      |  |                      |  |           |  |          |  |           |  |  |  |           | 
|Weighted average number of common
shares outstanding  basic and diluted              |  |  | 8,577,831            |  |                      |  | 8,008,928 |  |          |  | 8,577,373 |  |  |  | 7,965,178 | 
|                                                                                      |  |  |                      |  |                      |  |           |  |          |  |           |  |  |  |           | 

Options outstanding of 420,323 and 559,014 for the 13-week period ended June
29, 2002 and June 30, 2001, respectively, were not included in the table above
as they were anti-dilutive.

5. COMMITMENTS AND CONTINGENCIES

On February 1, 1996, 1166081 Ontario Inc., a former subsidiary of the
Company, acquired all of the capital stock of Hunter Technologies, Inc.
(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
second quarter of 1997, the Company notified certain of the sellers that it was
withholding payment on the promissory notes held by them pending resolution of
certain issues with the holders of the notes arising out of the purchase
transaction. The Company also claimed the entire amount in escrow and
instituted litigation to recover these amounts and additional amounts from
certain sellers in the purchase transaction, and certain of the sellers sued to
enforce collection of their notes.

During 1998, the Company effected a settlement with all but two of the
former shareholders, and a contingent settlement with these two. The
contingent settlement with the two former shareholders will result (if the
contingency is satisfied and that portion of the settlement effectuated) in
receipt by the Company of an additional $106,000 (including interest), and
cancellation of notes and accrued interest totaling approximately $234,000.

With regard to the foregoing, on February 20, 2002, the Company
transferred the shares of its wholly-owned subsidiary, 1166081 Ontario Inc. to
Roger Vuillod. All shares of Hunter are held by 1166081 Ontario Inc. Under
the terms of the transfer, Mr. Vuillod assumed all obligations and liabilities
associated with the ownership of the shares of 1166081 Ontario Inc. The
transfer of shares of 1166081 Ontario Inc. did not effect a transfer of the
Companys rights and obligations under the contingent settlement noted above.

The Company is a party to various legal proceedings that are incidental to
its business. Certain of these cases filed against the Company and other
companies engaged in businesses similar to the Company often allege, among
other things, product liability, personal injury and breach of contract and
warranty. These kinds of suits sometimes seek the imposition of large amounts
of compensatory and punitive damages and trials by jury. While these kinds of
suits normally would not be expected to have a material adverse affect on the
Company, the weakness of the Companys current financial position could, in the
opinion of management, cause a normally insignificant award of damages to have
a material adverse effect on the Company.

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6. SHORT-TERM BORROWINGS

Effective December 19, 2001, the Company entered into an amended bank line
of credit agreement with its principal lender for up to a maximum of $7.5
million which has been utilized to finance inventories, receivables and
operations. As of June 29, 2002 and December 31, 2001, the outstanding balance
on the existing line of credit was $6,924,000 and $5,567,000, respectively.
The line of credit is secured by the receivables, inventory and equipment of
the Company. Interest on the line of credit is payable monthly at a variable
rate based on the prime rate plus 2%.

On July 1, 2002, the Company received an extension from its primary lender
of its current line of credit through August 31, 2002. The lender also agreed
to waive the Companys current defaults of debt covenants contained in its loan
agreement through June 30, 2002. The extension does not effect a change in the
amount available to the Company under the line, which varies based on the value
of certain assets securing the line that include the Companys equipment,
inventory and accounts receivable. Under a previous extension, the Company
agreed to pay to the lender a fee in the amount of $100,000 in the event the
Company was unable to obtain replacement financing on or before July 1, 2002.
The lender has agreed to extend the payment of this fee until August 31, 2002.
Because the Company was unable to repay the line of credit in full by July 31,
2002, the lender is entitled to receive warrants to purchase common stock in
the Company equal to 10% of the Companys outstanding shares at an exercise
price of $0.14 per share. The Company also granted the lender a second
mortgage, subordinate in all respects to the lien of the first mortgage
described below, in all of the real property of the Company.

On April 5, 2002, the Company entered into an agreement with M-TIN, LLC, a
limited liability company controlled by two current directors and one former
director of the Company, to provide a $1.5 million term loan to the Company.
The loan is for a six-month term, subject to renewal for an additional six
months at the option of the Company provided that the Company pays a 5% renewal
fee. The loan bears interest at an annual rate of 12% and is subject to a
placement fee of 5% due at the funding of the loan and an additional 3%
prepayment fee on the amount prepaid. The loan is secured by an unencumbered
first mortgage in all of the real property of the Company.

On May 9, 2002, the Company entered into an additional agreement with
M-TIN, LLC to provide a $500,000 line of credit to the Company. The line of
credit matures on October 5, 2002, subject to renewal for an additional six
months at the option of the Company provided that the Company pays a 5% renewal
fee. The line of credit bears interest on the unpaid balance at an annual rate
of 12%. The line of credit is also subject to a placement fee equal to 5% of
the available credit and an additional 3% prepayment fee on the amount prepaid.
The line of credit is secured by the first mortgage in all of the real
property of the Company. As of August 12, 2002, $500,000 of the line of credit
had been utilized and no further credit was available.

Previously reported negotiations with a prospective lender for a new
asset-based, secured line of credit to replace its existing credit facility
have been discontinued by the prospective lender. The Company has not
identified another potential lender to replace its current credit facility as
of the date of this filing. The Company has been and continues to be in
discussion with parties involving various means to alleviate its financial
difficulties. These discussions involve several alternatives including, but
not limited to, additional debt secured by fixed assets of the Company, equity
or equity equivalents, an expansion of the M-TIN, LLC loan arrangement, and a
possible sale of the Company. The Company is in continuing discussions with
its primary lender in an effort to extend its existing credit facility beyond
the August 31, 2002 expiration date. There can be no assurances that the
lender will agree to an extension. Further, without additional working capital
from its primary lender or outside sources, the Company must generate
sufficient cash within its existing credit facility on an on-going basis in
order to maintain its operations. There can be no assurance that the Company
will be able to obtain additional financing from its primary lender or that
other sources will be identified or agree to provide the necessary financing
nor can any assurance be given that the Company will be able to generate cash
within its existing credit facility that is adequate to maintain its
operations.

