================================================================================
                                   FORM 10 - Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

(Mark One)

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

                  For the Quarterly Period Ended June 30, 1999

                                       OR

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


               For the transition period from _______ to _________

                         Commission File Number 0-20829

                           DIAMOND HOME SERVICES, INC.
             (Exact name of registrant as specified in its charter)

         DELAWARE                                    36-3886872
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

                  222 Church Street, Woodstock, Illinois 60098
          (Address of principal executive offices, including zip code)

                                 (815) 334-1414
              (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 for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. Yes (X ) No ( )

The number of shares of the registrant's common stock outstanding as of July 31,
1999, the latest practicable date, was 8,507,375 shares.


<PAGE>


                          PART I. FINANCIAL INFORMATION
                          -----------------------------

ITEM 1. FINANCIAL STATEMENTS
----------------------------

<TABLE>

                  DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<CAPTION>

                                                            Three Months Ended         Six Months Ended
                                                                 June 30,                June 30,
                                                        ----------------------    ---------------------
                                                           1999          1998       1999       1998
                                                           ----          ----       ----       ----
                                                              (In thousands, except per share data)
<S>                                                     <C>          <C>         <C>          <C>
Net sales ...........................................   $  66,362    $  65,615   $ 122,965    $  94,491
Cost of sales .......................................      43,804       41,951      81,338       58,140
                                                        ---------    ---------   ---------    ---------
Gross profit ........................................      22,558       23,664      41,627       36,351
Operating expenses:
     Selling, general, and administrative expense
                                                           22,540       21,602      41,754       33,891
     Restructuring expense ..........................        --           --         1,313         --
     Operating interest expense .....................         106           68         209          123
     Amortization expense ...........................         691          274       1,435          434
                                                        ---------    ---------   ---------    ---------
Operating income (loss) .............................        (779)       1,720      (3,084)       1,903
Interest expense ....................................       1,125          752       2,253          752
Interest income and other ...........................         150          130         309          256
                                                        ---------    ---------   ---------    ---------
Income (loss) before income taxes ...................      (1,754)       1,098      (5,028)       1,407
Income taxes ........................................        (662)         475      (1,848)         599
                                                        ---------    ---------   ---------    ---------
Net income (loss) ...................................   ($  1,092)   $     623   ($  3,180)   $     808
                                                        =========    =========   =========    =========

Net income (loss) per share:
     Basic ..........................................   ($   0.13)   $    0.07   ($   0.37)   $    0.09
                                                        =========    =========   =========    =========
     Diluted ........................................   ($   0.13)   $    0.07   ($   0.37)   $    0.09
                                                        =========    =========   =========    =========
Weighted average number of common shares outstanding:
     Basic ..........................................       8,507        8,507       8,507        8,507
                                                        =========    =========   =========    =========
     Diluted ........................................       8,507        8,507       8,507        8,507
                                                        =========    =========   =========    =========

See accompanying notes

</TABLE>


<PAGE>

<TABLE>

                  DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                                                      JUNE 30,    December 31,
                                                                                                       1999          1998
                                                                                                     ----------   -------------
                                                                                                     (Unaudited)
                                                                                                           (In thousands)
                                                                          ASSETS
<S>                                                                                                  <C>        <C>
Current assets
   Cash and cash equivalents .....................................................................   $  2,855   $  5,104
   Accounts receivable, net ......................................................................     24,698     22,138
   Inventories, net ..............................................................................     16,459     15,771
   Refundable income taxes .......................................................................      1,792      1,297
   Prepaids  and other current assets ............................................................      2,083      3,994
   Deferred income taxes .........................................................................      2,043      1,500
                                                                                                     --------   --------
Total current assets .............................................................................     49,930     49,804

Finance company accounts receivable, net .........................................................      9,239     10,011

Net property, plant and equipment ................................................................     20,416     20,812
Intangible assets, net ...........................................................................     37,517     38,981
Other ............................................................................................      6,749      6,521
                                                                                                     --------   --------
Total assets .....................................................................................   $123,851   $126,129
                                                                                                     ========   ========

                                                       LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
   Due to bank and current portion of long-term debt .............................................   $ 46,343   $ 10,225
   Accounts payable and accrued liabilities ......................................................     23,355     22,181
   Deferred revenue ..............................................................................      1,195      1,621
                                                                                                     --------   --------
Total current liabilities ........................................................................     70,893     34,027
Long-term liabilities:
   Long-term debt ................................................................................      9,105     44,705
   Warranty and retention ........................................................................     10,094     10,851
   Deferred income taxes .........................................................................        514        267
  Other ..........................................................................................      1,979      1,867
                                                                                                     --------   --------
Total long-term liabilities ......................................................................     21,692     57,690
Common stockholders' equity ......................................................................     31,266     34,412
                                                                                                     --------   --------
Total liabilities and common stockholders' equity ................................................   $123,851   $126,129
                                                                                                     ========   ========
See accompanying notes