See also Note 8 to Notes to Condensed Financial Statements, Going Concern
Matters, below.

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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
includes vented and vent-free gas heaters and furnaces, pre-engineered gas and
wood-burning fireplaces and gas logs. Following the disposition of the
Companys Canadian subsidiaries in February 2002, the other products segment
consists only of replacement parts for the home heating products segment. The
accounting policies for each segment are the same as those used by the Company.
The Company evaluates performance based on gross sales and gross margin. As
such, the Company does not allocate other items of income or expense to the
reportable operating segments. The results and identifiable net assets for the
two reportable segments of the Company are included in the following table.

|                                       |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |            |  
|-------------------------------------- | ---------------------------------------- | - | -------------------- | ---------- | -------------------- | - | --------- | ---------- | -------- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                       |                                          |   | 13-Week Period Ended |            | 26-Week Period Ended
|                                       |                                          |   |                      |            |                     
|                                       |                                          |   | June 29,             |            | June 30,             |   | June 29,  |            | June 30,
|                                       |                                          |   | 2002                 |            | 2001                 |   | 2002      |            | 2001    
|                                       |                                          |   |                      |            |                      |   |           |            |         
|Gross sales:                           |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           
|                                       | Home heating products                    |   | $                    | 8,170,000  |                      |   | $         | 9,368,000  |          |   | $          | 15,137,000 |   |   | $          | 16,199,000 |  
|                                       | Other products                           |   |                      | 124,000    |                      |   |           | 263,000    |          |   |            | 314,000    |   |   |            | 659,000    |  
|                                       |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           
|                                       |                                          | $ | 8,294,000            |            |                      | $ | 9,631,000 |            |          | $ | 15,451,000 |            |   | $ | 16,858,000 |           
|                                       |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           
|Reconciliation to net sales:           |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           
|                                       | Gross sales                              |   | $                    | 8,294,000  |                      |   | $         | 9,631,000  |          |   | $          | 15,451,000 |   |   | $          | 16,858,000 |  
|                                       | Freight revenue                          |   |                      | 52,000     |                      |   |           | 89,000     |          |   |            | 113,000    |   |   |            | 181,000    |  
|                                       | Discounts and royalties                  |   |                      | (130,000   | )                    |   |           | (164,000   | )        |   |            | (256,000   | ) |   |            | (257,000   | )
|                                       |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           
|                                       | Net sales                                |   | $                    | 8,216,000  |                      |   | $         | 9,556,000  |          |   | $          | 15,308,000 |   |   | $          | 16,782,000 |  
|                                       |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           
|Gross margin:                          |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           
|                                       | Home heating products                    |   | $                    | 3,004,000  |                      |   | $         | 2,895,000  |          |   | $          | 5,540,000  |   |   | $          | 5,308,000  |  
|                                       | Other products                           |   |                      | 76,000     |                      |   |           | 149,000    |          |   |            | 209,000    |   |   |            | 358,000    |  
|                                       |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           
|                                       |                                          | $ | 3,080,000            |            |                      | $ | 3,044,000 |            |          | $ | 5,749,000  |            |   | $ | 5,666,000  |           
|                                       |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           
|Reconciliation to gross profit (loss): |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           
|                                       | Gross margin                             |   | $                    | 3,080,000  |                      |   | $         | 3,044,000  |          |   | $          | 5,749,000  |   |   | $          | 5,666,000  |  
|                                       | Freight revenue                          |   |                      | 52,000     |                      |   |           | 89,000     |          |   |            | 113,000    |   |   |            | 181,000    |  
|                                       | Discounts and royalties                  |   |                      | (130,000   | )                    |   |           | (164,000   | )        |   |            | (256,000   | ) |   |            | (257,000   | )
|                                       | Fixed costs, variances, reserves & other |   |                      | (2,627,000 | )                    |   |           | (3,116,000 | )        |   |            | (4,959,000 | ) |   |            | (6,246,000 | )
|                                       |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           
|                                       | Gross profit (loss)                      |   | $                    | 375,000    |                      |   | $         | (147,000   | )        |   | $          | 647,000    |   |   | $          | (656,000   | )
|                                       |                                          |   |                      |            |                      |   |           |            |          |   |            |            |   |   |            |           

|                             |                       |   |            |           |             |   |            |            | 
|---------------------------- | --------------------- | - | ---------- | --------- | ----------- | - | ---------- | ---------- | 
|                             |                       |   | June 29    |           | December 31
|                             |                       |   | 2002       |           | 2001       
|                             |                       |   |            |           |            
|Identifiable net assets (1): |                       |   |            |           |             |   |            |           
|                             | Home heating products |   | $          | 9,741,000 |             |   | $          | 11,284,000 | 
|                             | Other products        |   |            | 181,000   |             |   |            | 387,000    | 
|                             | Other (2)             |   |            | 2,520,000 |             |   |            | 2,932,000  | 
|                             |                       |   |            |           |             |   |            |           
|                             |                       | $ | 12,442,000 |           |             | $ | 14,603,000 |           
|                             |                       |   |            |           |             |   |            |           



|(1) |  | Represents Property, Plant, Equipment and Inventory (each net respective
reserves)
|--- |  | ----------------------------------------------------------------------------------
|(2) |  | Represents amount attributable to the Companys corporate administration.         

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8. GOING CONCERN MATTERS

The financial statements as of and for the year ended December 31, 2001
were prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
As shown in the financial statements, as presented in the Companys Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission on
April 1, 2002, during the year ended December 31, 2001, the Company incurred a
net loss of $15.9 million. The Company also had short-term borrowings of $5.6
million as of December 31, 2001. The balance is payable to the Companys
primary lender under a bank line of credit agreement. The line of credit
agreement has been extended through August 31, 2002 by the current bank lender.
The Company is pursuing a more permanent form of financing. There can be no
assurance, however, that any new credit arrangement will be finalized or
further extensions granted beyond August 31, 2002.

Although the Company incurred a net loss in 2001, management continues to
implement and focus on strategies to return the Company to profitability. Two
primary objectives are to develop the necessary product offering to compete
effectively in each market segment served and to reduce fixed costs in
proportion to a lower level of revenue. Product development was essentially
completed in July 2002. During 2001, payroll expenses alone were reduced by
over $3 million (on an annualized basis). Fixed costs, including payroll
expenses, have continued to decline in the first half of 2002. In addition,
standard cost of goods sold has been reduced through vigorous direct cost
reductions. Although significantly improved over prior periods, unfavorable
manufacturing variances remain due to the lack of operating cash, which has
decreased the Companys ability to purchase raw materials and diminished the
orderly flow of materials throughout the manufacturing process, and has
resulted in production levels below what is needed to meet customer demand and
to fully absorb fixed costs. There can be no assurance that the Company can
provide sufficient operating cash, achieve production levels that meet customer
demand, eliminate negative variances or fully absorb current levels of fixed
costs.

The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern. The Companys continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to comply with the terms of its existing credit
line agreement, as extended, to obtain additional financing or refinancing as
may be required, and ultimately to re-establish profitable operations.

11



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##### Table of Contents






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 financial statements of the Company and notes thereto
appearing elsewhere in this Form 10-Q. All references to the second quarter
of 2002 and the second quarter of 2001 are referring to the 13-week periods
ended June 29, 2002 and June 30, 2001, respectively. All references to the
2002 year-to-date period and the 2001 year-to-date period are referring to the
26-week periods ended June 29, 2002 and June 30, 2001, respectively.

OVERVIEW

On July 1, 2002, the Company received an extension from its primary lender
of its current line of credit through August 31, 2002. The lender also agreed
to waive the Companys defaults of debt covenants contained in its loan
agreement through June 30, 2002. Under a previous extension of the loan
agreement, the Company agreed to pay to the lender a fee in the amount of
$100,000 if the Company was unable to obtain replacement financing on or before
July 1, 2002. The lender has agreed to extend the payment of this fee until
August 31, 2002 The extension does not change the amount available to the
Company as it varies based on the value of certain assets securing the line
that include the Companys equipment, inventory, and accounts receivable.
Because the Company was unable to repay the line of credit in full by July 31,
2002, the lender is entitled to receive warrants to purchase common stock in
the Company equal to 10% of the Companys outstanding shares at an exercise
price of $0.14 per share. The Company also granted the lender a second
mortgage, subordinate in all respects to the lien of the first mortgage
described below, in all the real property of the Company.

On April 5, 2002, the Company entered into an agreement with M-TIN, LLC, a
limited liability company controlled by two current directors and one former
director of the Company, to provide a $1.5 million term loan to the Company.
The loan is for a six-month term, subject to renewal for an additional six
months at the option of the Company provided that the Company pays a 5% renewal
fee. The loan bears interest at an annual rate of 12% and is subject to a
placement fee of 5% due at the funding of the loan and an additional 3%
prepayment fee on the amount prepaid. The loan is secured by an unencumbered
first mortgage in all of the real property of the Company.

On May 9, 2002, the Company entered into an additional agreement with
M-TIN, LLC to provide a $500,000 line of credit to the Company. The line of
credit matures on October 5, 2002, subject to renewal for an additional six
months at the option of the Company provided that the Company pays a 5% renewal
fee. The line of credit bears interest on the unpaid balance at an annual rate
of 12%. The line of credit is also subject to a placement fee equal to 5% of
the available credit and an additional 3% prepayment fee on the amount prepaid.
The line of credit is secured by the first mortgage in all of the real
property of the Company. As of August 12, 2002, $500,000 of the line of credit
had been utilized and no further credit was available.

Previously reported negotiations with a prospective lender for a new
asset-based, secured line of credit to replace its existing credit facility
have been discontinued by the prospective lender. The Company has not
identified another potential lender to replace its current credit facility as
of the date of this filing. The Company has been and continues to be in
discussion with parties involving various means to alleviate its financial
difficulties. These discussions involve several alternatives including, but
not limited to, additional debt secured by fixed assets of the Company, equity
or equity equivalents, an expansion of the M-TIN, LLC loan arrangement, and a
possible sale of the Company. The Company is in continuing discussions with
its primary lender in an effort to extend its existing credit facility beyond
the August 31, 2002 expiration date. There can be no assurances that the
lender will agree to an extension. Further, without additional working capital
from its primary lender or outside sources, the Company must generate
sufficient cash within its existing credit facility on an on-going basis in
order to maintain its operations. There can be no assurance that the Company
will be able to obtain additional financing from its primary lender or that
other sources will be identified or agree to provide the necessary financing
nor can any assurance be given that the Company will be able to generate cash
within its existing credit facility that is adequate to maintain its
operations.

12



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##### Table of Contents



Due to the enactment in March 2002 of the Job Creation and Worker
Assistance Act of 2002, the NOL carryback period has been extended to five years
for NOLs arising in tax years ending in 2001 and 2002. As a result of the new
law, the Company has filed an amended 1996 corporate income tax return and has
received an income tax refund of approximately $392,000 from the Internal
Revenue Service.

As a result of the $15.9 million net loss incurred during fiscal 2001, and
the fact that there can be no assurance that any new credit arrangement will be
made or further extensions granted by the Companys primary lender beyond the
current extension, the Company received a going concern qualification from its
independent public accountants in connection with its audited financial
statements for the year ended December 31, 2001, as described more fully in the
Report of Independent Public Accountants included in the Companys Annual
Report on Form 10-K filed with the Securities and Exchange Commission on April
1, 2002.

On July 9, 2002, the Company received notice of a lawsuit filed by a former
officer of the Company claiming payments under a Supplemental Income Agreement
issued in 1983. The Company has filed a response and intends to defend this
matter vigorously.

On July 11, 2002, the Company dismissed its independent accountants,
Arthur Andersen LLP (Andersen), effective immediately. The decision to
terminate the engagement of Andersen was approved by the Companys Board of
Directors upon the recommendation of its Audit Committee. Andersens report on
the Companys 2001 financial statements was issued earlier in March 2002, in
conjunction with the filing of the Companys Annual Report on Form 10-K for the
year ended December 31, 2001. The Company has not yet engaged replacement
independent auditors. Accordingly, the Companys interim financial statements
for the period ended June 29, 2002 have not been reviewed by an independent
accounting firm.