</TABLE>

<PAGE>

<TABLE>

                  DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<CAPTION>

                                                                                                      Six Months Ended
                                                                                                          June 30,
                                                                                              ----------------------------------
                                                                                                       (In thousands)
                                                                                                   1999              1998
                                                                                                   ----              ----
<S>                                                                                                 <C>                    <C>
Net income (loss).........................................................................          ($3,180)               $808
    Adjustments to reconcile net income (loss) to net cash provided by (used in)
        operating activities: ............................................................
        Depreciation and amortization.....................................................             2,815                852
        Deferred income taxes.............................................................             (296)              (495)
        Other.............................................................................               220                134
        Changes in operating assets and liabilities:
           Accounts receivable and other assets...........................................             (761)            (2,626)
           Inventories....................................................................             (688)              (455)
           Accounts payable and accrued expenses..........................................             1,174               (99)
           Deferred revenues..............................................................             (426)               (17)
           Warranty and retention.........................................................             (757)                566
                                                                                              ---------------   ----------------
    Net cash provided by (used in) operating activities...................................           (1,899)            (1,332)
Investing activities:
      Acquisition of Reeves Southeastern Corporation, net of cash acquired................                --           (30,938)
     Consumer finance loans originated, net of collections................................             (772)            (1,885)
     Other                                                                                               861            (2,230)
     Capital expenditures, net............................................................             (991)            (1,509)
                                                                                              ---------------   ----------------
     Net cash used in investing activities................................................             (902)           (36,562)
Financing activities:
      Advances under revolving credit agreement, net......................................             2,621                500
      Proceeds on (payments of) term debt and capital leases..............................           (1,731)             30,000
     Borrowings on finance company bank line of credit, net...............................             (100)              1,720
     Payments on notes receivable from officers for treasury stock and other..............                34                 57
     Payments due to stockholders.........................................................             (272)              (288)
                                                                                              ---------------   ----------------
     Net cash provided by (used in) financing activities..................................               552             31,989
     Net increase (decrease) in cash and cash equivalents.................................           (2,249)            (5,905)
     Cash and cash equivalents at beginning of period.....................................             5,104              9,966
                                                                                              ---------------   ----------------
     Cash and cash equivalents at end of period...........................................            $2,855             $4,061
                                                                                              ===============   ================
    Supplemental cash flow disclosure:
      Interest paid.......................................................................            $2,090               $127
                                                                                              ===============   ================
      Income taxes paid...................................................................                $6             $1,006
                                                                                              ===============   ================
   Investing and financing activities exclude the following non-cash transactions:
      Acquisition of Reeves Southeastern Corporation through notes payable................               $--            $11,413
                                                                                              ===============   ================
See accompanying notes.

</TABLE>


<PAGE>


                  DIAMOND HOME SERVICES, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.                BASIS OF PRESENTATION

                 The accompanying  unaudited  condensed  consolidated  financial
statements have been prepared in accordance with generally  accepted  accounting
principles for interim  financial  information and Article 10 of Regulation S-X.
Accordingly,  they do not include all of the information and footnotes  required
by generally accepted accounting  principles for complete financial  statements.
In the opinion of management,  all adjustments  (consisting of normal  recurring
accruals)  considered  necessary  for a fair  presentation  have been  included.
Operating  results for the three-month and six-month periods ended June 30, 1999
are not necessarily  indicative of the results that may be expected for the year
ending  December 31, 1999. For further  information,  refer to the  consolidated
financial  statements  included in the Company's 1998 Annual Report on Form 10-K
and Form 8-K/A filed May 13, 1998.
                 The  preparation  of financial  statements in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
                 These  condensed   consolidated  financial  statements  include
Diamond  Home  Services,  Inc.  (the  "Company")  and its  subsidiaries  Diamond
Exteriors,  Inc.(R) ("Exteriors"),  Reeves Southeastern  Corporation ("Reeves"),
Marquise  Financial  Services,  Inc.  ("Marquise"),  and  Solitaire  Heating and
Cooling, Inc. d/b/a KanTel(TM) ("KanTel").

2.               CONSUMER FINANCING

                 The following  summarized  condensed financial  information for
Marquise,   the  Company's  finance   subsidiary,   is  before   elimination  of
inter-company transactions in consolidation:

<TABLE>

                                                                    JUNE 30, 1999                          December 31, 1998
                                                           ---------------------------      ---------------------------------
                                                                   (UNAUDITED)
<S>                                                                           <C>                                   <C>
ASSETS:
Cash......................................................                    $94,000                               $343,000
Financing receivables, net................................                  9,239,000                             10,011,000
Other assets..............................................                  1,235,000                              1,237,000
                                                           ===========================      =================================
Total assets..............................................                $10,568,000                            $11,591,000
                                                           ===========================      =================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Due to Bank...............................................                 $4,425,000                             $4,525,000
Due to Diamond Exteriors, Inc.............................                  5,792,000                              6,724,000
Other.....................................................                     65,000                                 74,000
                                                           ---------------------------      ---------------------------------
Total liabilities.........................................                 10,282,000                             11,323,000
Total stockholder's equity................................                    286,000                                268,000
                                                           ===========================      =================================
Total liabilities and stockholder's equity................                $10,568,000                            $11,591,000
                                                           ===========================      =================================

</TABLE>


<PAGE>


            Results of operations for the three months and six months ended June
30, 1999 and 1998, respectively:

<TABLE>

                                                         Three Months Ended                     Six Months Ended
                                                              June 30,                             June 30,
                                                 --------------------------------- -------------------------------------------------
                                                  1999               1998                    1999              1998
                                                  ----               ----                    ----              ----
                                                                              (Unaudited)
<S>                                                     <C>              <C>              <C>              <C>
Financing income...............................         $374,000         $412,000         $768,000         $787,000
General and administrative expenses (1)........          373,000          509,000          848,000          966,000
                                                 ---------------- ---------------- ---------------- ----------------
Income (loss) before tax benefit...............            1,000         (97,000)         (80,000)        (179,000)
Income taxes...................................               --         (39,000)         (30,000)         (72,000)
                                                 ================ ================ ================ ================
Net income (loss)..............................           $1,000        ($58,000)        ($50,000)       ($107,000)
                                                 ================ ================ ================ ================

(1)  Includes  interest  expense  paid to the Company and  provision  for credit
losses.

</TABLE>

            Cash  flow  for the  six  months  ended  June  30,  1999  and  1998,
respectively:

<TABLE>

                                                                          Six Months Ended June 30,
                                                                -----------------------------------------------
                                                                   1999                          1998
                                                                ---------------             -------------------
                                                                                 (Unaudited)
<S>                                                                      <C>                           <C>
Cash at beginning of period..................................            $343,000                      $23,000
Net cash used in operating activities........................              11,000                     (16,000)
Net cash provided by (used in) investing activities..........             772,000                  (1,885,000)
Net cash provided by financing activities....................         (1,032,000)                    1,952,000
                                                                ------------------
                                                                                            ===================
Cash at end of period........................................             $94,000                      $74,000
                                                                ==================          ===================

</TABLE>

                 At June 30, 1999,  Marquise had approximately  $200 thousand in
approved but not funded loan commitments.

3.               ACQUISITIONS

              On  April 20, 1998,  the  Company  purchased  all the  outstanding
shares of Reeves for an aggregate consideration of $42,621,000 consisting of: 1)
$30,000,000 cash at closing; 2) $3,413,000 non-interest bearing notes payable in
installments  through June 2000;  3)  $7,708,000 in 7% notes payable (to be paid
into an escrow account for future possible  environmental  expenses, as defined)
in installments through June 2005; and 4) $1,500,000 in transaction costs.
            On November 16, 1998 the Company acquired certain net assets and the
telephone  lead-taking  operation and  telemarketing  business of H.I.,  Inc., a
related party,  for an aggregate  purchase price of $2,398,000  (including  $100
thousand in transaction  costs) consisting of $1,498,000 net cash at closing and
$900 thousand in 5% contingent convertible subordinated notes due October 2005.
            Based  on  the  terms  of the  transactions,  the  acquisitions  are
accounted for as a purchase,  in accordance  with  Accounting  Principles  Board
Opinion  No.  16.  Accordingly,  the  accompanying  consolidated  statements  of



<PAGE>


operations include Reeves's and KanTel's results of operations since the date of
acquisition.  The Company  revalued the basis of Reeves's and KanTel's  acquired
assets  and  assumed  liabilities  to fair  value at the date of  purchase.  The
purchase  prices of Reeves and KanTel are calculated as the cash plus fair value
of notes paid plus the Company's  transaction  costs. The difference between the
purchase price and the fair value of identifiable tangible and intangible assets
acquired  and the  liabilities  assumed and incurred is recorded as goodwill and
amortized  over a period of 40 years for  Reeves  and 7 years  for  KanTel.  The
allocation of the acquisition purchase prices is as follows:

                       Purchase price                             $43,419,000
                       Transaction costs                            1,600,000
                                                             -----------------
                       Total purchase price                       $45,019,000
                                                             =================

                       Fair value of assets acquired              $63,072,000
                       Goodwill                                    10,661,000
                       Liabilities assumed                       (28,714,000)
                                                             -----------------
                       Total                                      $45,019,000
                                                             =================

            The following  unaudited pro forma  information for the three months
and six months  ended  June 30,  1998  reflects  the  results  of the  Company's
operation as if the  acquisitions  had  occurred at the  beginning of the period
presented  adjusted,  in the case of Reeves,  for 1) the effect of the recurring
charges related to the  acquisition,  primarily the amortization of goodwill and
other  intangible  assets,   interest  expense  on  borrowings  to  finance  the
acquisition, and an increase in depreciation expense due to the write-up to fair
market value of fixed assets;  and 2) the elimination of compensation  for prior
management and directors, certain benefit plans, and non-recurring charges.

<TABLE>

                                   Three Months Ended June 30,                  Six Months Ended June 30,
                               ---------------------------------------- ------------------------------------
                                  1999                 1998                 1999                 1998
                                  ----                 ----                 ----                 ----
<S>                                   <C>            <C>                   <C>                  <C>
Revenues                              $66,362,000    $74,040,000           $122,965,000         $125,020,000
Net income (loss)                    ($1,092,000)        885,000           ($3,180,000)              735,000
Net income (loss)
   per share - diluted                     ($.13)           $.10                 ($.37)                 $.09

</TABLE>

            The pro forma  results have been prepared for  comparative  purposes
only and do not purport to be  indicative of the results  which  actually  would
have  been  attained  if the  acquisitions  had been  consummated  on the  dates
indicated  above, nor does it purport to indicate or suggest what the results of
the operations of the Company will be for any future period.

4.          RECEIVABLES

            Based on recent  discussions  with the Sears,  the  Company has been
advised by Sears  that there is a dispute in the amount of credit  participation
fee income due to the Company.  At June 30, 1999,  the Company had recorded $2.8
million ($1.2 million  non-current) in earned but not paid credit  participation



<PAGE>


fee  income.  The  dispute  relates to an  interpretation  in the Sears  license
agreement as to how much, if any, of the unpaid credit  participation fee income
is due to the Company in the event of, among other things,  an early termination
of the  license  agreement  or in the event of the  non-renewal  of the  license
agreement.  The Company is in  discussions  with Sears to understand and clarify
the  points  of  the  dispute.   The  Company  continues  to  believe  that  its
interpretation and practices are supportable. However, there can be no assurance
that once the  discussions  and  negotiations  are concluded  that the Company's
interpretation of the agreement or actual  negotiations will support the current
carrying value of the credit  participation  fee receivable.  The Company's best
estimate,  as at June 30,  1999,  of the amount of the dispute is  approximately
$1.7 million.

5.          INVENTORIES

            The components of inventories at June 30, 1999 and December 31, 1998
are as follows:

                                                  JUNE 30,     December 31,
                                                    1999            1998
                                            ---------------- ----------------
                     Raw materials                 $564,000          $449,000
                     Work in progress               795,000           861,000
                     Finished goods              15,100,000        14,461,000
                                            ================ =================
                     Total                      $16,459,000       $15,771,000
                                            ================ =================
6.          DEBT

            On June 30,  1999,  the  Company  was in default on the  restrictive
covenant to its $42 million secured  syndicated bank credit facility (also,  the
"Bank  Group")  with regard to minimum  cash flow,  as  defined.  The Company is
negotiating to obtain a waiver to this default.  The Company has been advised by
the Bank Group that its $42 secured  syndicated  bank credit  facility  has been
reassigned  to the  workout  section  of each of the  participating  banks.  The
contemplated  conditions  to  obtaining  a  waiver  include:  1)  a  $4  million
prepayment  of the $18 million  term notes by  September  15,  1999;  2) the net
proceeds  from the sale of assets,  as defined,  to reduce the $18 million  term
notes which amounts can be used to reduce the prepayments  required in 1) above;
3) a $2.5 million  reduction to the  borrowing  base  availability  (at June 30,
1999, the Company had $3.7 million in excess borrowing base availability);  and,
4) as a condition  precedent,  a definitive  agreement  for the sale of at least
$4.6  million of the Marquise  accounts  receivable.  The Company has  initiated
several  cash  stimulation   programs  to  commence  to  address  the  foregoing
requirements.  Notwithstanding the Company's inability to predict with certitude
whether it can meet the foregoing contemplated requirements within the specified
time period,  the Bank Group to date has not agreed to adjust the third  quarter
cash flow  restrictive  covenant  which  requires a  cumulative  cash flow of $7
million  or to  adjust  its  end of year  restrictive  covenants.  Based  on the
operating  results of the Company,  specifically  its installed home improvement
business,  for the first six  months and July  1999,  it is not likely  that the
Company will be in compliance with these restrictive  covenants.  While the Bank
Group has informally  expressed its  intentions,  as it has in the past, to work
with the  Company,  there  can be no  assurance  that at the  conclusion  of the