As used in the following discussion and elsewhere in this Quarterly
Report, the term gross sales reflects total customer invoices billed by the
Company for the applicable period, net of any customer sales credits issued.
The term net sales as used herein and elsewhere in this Quarterly Report,
reflects gross sales less deductions for cash discounts and royalties paid by
the Company.

13



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##### Table of Contents



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.

|                                    |                                    |  |                      |      |                      |  |          |      |          |  |       |      |  |  |       |      | 
|----------------------------------- | ---------------------------------- |  | -------------------- | ---- | -------------------- |  | -------- | ---- | -------- |  | ----- | ---- |  |  | ----- | ---- | 
|                                    |                                    |  | 13-Week Period Ended |      | 26-Week Period Ended
|                                    |                                    |  |                      |      |                     
|                                    |                                    |  | June 29,             |      | June 30,             |  | June 29, |      | June 30,
|                                    |                                    |  | 2002                 |      | 2001                 |  | 2002     |      | 2001    
|                                    |                                    |  |                      |      |                      |  |          |      |         
|Net sales                           |                                    |  | 100.0                | %    |                      |  | 100.0    | %    |          |  | 100.0 | %    |  |  | 100.0 | %   
|Cost of sales                       |                                    |  | 95.4                 |      |                      |  | 101.5    |      |          |  | 95.8  |      |  |  | 103.9 |     
|                                    |                                    |  |                      |      |                      |  |          |      |          |  |       |      |  |  |       |     
|Gross profit (loss)                 |                                    |  | 4.6                  |      |                      |  | (1.5     | )    |          |  | 4.2   |      |  |  | (3.9  | )   
|                                    |                                    |  |                      |      |                      |  |          |      |          |  |       |      |  |  |       |     
|Operating expenses:                 |                                    |  |                      |      |                      |  |          |      |          |  |       |      |  |  |       |     
|                                    | Selling                            |  |                      | 10.8 |                      |  |          | 15.3 |          |  |       | 11.4 |  |  |       | 19.1 | 
|                                    | General and administrative         |  |                      | 11.8 |                      |  |          | 15.4 |          |  |       | 14.6 |  |  |       | 16.7 | 
|                                    | Non-cash ESOP compensation expense |  |                      | .0   |                      |  |          | 0.3  |          |  |       | .0   |  |  |       | 0.6  | 
|                                    | Loss
on abandonment of subsidiary  |  |                      | .0   |                      |  |          | .0   |          |  |       | .0   |  |  |       | 36.1 | 
|                                    |                                    |  |                      |      |                      |  |          |      |          |  |       |      |  |  |       |     
|                                    |                                    |  | 29.9                 |      |                      |  | 31.0     |      |          |  | 26.0  |      |  |  | 72.5  |     
|                                    |                                    |  |                      |      |                      |  |          |      |          |  |       |      |  |  |       |     
|Operating loss                      |                                    |  | (18.0                | )    |                      |  | (32.5    | )    |          |  | (21.8 | )    |  |  | (76.4 | )   
|Gain on sales of assets             |                                    |  | (0.6                 | )    |                      |  | 0.0      |      |          |  | (1.2  | )    |  |  | 0.0   |     
|Net interest and other income       |                                    |  | 3.5                  |      |                      |  | 2.6      |      |          |  | 2.8   |      |  |  | 2.9   |     
|                                    |                                    |  |                      |      |                      |  |          |      |          |  |       |      |  |  |       |     
|Loss before income taxes            |                                    |  | (20.9                | )    |                      |  | (35.1    | )    |          |  | (23.4 | )    |  |  | (79.3 | )   
|Credit for income taxes             |                                    |  | (0.5                 | )    |                      |  | 0.0      |      |          |  | (2.6  | )    |  |  | .0    |     
|                                    |                                    |  |                      |      |                      |  |          |      |          |  |       |      |  |  |       |     
|Loss from continuing operations     |                                    |  | (20.4                | )    |                      |  | (35.1    | )    |          |  | (20.8 | )    |  |  | (79.3 | )   
|Income from discontinued operations |                                    |  | .0                   |      |                      |  | 2.6      |      |          |  | .0    |      |  |  | 10.2  |     
|                                    |                                    |  |                      |      |                      |  |          |      |          |  |       |      |  |  |       |     
|Net income (loss)                   |                                    |  | (20.4                | )%   |                      |  | (32.5    | )%   |          |  | (20.8 | )%   |  |  | (69.1 | )%  
|                                    |                                    |  |                      |      |                      |  |          |      |          |  |       |      |  |  |       |     

13-Week Period Ended June 29, 2002 Compared to 13-Week Period Ended June 30, 2001

Net Sales

Net sales in the 13-week period ended June 29, 2002 decreased $1.4
million, to $8.2 million from $9.6 million in the 13-week period ended June 30,
2001, a 14.6% decline.

Home Heating Products.The decrease in net sales of home heating products was
primarily in woodburning fireplaces where sales dropped from $4.5 million in
the second quarter 2001 to $3.3 million in the second quarter 2002, a decrease
of $1.2 million or 26.7%. Home heating product sales slowed due to the
continued downturn in the manufactured housing market.

Other Products.Net sales of other products decreased $150,000, or 54.7%, in
the second quarter of 2002 to $124,000 as compared to $274,000 in the second
quarter of 2001. The decrease in sales is primarily due to a reduction in OEM
business.

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Gross Profit (Loss)

Gross profit in the second quarter of 2002 was $375,000 as compared to a
gross loss of ($147,000) in the second quarter of 2001, an increase of
$522,000. Gross margin, defined as gross sales less production costs, improved
from $3,044,000 in the second quarter of 2001 to $3,080,000 in the second
quarter of 2002, despite the decrease in sales of $1.4 million.

Home Heating Products.The gross margin on sales of home heating products in
the second quarter of 2002 was $3.0 million, or 36.8% of home heating sales.
The gross margin on home heating products in the second quarter of 2001 was
$2.9 million, or 30.9% of home heating sales. The improvement in gross margin
percentage was primarily the result of increases in gross sales of higher
margin gas fireplaces and unvented fireboxes.