<PAGE>



negotiations  the Company will be able to negotiate terms and conditions that it
can reasonably  attain for the immediate future periods;  and,  therefore,  will
continue  to be  dependent  on  the  ongoing  forbearance  of  the  Bank  Group.
Accordingly,  the Company has  reclassified all $38.3 million of its outstanding
debt to the Bank  Group to  current  portion of  long-term  debt on its  balance
sheet.  In addition,  given the Company's  financial  condition  and  continuing
operating  losses of its installed home  improvement  business,  the Company has
retained special legal counsel and is in the process of retaining  financial and
operating  crisis  consultants  to  advise  the  Company  of all its  financial,
operating  and legal  alternatives  as it  attempts  to  stabilize  its  current
situation.

7.          Segment Data

            With the  acquisition of Reeves in April 1998, the Company  operates
in two industry  segments and solely in the U.S.:  installed home  improvements,
and manufacturing and wholesale distribution.  The industry segments are defined
as follows:

Installed Home Improvements
Selling,  furnishing and arranging the installation of roofing systems, gutters,
fencing,  doors  and  related  installed  exterior  home  improvement  products;
financing of installed home  improvements;  and  lead-taking  and  telemarketing
operations.

Manufacturing and Wholesale Distribution
Manufacturing of chain-link fencing; wholesale distribution of chain-link, wood,
PVC and ornamental fencing and related products;  installation,  maintenance and
monitoring of perimeter security products and services.

            Inter-segment sales are generally recorded at market.  Income (loss)
from  operations  by  segment  consists  of net sales less  operating  costs and
expenses  including  costs of  borrowed  funds,  income  and  general  corporate
expenses that are traceable to the business segment.
            Income from operations and earnings before  interest,  income taxes,
depreciation and  amortization  for the installed home  improvement  segment for
1999  includes a pretax  charge of  $1,313,000  for  restructuring  and  related
expenses.


<PAGE>

<TABLE>


                                                           Three Months ended June 30,                  Six Months ended June 30,
                                                   ----------------------------------------     -----------------------------------
                                                              1999               1998                  1999                1998
                                                   --------------------- ------------------     ----------------- -----------------
<S>                                                         <C>                <C>                   <C>               <C>
Net sales
     Installed Home Improvements                            $31,823,000        $41,131,000           $60,701,000       $70,007,000
     Manufacturing and Distribution                          34,539,000         24,484,000            62,264,000        24,484,000
                                                   --------------------- ------------------     ----------------- -----------------
                                                             66,362,000         65,615,000           122,965,000        94,491,000
Inter-segment sales:
     Manufacturing and Distribution                           1,690,000          1,560,000             2,588,000         1,560,000
     Eliminations                                           (1,690,000)        (1,560,000)           (2,588,000)       (1,560,000)
                                                   --------------------- ------------------     ----------------- -----------------
     Net Sales                                               66,362,000         65,615,000           122,965,000        94,491,000
                                                   ===================== ==================     ================= =================

Pre-tax income
     Installed Home Improvements                            (3,042,000)            120,000           (5,550,000)           429,000
     Manufacturing and Distribution                           1,288,000            978,000               522,000           978,000
                                                   --------------------- ------------------     ----------------- -----------------
                                                            (1,754,000)          1,098,000           (5,028,000)         1,407,000
                                                   ===================== ==================     ================= =================

Depreciation and amortization expense
     Installed Home Improvements                                617,000            282,000             1,264,000           545,000
     Manufacturing and Distribution                             767,000            307,000             1,551,000           307,000
                                                   --------------------- ------------------     ----------------- -----------------
                                                              1,384,000            589,000             2,815,000           852,000
                                                   ===================== ==================     ================= =================

Additions to property, plant, and equipment
     Installed Home Improvements                                250,000          1,144,000               605,000         1,509,000
     Manufacturing and Distribution                             204,000                 --               386,000                --
                                                   --------------------- ------------------     ----------------- -----------------
                                                                454,000          1,144,000               991,000         1,509,000
                                                   ===================== ==================     ================= =================

Earnings (Loss) before interest, income
   taxes, depreciation and amortization
     Installed Home Improvements                            (2,562,000)            402,000           (4,286,000)           974,000
     Manufacturing and Distribution                           3,317,000          2,037,000             4,326,000         2,037,000
                                                   --------------------- ------------------     ----------------- -----------------
                                                               $755,000         $2,439,000               $40,000        $3,011,000
                                                   ===================== ==================     ================= =================

</TABLE>

                 The Company's  results of operations may fluctuate from year to
year or quarter to quarter  due to a variety of  factors.  The  Company  expects
lower  levels of sales and  profitability  during the period  from  mid-November
through  mid-March,  impacting the first and fourth  quarters of each year.  The
Company believes that this seasonality is caused by 1) winter weather in certain
of the Company's  markets located in the northeastern and north central U.S. and
by rainy weather, each of which limits the Company's ability to install exterior
home improvement  products;  and 2) reduced demand for commercial and industrial
fencing and related products.



<PAGE>


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

RESULTS OF OPERATIONS
SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998

Net Sales

                 Net sales increased $747 thousand,  or 1.1%, from $65.6 million
for the second quarter 1998 to $66.4 million for the second quarter 1999.

                 Installed Home Improvements

                 Installed  home   improvement   product  sales  decreased  $9.3
million,  or 22.6%,  from $41.1 million for the second  quarter of 1998 to $31.8
million for the second  quarter of 1999. Net sales  attributable  to roofing and
gutter products and services decreased $7.4 million,  or 28.6%, to $18.6 million
in the second  quarter  1999.  Net sales  attributable  to fencing  products and
services decreased $1.1 million, or 12.7%, to $7.4 million in the second quarter
of 1999. Net sales attributable to garage doors, entry doors, and other products
and services  decreased $568 thousand,  or 10.0%,  to $5.1 million in the second
quarter 1999.  Credit  participation  fee income decreased $166 thousand to $391
thousand in the second  quarter  1999.  Finance  interest  income  decreased $41
thousand to $371  thousand on  receivables  financed  by the  Company's  finance
subsidiary, Marquise. Backlog, defined as jobs sold but not installed, increased
$6.5 million from $11.3 million at the end of March 1999 to $17.8 million at the
end of the second  quarter  1999.  Backlog  increased  $4.0  million  from $12.0
million  at the end of March  1998 to  $16.0  million  at the end of the  second
quarter  1998.  The  decrease  in  installed  sales and  increase in backlog was
attributable  to  the  continuing  effects  of  the  restructuring  and  related
activities  in this  segment  as they  relate  to  poor  operating  efficiencies
measured  in reduced  close  ratios,  increased  cancellations,  reduced  credit
approvals, delays in scheduling installers and insufficient numbers of certified
installers in certain markets.


<PAGE>


                 Manufacturing and Wholesale Distribution

                 Manufacturing and wholesale  distribution sales increased $10.1
million,  or 41.1%,  from $24.5 million for the ten weeks ended June 30, 1998 to
$34.5  million for the second full  quarter (13 weeks) 1999.  Manufacturing  and
wholesale distribution sales are comprised of the following major product lines:

<TABLE>

                                                                            Three months ending June 30,
                                                                             1999                      1998
                       <S>                                                  <C>                       <C>
                       Chain link and accessories                           $21,698,000               $17,077,000
                       Wood                                                   6,547,000                 4,488,000
                       Ornamental/specialty                                   3,192,000                 1,929,000
                       Gate operators and access control                      1,927,000                   903,000
                       Security systems                                       2,642,000                 1,647,000
                       Other                                                    223,000                        --
                                                                   --------------------- -------------------------
                                                                             36,229,000                26,044,000
                       Less:  inter-segment sales                             1,690,000                 1,560,000
                                                                   ===================== =========================
                                                                            $34,539,000               $24,484,000
                                                                   ===================== =========================
</TABLE>

                 Backlog, defined as orders placed but not delivered,  increased
$1.0  million  from $3.6 million at the end of March 1999 to $4.6 million at the
end of the second quarter 1999.

Gross Profit

                 Gross  profit  decreased  $1.1  million,  or 4.7%,  from  $23.7
million, or 36.1% of net sales, for the second quarter 1998 to $22.6 million, or
34.0% of net sales, for the second quarter 1999.

                 Installed Home Improvements

                 Installed home improvement  product gross profit decreased $3.8
million,  or 21.4%,  from $17.6 million,  or 42.9% of installed home improvement
product  sales,  for the  second  quarter  1998 to  $13.9  million,  or 43.6% of
installed  home  improvement  product  sales,  for the second  quarter 1999. The
decrease in gross profit amount was  attributable to the 22.6% decrease in sales
and $207  thousand  decrease  in credit  participation  fee income  and  finance
income. The increase in gross profit expressed as a percentage of installed home
improvement  product  sales  was  attributable  to a  shift  in  product  mix to
higher-margin  products and a price increase.  The license fee incurred to Sears
decreased  $847  thousand  from $4.2 million in the second  quarter 1998 to $3.3
million for the second  quarter  1999,  and,  expressed as a  percentage  of net
installed  home  improvement  product sales (which is defined as installed  home
improvement  product sales or segment sales excluding credit  participation  and
finance  interest  income),  increased  from 10.4% for the second  quarter 1998,
compared to 10.6% of net installed home improvement product sales for the second
quarter  1999.  The  decrease  in license  fee  incurred  to Sears in the second
quarter 1999 was due to an overall  decrease in net installed  home  improvement
sales; and the percentage increase is attributable to fewer roofing repairs with
no license  fees during the quarter.  On January 1, 1996,  Sears and the Company


<PAGE>



entered into an agreement which has been amended and extended  through  December
31, 2001. Among other things, the license agreement provides for a fixed license
fee, at the March 1995  license fee rate,  to be charged  during the term of the
license   agreement.   Gross  profit  before  the  Sears  license  fee,   credit
participation fee and finance interest income decreased $4.4 million,  or 21.1%,
from $20.8 million,  or 51.8% of net installed home  improvement  product sales,
for the second  quarter 1998 to $16.4  million,  or 52.8% of net installed  home
improvement  product  sales,  for the  second  quarter  1999.  The unit costs of
material,  installation labor and warranty expense remained  relatively constant
during the quarterly period.

                 Manufacturing and Wholesale Distribution

                 Manufacturing and wholesale distribution gross profit increased
$2.7  million,   or  44.4%,  from  $6.0  million,  or  23.1%  of  gross  (before
inter-segment  elimination)  segment  revenue,  for the ten weeks ended June 30,
1998 to $8.7  million,  or 24.0% of gross segment  revenue,  for the second full
quarter 1999.

Selling, General and Administrative Expenses

                 Selling,  general and  administrative  expenses  increased $938
thousand,  or 4.5%,  from  $21.6  million in the  second  quarter  1998 to $22.6
million in the second quarter 1999 and, as a percentage of net sales,  increased
from  32.9% to 34.0%.  Reeves  contributed  $5.9  million  and $4.2  million  in
selling,  general and administrative  expense in the second quarter 1999 and the
ten weeks ended June 30, 1998, respectively.