Other Products.The gross margin on sales of other products in the second
quarter of 2002 was $76,000 or 61.3% of other sales. The gross margin on sales
of other products in the second quarter of 2001 was $149,000, or 56.7 % of
other products sales. The increase in gross margin percentage in the other
products segment was primarily the result of a price increase in home heating
replacement parts that occurred in August 2001.

Selling Expenses

Selling expenses in the second quarter of 2002 decreased to $889,000 from
$1.5 million in the second quarter of 2001, a decrease of $568,000 or 38%.
The decrease was attributable primarily to a decrease in advertising and
promotion expenses of $113,000, a decrease in commission expense of $254,000, a
decrease in personnel and administrative expenses of $76,000, and a decrease in
travel and entertainment expenses of $92,000. Selling expenses as a percentage
of net sales decreased to 10.8% in the second quarter of 2002 from 17.7% in the
second quarter of 2001, due to efforts to reduce selling expenses in proportion
to sales.

General and Administrative Expenses

General and administrative expenses in the second quarter of 2002
decreased to $971,000 from $1,474,000 in the second quarter of 2001, a decrease
of $503,000, or 34.1%. The decrease was primarily the result of a reduction in
personnel and related expenses of $31,000, reduced professional services
expense of $91,000, a decrease in supplies and other expense of $84,000 and a
decrease in severance pay of $298,000 due to concentrated efforts to streamline
administrative operations and to cut costs and cash outlays.

Non-cash ESOP Compensation Expense

Non-cash ESOP compensation expense was $0 in the second quarter of 2002 as
compared to $32,000 in the second quarter of 2001 due to the payment in full of
the principal and interest of the ESOP debt in the fourth quarter of 2001.
Prior to the cancellation of the ESOP loan, shares owned by the ESOP were held
in a suspense account. Shares of common stock were committed to be to be
released from the ESOPs suspense account and credited to ESOP participants
accounts based on the ratio that the principal debt repayment of the ESOP loan
bore to the original principal debt balance. The Company was required to
recognize compensation expense each fiscal quarter in an amount equal to
one-fourth of the number of shares of common stock committed to be released
from the ESOPs suspense account each year multiplied by the average fair
market value of such shares during the period. In connection with the
cancellation of the ESOP loan, all unallocated shares of common stock held in
the ESOPs suspense account were credited to the ESOP participants accounts.

15



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##### Table of Contents



Gain on Sale of Assets

The gain on sales of assets of $46,000 is due to the final transfers of
Broilmaster premium barbecue gas grill inventory to the purchaser of the
Broilmaster line that occurred in the second quarter of 2002.

Interest Expense

Interest expense in the second quarter of 2002 was $286,000 as compared to
$266,000 in the second quarter of 2001, an increase of $20,000, or 1.1%. The
increase was attributable to a slight increase in average outstanding debt.

Interest and Other Income

Interest and other income in the second quarter of 2002 was $0 as compared
to $15,000 in the second quarter of 2001. The decrease was attributable to a
decrease in average outstanding investments.

Credit for Income Taxes

Due to the enactment of the Job Creation and Worker Assistance Act of 2002
by Congress and President Bush in March, 2002, which extends the NOL carryback
period to five years for NOLs arising in tax years ending in 2001 and 2002, the
Company has received an income tax refund of approximately $392,000 from the
Internal Revenue Service.

26-Week Period Ended June 29, 2002 Compared to 26-Week Period Ended June 30, 2001

Net Sales

Net sales in the 26-week period ended June 29, 2002 decreased to $15.3
million from $16.8 million in the 26-week period ended June 29, 2001, a
decrease of $1.5 million, or 8.9%.

Home Heating Products.Gross sales of home heating products declined to $15.1
million in the 2002 year-to-date period from $16.2 million in the 2001
year-to-date period, a decrease of $1.1 million or .7%. Home heating product
sales slowed due to the continued downturn in the manufactured housing market.

Other Products.Gross sales of other products decreased $345,000, or 52.4%, in
the 2002 year-to-date period to $314,000 as compared to $659,000 in the 2001
year-to-date period. The decrease in sales is primarily due to a reduction in
OEM business.

Gross Profit (Loss)

Gross profit in the 2002 year-to-date period grew to $647,000 as compared
to a gross loss of ($656,000) in the 2001 year-to-date period, an improvement
of $1.3 million, despite the $1.5 million decrease in net sales. Gross margin,
defined as gross sales less production costs, rose to $5,749,000 in the second
quarter of 2002 from $5,566,000 in the second quarter of 2001, an increase of
3.3%. This is due to diligent efforts to control production variances and the
implementation of new computer software that provided an improved way to
monitor production costs.

Home Heating Products.The gross margin on sales of home heating products in
the 2002 year-to-date period was $5.5 million, or 36.4% of home heating sales.
The gross margin on home heating products in the 2001 year-to-date period was
$5.3 million, or 32.7% of home heating sales. The increase in gross margin
percentage was primarily the result of sales of higher margin gas fireplaces
and unvented fireboxes.

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Other Products.The gross margin on sales of other products in the 2002
year-to-date period was $209,000 or 66.6% of other sales. The gross margin on
sales of other products in the 2001 year-to-date period was $358,000, or 54.3%
of other products sales. The increase in gross margin percentage in the other
segment was primarily the result of a price increase in home heating
replacement parts in August 2001.

Selling Expenses

Selling expenses in the 2002 year-to-date period decreased to $1.8 million
from $3.2 million in the 2001 year-to-date period, a decrease of $1.4 million
or 45.3%, primarily as a result of a decrease in advertising and promotion
expenses of $622,000, a decrease in commission expense of $369,000, and a
decrease in personnel and administrative expenses of $412,000. Selling
expenses as a percentage of net sales decreased to 9.2% in the 2002
year-to-date period from 19.0% in the 2001 year-to-date period, due to
continued efforts to decrease selling expenses in proportion to sales.

General and Administrative Expenses

General and administrative expenses in the 2002 year-to-date period
decreased to $2.2 million from $2.8 million in the 2001 year-to-date period, a
decrease of $571,000, or 20.4%. The decrease consists primarily of a reduction
in personnel and related expenses of $144,000, reduced professional services
expense of $99,000, a decrease in supplies and other expense of $92,000 and a
decrease in severance pay of $236,000 due to concentrated efforts to streamline
administrative operations and to cut costs and cash outlays.