                 Installed Home Improvements

                 Selling,  general and administrative  expenses for this segment
decreased $728 thousand,  or 4.2%, from $17.4 million in the second quarter 1998
to $16.6  million in the second  quarter 1999 and, as a percentage  of installed
home  improvement  sales,   increased  from  42.2%  to  52.3%.  Selling  expense
representing sales managers' and home consultants' direct  compensation,  direct
advertising expense and lead-taking costs decreased $25 thousand to $7.0 million
for the second  quarter 1999; as a percentage  of net installed  sales,  selling
expense  increased  from 17.4% to 22.5%.  Selling  compensation  increased  $380
thousand,  or 11%, from $3.5 million in the second  quarter 1998 to $3.9 million
in the second  quarter 1999; as a percentage  of net  installed  sales,  selling
compensation  increased from 8.7% to 12.4 %. The percentage  increase in selling
compensation  was  attributable to the imbalance of fixed cost components in the
new  compensation  plan to below-plan  net installed  sales volume.  The primary
purpose of the changes in selling compensation programs is to improve recruiting
and retention of home consultants and sales  management.  Effective May 1, 1999,
as part of the restructuring  initiative,  the compensation arrangement for home
consultants, sales managers, and field operations management has been changed to
include:  1) for selling  compensation,  minimum draws and fixed auto allowances
offset  by lower  commission  rates;  and 2) for  field  operations  management,
increased quota incentive  bonuses.  Direct  advertising  expense decreased $730
thousand,  or 26.1%,  from $2.8  million  for the  second  quarter  1998 to $2.1
million for the second  quarter 1999;  as a percentage  of net installed  sales,
direct  advertising  expense  decreased from 6.9% for the second quarter 1998 to
6.7% for the second quarter 1999.  Lead-taking costs increased $326 thousand, or
44.6% from $731  thousand  for the second  quarter  1998 to $1.1 million for the
second quarter 1999; as a percentage of net installed sales,  lead-taking  costs
increased from 1.8% to 3.4%. The increase was  attributable to a 18% increase in
total  leads or  scheduled  appointments,  increased  service  levels (to reduce
incidence of abandoned calls),  ongoing  development of new scripts and database
maintenance.
                 General and administrative expenses representing administrative
support including training,  customer service, home consultant support services,
field installations  operations,  and Marquise payrolls and Company benefits and
general  expenses,  decreased  $808  thousand  from $10.4 million for the second
quarter 1998 to $9.6 million for the second quarter 1999; as a percentage of net
segment  sales,  general and  administrative  expenses  increased  from 25.4% to
30.3%.  Performance-based  compensation  paid to  officers,  field  installation
managers and field operations staff,  including KanTel,  increased $186 thousand
from $183  thousand in the second  quarter  1998 to $369  thousand in the second
quarter  1999.  No  performance-based  compensation  was paid to officers in the
second  quarter  1999.  Included in general and  administrative  expenses in the
second  quarter 1999 are expenses  approximating  in the aggregate $840 thousand
for the "University of Diamond" training,  customer service, and home consultant
services.

                 Manufacturing and Wholesale Distribution

                 Selling,  general and administrative  expenses for this segment
increased $1.7 million, or 39.4%, from $4.2 million for the ten weeks ended June
30, 1998 to $5.9  million in the second  quarter  1999 and, as a  percentage  of
gross  segment   revenues,   remained   constant  at  16.3%.   Selling  expenses
representing the operations, primarily payroll and related costs, and facilities
and equipment costs, of distribution  centers increased $1.5 million,  or 42.9%,
to $4.9  million  in the  second  quarter of 1999.  General  and  administrative
expenses  increased  $209  thousand,  or 25.1%,  to $1.0  million  in the second
quarter of 1999.

Operating Interest Expense

                 Operating  interest expense  increased from $68 thousand in the
second quarter 1998 to $106 thousand in the second quarter 1999. The increase in
operating  interest  expense  resulted from the Company's  finance  subsidiary's
borrowings during the quarter.

Amortization of Intangibles

                 Amortization  of intangibles  increased $417 thousand from $274
thousand in the second quarter 1998 to $691 thousand in the second quarter 1999.
The amortization  expense relates  primarily to goodwill  incurred in connection
with the September 1994 stock repurchase from management and the amortization of
intangibles,  including  goodwill and covenants  not to compete,  related to the
Reeves  acquisition in April 1998 and to a lesser extent the KanTel  acquisition
in November 1998.

Interest Expense


<PAGE>


                 Interest  expense  increased  from $752  thousand in the second
quarter 1998 to $1.1 million in the second quarter 1999. This increase  reflects
the full  quarter  effect  of  interest  expense  incurred  related  to the debt
associated  with the  acquisition  of Reeves  and to a lesser  extent to working
capital  requirements  related to Reeves,  and an increase in the interest  rate
spread;  and,  capitalized  leases  related  to the  Company's  new  information
technology systems.

Interest Income and Other

                 Interest  income  increased  $20 thousand from $130 thousand in
the second quarter 1998 to $150 thousand in the second  quarter 1999,  primarily
due to  finance  income  on  Reeves's  trade  receivables  partially  offset  by
decreased interest income from lower Company invested cash balances.

Income Taxes

                 The Company's income taxes decreased from $475 thousand,  or an
effective rate of 43.3%, for the second quarter 1998 to an income tax benefit of
$662 thousand,  or an effective rate of 37.7%,  for the second quarter 1999. The
difference in the effective income tax rate and the federal statutory rate (34%)
is due primarily to  amortization  of certain  intangibles  (which  increased in
1999) which are not deductible for federal income tax purposes and the effect of
state income taxes.

FIRST SIX MONTHS 1999 COMPARED TO FIRST SIX MONTHS 1998

Net Sales

                 Net sales increased $28.5 million, or 30.1%, from $94.5 million
for the first six months 1998 to $123.0  million for the first six months  1999.
Reeves,  acquired in April, 1998,  contributed $62.3 million to net sales in the
first six months  1999,  compared to $24.5  million for the ten weeks ended June
30, 1998.

                 Installed Home Improvements

                 Installed  home   improvement   product  sales  decreased  $9.3
million,  or 13.3%,  from $70.0  million  for the first six months 1998 to $60.7
million for the first six months  1999.  Net sales  attributable  to roofing and
gutter  products and services  decreased  $7.4 million or 16.5% to $37.3 million
for the first six months 1999. Net sales  attributable  to fencing  products and
services  decreased  $1.1  million or 10.3% to $11.1  million  for the first six
months 1999.  Net sales  attributable  to garage doors,  entry doors,  and other
products and services  decreased  $741 thousand or 6.5% to $10.6 million for the
first six months 1999. Credit participation fee income decreased $28 thousand to
$885  thousand  in the first six months  1999.  Interest  income on  receivables
financed by the Company's consumer finance subsidiary,  Marquise,  decreased $19
thousand to $768  thousand  for the first six months 1999.  Backlog,  defined as
jobs sold but not  installed,  increased  $3.9 million from $13.9 million at the
end of December,  1998 to $17.8 million at the end of the first six months 1999.
Backlog increased $5.1 million from $10.9 million at the end of December 1997 to


<PAGE>



$16.0 million at the end of the second  quarter 1998.  The decrease in installed
sales and increase in backlog occurred  primarily in the second quarter 1999 and
was  attributable  to the continuing  effects of the  restructuring  and related
activities  in this  segment  as they  relate  to  poor  operating  efficiencies
measured  in reduced  close  ratios,  increased  cancellations,  reduced  credit
approvals, delays in scheduling installers and insufficient numbers of certified
installers in certain markets.

                 Manufacturing and Wholesale Distribution

                 Manufacturing  and wholesale  distribution  sales for the first
six months  1999 and the ten weeks  ending June 30,  1998 are  comprised  of the
following major product lines:

<TABLE>

                                                                 SIX MONTHS ENDED      Ten Weeks Ended
                                                                  JUNE 30, 1999         June 30, 1998
                                                                  -------------        ----------------
<S>                                                                     <C>                 <C>
                       Chain link and accessories                       $40,134,000         $17,077,000
                       Wood                                               9,754,000           4,488,000
                       Ornamental/specialty                               5,005,000           1,929,000
                       Gate operators and access control                  3,695,000             903,000
                       Security systems                                   6,041,000           1,647,000
                       Other                                                223,000                  --
                                                                 -------------------   -----------------
                                                                         64,852,000          26,044,000
                       Less:  inter-segment sales                         2,588,000           1,560,000
                                                                 ===================   =================
                                                                        $62,264,000         $24,484,000
                                                                 ===================   =================

</TABLE>

                 Backlog, defined as orders placed but not delivered,  increased
$1.5 million  from $3.1  million at the end of December  1998 to $4.6 million at
the end of June 1999.

Gross Profit

                 Gross  profit  increased  $5.3  million,  or 14.5%,  from $36.4
million,  or 38.5% of net sales, for the first six months 1998 to $41.6 million,
or 33.9% of net sales, for the first six months 1999.  Reeves  contributed $15.2
million to gross profit in the first six months  1999,  compared to $6.0 million
for the ten weeks ended June 30, 1998.

                 Installed Home Improvements

                 Installed home improvement  product gross profit decreased $3.9
million,  or 13.0%,  from $30.3 million,  or 43.3% of installed home improvement
product  sales,  for the first six  months  1998 to $26.4  million,  or 43.5% of
installed home  improvement  product  sales,  for the first six months 1999. The
decrease in gross profit amount was  attributable  to a 13.3%  decrease in sales
and $56  thousand  decrease  in credit  participation  fee income and in finance
interest  income.  The increase in gross  profit,  expressed as a percentage  of
installed home improvement  product sales,  resulted from a shift in product mix
and price increases.  The license fee incurred to Sears decreased $860 thousand,
or 12.1%, from $7.1 million,  or 10.4% of net installed home improvement product


<PAGE>



sales, for the first six months 1998 to $6.2 million,  or 10.6% of net installed
home  improvement  product sales, for the first six months 1999. The decrease in
the  license  fee  incurred to Sears for the first six months 1999 was due to an
overall  decrease in net  installed  home  improvement  product  sales;  and the
percentage  increase  to a shift in the balance of sales.  Effective  January 1,
1996,  Sears and the Company entered into a three-year  license  agreement which
has been amended and extended through December 31, 2001. Among other things, the
license  agreement  provides for a fixed  license fee, at the March 1995 license
fee rate, to be charged during the term of the license  agreement.  Gross profit
before the Sears  license fee,  credit  participation  fee and finance  interest
income  decreased $4.7 million,  or 13.3%,  from $35.7 million,  or 52.3% of net
installed home improvement product sales, for the first six months 1998 to $31.0
million, or 52.5% of net installed home improvement product sales, for the first
six months 1999. The decrease in gross profit amount was attributable to a 13.6%
decrease in net installed home improvement  product sales;  and, the increase in
gross profit index was  attributable  to a shift in product mix and increases in
unit  prices.  The unit  costs of  materials,  installation  labor and  warranty
expense remained relatively constant during the six month period.

                 Manufacturing and Wholesale Distribution

                 Manufacturing and wholesale distribution gross profit increased
$9.2 million,  or 153.5%, from $6.0 million in the ten weeks ended June 30, 1998
to $15.2 million in the first full six months 1999 and, as a percentage of gross
(before  inter-segment  elimination)  segment  revenue,  increased from 23.1% to
23.5%.

Selling, General and Administrative Expenses

                 Selling,  general and  administrative  expenses  increased $7.9
million,  or 23.2%,  from $33.9  million  in the first six months  1998 to $41.8
million  in the first  six  months  1999  and,  as a  percentage  of net  sales,
decreased from 35.9% to 34.0%. Reeves contributed $11.7 million and $4.2 million
in selling,  general and administrative expense in the first six months 1999 and
the ten weeks ended June 30, 1998, respectively.