Non-cash ESOP Compensation Expense

Non-cash ESOP compensation expense was $0 in the 2002 year-to-date period
as compared to $95,000 in the 2001 year-to-date period due to the payment in
full of the principal and interest of the ESOP debt in the fourth quarter of
2001. Prior to the cancellation of the ESOP loan, shares owned by the ESOP
were held in a suspense account. Shares of common stock were committed to be
to be released from the ESOPs suspense account and credited to ESOP
participants accounts based on the ratio that the principal debt repayment of
the ESOP loan bore to the original principal debt balance. The Company was
required to recognize compensation expense each fiscal quarter in an amount
equal to one-fourth of the number of shares of common stock committed to be
released from the ESOPs suspense account each year multiplied by the average
fair market value of such shares during the period. In connection with the
cancellation of the ESOP loan, all unallocated shares of common stock held in
the ESOPs suspense account were credited to the ESOP participants accounts.

Loss on Abandonment of Subsidiary

As a result of the transfer of the shares of 1166081 Ontario, Inc. to Mr.
Roger Vuillod, effective January 1, 2001, the Company incurred a $6.1 million
loss on the abandonment of the subsidiary in the first quarter of 2001, as
explained in the Companys Annual Report on Form 10-K for the year ended
December 31, 2001, as filed with the Securities and Exchange Commission on
April 1, 2002. As the loss is nonrecurring, no expense was recorded for the
2002 year-to-date period.

Gain on Sale of Assets

The gain on sales of assets of $184,000 is due to the final transfers of
Broilmaster premium barbecue gas grill inventory to the purchaser of the
Broilmaster line that occurred in the first and second quarter of 2002.

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Interest Expense

Interest expense in the 2002 year-to-date period was $435,000 as compared
to $528,000 in the 2001 year-to-date period, a decrease of $93,000, or 17.6%.
The decrease was attributable to an overall decrease in average outstanding
debt.

Interest and Other Income

Interest and other income in the 2002 year-to-date period was $0 as
compared to $39,000 in the 2001 year-to-date period. The decrease was
attributable to a decrease in average outstanding investments.

Credit for Income Taxes

Due to the enactment of the Job Creation and Worker Assistance Act of 2002
in March, 2002, which extends the NOL carryback period to five years for NOLs
arising in tax years ending in 2001 and 2002, the Company filed a 1996 amended
income tax return and received an income tax refund of approximately $392,000
from the Internal Revenue Service.

Recent Accounting Pronouncements

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141, Business Combinations
(FAS 141) and No. 142, Goodwill and Other Intangible Assets (FAS 142).
Business combinations initiated after June 30, 2001, must be accounted for
under the provisions of these two statements. The Company must also apply
these provisions to previously recorded business combinations as of January 1,
2001. The principal provisions of FAS 141 and FAS 142 are as follows:



| |  |  | All business combinations initiated after June 30, 2001, will
be accounted for using the purchase method, under which the
identifiable assets and liabilities of the acquired business are
recorded at their respective fair market values with the residual
amount being recorded as goodwill. The pooling-of-interests
method, under which the financial statements of the acquirer and the
acquiree were combined as if the two businesses had always been one,
will no longer be used.                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Goodwill and identifiable intangible assets will no longer be
amortized over a maximum period of forty years. Goodwill will not be
amortized but will instead be tested for impairment annually or upon
the occurrence of certain triggering events. Identifiable
intangible assets will be amortized over their expected useful lives;
those with indefinite expected useful lives will not be amortized.
Identifiable intangible assets will continue to be tested for
impairment under previously existing accounting standards.

The Company adopted FAS 141 and FAS 142 on January 1, 2002, and expects
the adoption of these standards to have no material impact on its financial
condition, results of operations or cash flows.

In August 2001, the FASB issued FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supercedes both FAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and the accounting and reporting provisions for the
disposal of a segment of a business contained in APB Opinion No. 30, Reporting
the Results of OperationsReporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. FAS No. 144 establishes a single accounting model for
long-lived assets to be disposed of by sale and broadens the presentation of
discontinued operations. The provisions of FAS No. 144 are effective beginning
in 2002 and the Company has not yet quantified the impact of adopting FAS No.
144 on its financial statements. As of the date of this filing, the Company
has not had an occurrence that required reporting under FAS No. 144.

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LIQUIDITY AND CAPITAL RESOURCES

The financial statements for the year ended December 31, 2001 were
prepared on a going concern basis. As shown in the financial statements, as
presented in the Companys Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission on April 1, 2002, during the year ended
December 31, 2001, the Company incurred a net loss of $15.9 million. The
Company has experienced significant losses during the previous four years, and
expects to report a loss for fiscal year 2002. Such losses have resulted in
the Company having negative net worth of $1.8 million at June 29, 2002. The
Companys continuation as a going concern is dependent upon its ability to
obtain an extension of its present credit facility beyond August 31, 2002 and
additional credit or equity funding which is required immediately. Thereafter,
the Company must obtain replacement permanent financing from alternate sources.
In addition, the Company must be able to generate sufficient cash flow to meet
its obligations on a timely basis, must be able to comply with the terms of its
existing credit line, and, if replaced, with the terms of its replacement
financing, and ultimately must be able to return to profitable operations.
However, there can be no assurance that the Company will be able to obtain the
necessary extension of the present credit facility or obtain or generate cash
necessary to continue its operations.

The Company finances interim working capital requirements with its bank
line of credit with its principal lender. Interest on the line of credit is
payable monthly at a rate of 2% in excess of the lenders prime rate. As of
June 29, 2002, a maximum of $7.5 million was available to the Company under its
line of credit, with the actual amount available under the line of credit being
based on the value from time to time of certain assets (i.e., the borrowing
base) securing the line of credit. The line of credit is secured by the
receivables, equipment and inventory of the Company. As of June 29, 2002, the
outstanding balance was $6.9 million with $31,000 available.

On July 1, 2002, the Company received an extension from its primary lender
of its current line of credit through August 31, 2002. The lender also agreed
to waive the Companys defaults of debt covenants contained in its loan
agreement through June 30, 2002. Under the previous extension of the loan
agreement, the Company agreed to pay to the lender a fee in the amount of
$100,000 if the Company was unable to obtain replacement financing on or before
July 1, 2002. The lender has agreed to extend the payment of this fee until
August 31, 2002. The extension does not change the amount available to the
Company as it varies based on the value of certain assets securing the line
that include the Companys equipment, inventory, and accounts receivable.
Because the Company was unable to repay the line of credit in full by July 31,
2002, the lender is entitled to receive warrants to purchase common stock in
the Company equal to 10% of the Companys outstanding shares at an exercise
price of $0.14 per share. The Company also granted the lender a second
mortgage, subordinate in all respects to the lien of the first mortgage
described below, in all the real property of the Company.

On April 5, 2002, the Company entered into an agreement with M-TIN, LLC, a
limited liability company controlled by two current directors and one former
director of the Company, to provide a $1.5 million term loan to the Company.
The loan is for a six-month term, subject to renewal for an additional six
months at the option of the Company provided that the Company pays a 5% renewal
fee. The loan bears interest at an annual rate of 12% and is subject to a
placement fee of 5% due at the funding of the loan and an additional 3%
prepayment fee on the amount prepaid. The loan is secured by an unencumbered
first mortgage in all of the real property of the Company.

On May 9, 2002, the Company entered into an additional agreement with
M-TIN, LLC to provide a $500,000 line of credit to the Company. The line of
credit matures on October 5, 2002, subject to renewal for an additional six
months at the option of the Company provided that the Company pays a 5% renewal
fee. The line of credit bears interest on the unpaid balance at an annual rate
of 12%. The line of credit is also subject to a placement fee equal to 5% of
the available

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credit and an additional 3% prepayment fee on the amount prepaid. The
line of credit is secured by the first mortgage in all of the real property of
the Company. As of August 12, 2002, $500,000 of the line of credit had been
utilized and no further credit was available.

Additionally, the Company received an income tax refund of approximately
$392,000 from the Internal Revenue Service due to the enactment of the Job
Creation and Worker Assistance Act of 2002 in March, 2002, which extended the
NOL carryback period to five years for NOLs arising in tax years ending in 2001
and 2002.

Previously reported negotiations with a prospective lender for a new
asset-based, secured line of credit to replace its existing credit facility
have been discontinued by the prospective lender. The Company has not
identified another potential lender to replace its current credit facility as
of the date of this filing. The Company has been and continues to be in
discussion with parties involving various means to alleviate its financial
difficulties. These discussions involve several alternatives including, but
not limited to, additional debt secured by fixed assets of the Company, equity
or equity equivalents, an expansion of the M-TIN, LLC loan arrangement, and a
possible sale of the Company. The Company is in continuing discussions with
its primary lender in an effort to extend its existing credit facility beyond
the August 31, 2002 expiration date. There can be no assurances that the
lender will agree to an extension. Further, without additional working capital
from its primary lender or outside sources, the Company must generate
sufficient cash within its existing credit facility on an on-going basis in
order to maintain its operations. There can be no assurance that the Company
will be able to obtain additional financing from its primary lender or that
other sources will be identified or agree to provide the necessary financing
nor can any assurance be given that the Company will be able to generate cash
within its existing credit facility that is adequate to maintain its
operations.

CRITICAL ACCOUNTING POLICIES

The Securities and Exchange Commission has indicated that a critical
accounting policy is one which is both important to the portrayal of a
companys financial condition and results and requires managements most
difficult, subjective or complex judgements, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. The
Company believes that the following accounting policies fit this definition:

Allowance for doubtful accounts.Certain of the trade accounts
receivable are subject to bad debt losses. A reserve has been recorded to
reflect expected bad debt losses based on past experience with similar accounts
receivable. The reserve is believed to be correct. However, it is possible
that the accuracy of the reserve could be affected substantially due to
changing economic conditions. The reserve is reviewed on a regular basis and
adjusted as necessary to react to these changes as soon as possible. However,
there can be no assurance that the Company will be able to accurately estimate
bad debt losses on its accounts receivable.

Excess and obsolete reserve.The Company has estimated that at June 29,
2002, it has approximately $727,000 of raw material, purchased parts, and
work-in-process inventory that has not been utilized in the production of
finished goods, as well as finished goods that are not saleable items due to
obsolescence, as compared to $1,058,000 for the period ended December 31, 2001.
A reserve is calculated using the prior year history of usage and sales to
estimate excess inventory and on projections of future production and future
sales to estimate obsolescence. It is recorded annually and reduced each
accounting period by the amount of excess and obsolete inventory sold or
scrapped. The Company believes that the reserve is adequate. It is possible,
however, that the adequacy could be materially affected in the future by
factors such as customer demands and preferences, economic events, and
governmental regulations.

Income taxes.The Company has a history of unprofitable operations from
losses incurred in 2001 as well as prior years. These losses generated a
sizeable federal tax net operating loss, or NOL, carryforward of approximately
$39 million. Generally accepted accounting principles require that a valuation
allowance be recorded against the deferred tax asset associated with the NOL if
it is more likely than not that the Company will not be able to apply the
asset to taxes due on future earnings. Due to the amount of the deferred tax
asset and the uncertainties of the prospects of the Company, the asset has not
been recognized. However, due to the enactment of the Job Creation and Worker
Assistance

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##### Table of Contents



Act of 2002 in March, 2002, which extends the NOL carry back period to
five years for NOLs arising in tax years ending in 2001 and 2002, the Company
received an income tax refund of approximately $392,000 from the Internal
Revenue Service. Additionally, it is possible that the Company may become
profitable in the future in which case management may conclude that it is more
likely than not that all or a portion of the deferred tax asset could be
recouped. In that situation the tax asset would be recorded at net realizable
value at that time and then provide for income taxes at a rate equal to the
combined federal and state effective rates. Subsequent changes to the
estimated net realizable value of the deferred tax asset could cause the
provision for income taxes to vary significantly from period to period,
although the cash tax payments would remain unaffected until the effect of the
NOL is utilized.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates as
part of its normal operations. Prior to the transfer of its Canadian
subsidiaries in February 2002, the Company was also exposed to market risk from
changes in foreign currency exchange rates. The Company has estimated its
market risk exposures using sensitivity analyses assuming a 10% change in
market rates.

FOREIGN CURRENCY EXCHANGE RATE RISK

Prior to the transfer of its Canadian operations in February 2002, the
Company had 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 translated the Canadian dollar income statement to U.S. dollars
using the average rate of exchange and translated the Canadian dollar balance
sheet to U.S. dollars using the closing rate of exchange. Certain accounts
(e.g., capital stock) were translated using an historical exchange rate.
Consequently, unrealized foreign currency translation adjustments are reported
as a separate component of stockholders equity.

Because the Company has transferred all of its Canadian operations, the
Company is no longer exposed to material market risks from changes in foreign
currency change rates.

INTEREST RATE RISK

At June 29, 2002, the Company had $6.9 million of debt outstanding at a
variable interest rate of prime plus 2%. Therefore, the Company is exposed to
interest rate fluctuations on the debt balance. A hypothetical increase of 10%
(for example, the prime rate of 9.0% would increase to 9.90%) in the prime
lending rate would not cause the Companys interest expense to increase
significantly.

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PART II. OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

|      |  |                                                                                                                                          
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|10(a) |  | Letter Agreement of AmSouth Bank dated July 1, 2002.                                                                                     
|     
|10(b) |  | $500,000 Revolving Note made by Martin Industries, Inc. in
favor of M-TIN, LLC dated May 9, 2002.                                        
|     
|10(c) |  | Real Estate Mortgage, Security Agreement and Financing
Statement by and between Martin Industries, Inc. and M-TIN, LLC dated
May 9, 2002.
|     
|99.1  |  | Chief Executive Officer Certificate pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                                           
|     
|99.2  |  | Chief Financial Officer Certificate pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.                                           

(b)  Reports on Form 8-K



| |                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 14, 2002, the Company filed a Current Report on Form
8-K in which the Company reported under Item 9 the resignation of
William D. Biggs, Sr. as a director of the Company, the Companys
continuing efforts to replace its current credit facility with its
primary lender, and the rescheduling of the Companys annual
meeting.
|
| | On July 11, 2002, the Company filed a Current Report on Form
8-K in which the Company reported under Item 4 that it had
dismissed its independent accountants, Arthur Andersen, LLP
(Andersen), effective immediately.                                                                                                                 

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

With the exception of historical information, the matters and statements
discussed, made or incorporated by reference in this Quarterly Report on Form
10-Q 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.
Specifically, this Quarterly Report on Form 10-Q contains forward-looking
statements regarding:



| |  |  | the Companys efforts to obtain replacement financing and
equity investment in, or a sale of, the Company;                              
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the Companys beliefs with respect to the funding of its
operations during fiscal year 2002, including the period up to
August 31, 2002;
|
| |  |  | the likely benefits from cost reductions and plant
consolidations;                                                                      

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| |  |  | the short-term and long-term programs being undertaken by
the Company and expectations regarding the future
competitiveness of the Companys products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the Companys future ability to meet the needs and expectations of its customers;                                                                     
|
| |  |  | results in future quarters;                                                                                                                           
|
| |  |  | the estimated reserve for excess and obsolete inventories;                                                                                            
|
| |  |  | the utilization of deferred tax assets related to net operating loss carryforwards; and                                                               
|
| |  |  | the Companys expectations and estimates regarding its interest rate risk.                                                                            

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 to the statements included
in this Quarterly Report of Form 10-Q, the Company and its representatives may
from time to time make other oral or written statements that are also
forward-looking statements.

Forward-looking statements contained in this Quarterly Report on Form 10-Q and
those that may be made in the future 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s primary lender will extend its current credit
facility beyond August 31, 2002; that, pending the securing of new financing or
a sale of the Company, the Company will continue to generate funds or have
credit available to it that is sufficient to continue to fund its operations;
that the Company will be able to obtain replacement financing or equity
investment in the Company or consummate a sale of the Company; that the
Companys cost reduction and plant consolidations will be successful or that
the Company will achieve a level of revenue that will allow the Company to
return to profitability; that the Company will be able to successfully
implement or complete the short-term and long-term programs being undertaken by
the Company; that the Companys new products will meet its expectations; that
the Company will be able in the future to meet the needs and expectations of
its customers; that the Company will not exceed the estimated reserve for
excess and obsolete inventories or will utilize deferred tax assets related to
net operating loss carryforwards. 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 revenues and earnings; the Companys
ability to generate cash or secure adequate financing to fund its operations;
the Companys business strategy, including its strategy of pursuing new product
development; potential losses from product liability and personal injury
lawsuits; the effects of seasonality and weather conditions on the Companys
home heating product sales and other sales; 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; and the other risks and uncertainties discussed or indicated in all
documents filed by the Company with the Commission, including the Companys
Annual Report on Form 10-K filed with the Commission on April 1, 2002. The
Company expressly disclaims any obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.

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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.

|                       |  |    |  |                                                                                                                                               
|---------------------- |  | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|MARTIN INDUSTRIES, INC |  |    |  |                                                                                                                                               
|                       |  |    |  |                                                                                                                                               
|Date: August 19, 2002  |  | By |  | /s/ James W. Truitt                                                                                                                           
|                       |  |    |  |                                                                                                                                               
|                       |  |    |  | James W. Truitt
Vice President and Chief Financial Officer and Secretary
(Executed on behalf of Registrant and
as Principal Financial Officer)

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##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                                                                          
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                          
|Number  |  | Description of Exhibits                                                                                                                  
|        |  |                                                                                                                                          
|10(a)   |  | Letter Agreement of AmSouth Bank dated July 1, 2002.                                                                                     
|       
|10(b)   |  | $500,000 Revolving Note made by Martin
Industries, Inc. in favor of M-TIN, LLC dated May 9,
2002.                                        
|       
|10(c)   |  | Real Estate Mortgage, Security Agreement and
Financing Statement by and between Martin
Industries, Inc. and M-TIN, LLC dated May 9, 2002.
|       
|99.1    |  | Chief Executive Officer Certificate pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.                                           
|       
|99.2    |  | Chief Financial Officer Certificate pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.                                           

25