                 Installed Home Improvements

                 Selling,  general and administrative  expenses for this segment
increased  $428  thousand,  or 1.4%,  from $29.7 million in the first six months
1998 to $30.1  million  in the first six months  1999 and,  as a  percentage  of
installed  home  improvement  sales,  increased  from  42.4% to  49.9%.  Selling
expenses representing sales managers' and home consultants' direct compensation,
direct  advertising  expense and  lead-taking  costs  increased $397 thousand to
$11.6  million  for the first six  months  1999;  and,  as a  percentage  of net
installed  sales,  selling  expense  increased  from  16.4%  to  19.6%.  Selling
compensation  increased $241 thousand,  or 4.1%,  from $5.9 million in the first
six months 1998 to $6.1 million in the first six months 1999; as a percentage of
net installed  sales,  selling  compensation  increased from 8.6% to 10.4%.  The
percentage  increase  in selling  compensation  was  attributable  to the second
quarter 1999 imbalance of fixed costs components in the new compensation plan to
below-plan net installed  sales.  The primary  purpose of the changes in selling



<PAGE>



compensation programs is to improve recruiting and retention of home consultants
and  sales  management.  Effective  May 1,  1999,  as part of the  restructuring
initiative,  the compensation arrangement for home consultants,  sales managers,
and field  operations  management  has been  changed to include:  1) for selling
compensation, minimum draws and fixed auto allowances offset by lower commission
rates;  and  2) for  field  operations  management,  increased  quota  incentive
bonuses.  Direct advertising expense decreased $252 thousand, or 6.2%, from $4.1
million for the first six months  1998 to $3.8  million for the first six months
1999;  as a  percentage  of net  installed  sales,  direct  advertising  expense
increased  from  6.0% for the first  six  months  1998 to 6.5% for the first six
months 1999.  Lead-taking  costs  increased  $408  thousand,  or 33.7% from $1.2
million for the first six months  1998 to $1.6  million for the first six months
1999; as a percentage of net installed sales,  lead-taking  costs increased from
1.8% to 2.7%.  The increase was  attributable  to 18% increase in total leads or
scheduled  appointments  during the first six  months,  and,  commencing  in the
second quarter 1999,  increased  service levels,  development of new scripts and
database maintenance.
                 General and administrative expense representing  administrative
support including training,  customer service, home consultant support services,
field installations  operations,  and Marquise payrolls and Company benefits and
general  expenses,  increased $117 thousand,  or 6.3% from $18.6 million for the
first six  months  1998 to $18.7  million  for the first six months  1999;  as a
percentage of net segment sales,  general and administrative  expenses increased
from 26.6% to 30.8%.  Performance-based  compensation  paid to  officers,  field
installation  managers and field operations staff,  including KanTel,  increased
$77 thousand from $686 thousand in the first six months 1998 to $763 thousand in
the  first  six  months  1999.  No  performance-based  compensation  was paid to
officers in the first six months  1999.  Included in general and  administrative
expenses  in the  first  six  months  1999  are  expenses  approximating  in the
aggregate  $1.1  million  for the  "University  of Diamond"  training,  customer
service, and, commencing in the second quarter, home consultant services.

                 Manufacturing and Wholesale Distribution

                 Selling, general, and administrative expenses for the first six
months  1999  for  this  segment  includes  selling  expenses  of  $9.5  million
representing the operations, primarily payroll and related costs, and facilities
and equipment costs, of 31 distribution  centers and $2.2 million of general and
administrative  expenses.  For the ten  weeks  ended  June  30,  1998,  selling,
general,  and  administrative  expenses  consisted  of $3.4  million  in selling
expenses and $832 thousand in general and administrative expenses.

Restructuring Expense

                 During the first six months 1999,  the Company  recorded a $1.3
million pre-tax charge for restructuring and related activities in its installed
home improvements segment, comprised of a $759 thousand charge for severance and
employee  retention  incentive bonuses, a $314 thousand charge for restructuring
consultancy and related  expenses,  and a $240 thousand charge for out-of-pocket
expenses  related to  restructuring  implementation.  The first six months  1999
restructuring  charge  was  approximately  $300  thousand  higher  than  initial
estimates  necessitated  by  the  need  to  both  hold  to  and  accelerate  the
restructuring timetable.


<PAGE>


Operating Interest Expense

                 Operating  interest expense increased from $123 thousand in the
first  six  months  1998 to $209  thousand  in the first six  months  1999.  The
increase in operating  interest  expense  resulted  from the  Company's  finance
subsidiary's borrowings during the first six months.

Amortization of Intangibles

                 Amortization  of  intangibles  increased $1.0 million from $434
thousand  in the first six months  1998 to $1.4  million in the first six months
1999.  The  amortization  expense  relates  primarily  to  goodwill  incurred in
connection  with the September  1994 stock  repurchase  from  management and the
amortization  of intangibles,  including  goodwill and covenants not to compete,
related  to the  Reeves  acquisition  in April  1998 and to a lesser  extent the
KanTel acquisition in November 1998.

Interest Expense

                 Interest expense  increased from $752 thousand in the first six
months 1998 to $2.3 million in the first six months 1999. This increase reflects
the full six month  effect of  interest  expense  incurred  related  to the debt
associated with the acquisition of Reeves,  and an increase in the interest rate
spread;  and,  capitalized  leases  related  to the  Company's  new  information
technology systems.

Interest Income and Other

                 Interest  income  increased  $53 thousand from $256 thousand in
the first six months 1998 to $309 thousand in the first six months 1999.

Income Taxes

                 The Company's income taxes decreased from $599 thousand,  or an
effective  rate of  42.6%,  for the first  six  months  1998 to a credit of $1.8
million,  or an  effective  rate of 36.8%,  for the first six months  1999.  The
difference in the effective income tax rate and the federal statutory rate (34%)
is due primarily to  amortization  of  intangibles  which are not deductible for
income tax purposes and the effect of state income taxes.


<PAGE>



LIQUIDITY AND CAPITAL RESOURCES

                 The  Company's  primary  capital  needs  have  been to fund the
growth  of the  Company,  to fund  the  September  1994  stock  repurchase  from
management,  to  fund  the  operations  of  the  Company's  finance  subsidiary,
Marquise,  and,  more  recently,  to fund new  information  technology  systems,
acquisitions,  and 1999 restructuring and operating losses of its installed home
improvement business.  The Company's primary sources of liquidity have been cash
flow from operations,  borrowings under its bank credit facilities, and, in June
1996,  the  net  proceeds  of  its  initial  public   offering.   The  Company's
manufacturing and wholesale  distribution  businesses  require minimal levels of
capital  expenditures  while its installed home  improvement  businesses are not
capital intensive. Capital expenditures for first six months 1999 and years 1998
and 1997 were  approximately  $1.0  million,  $3.8  million,  and $4.3  million,
respectively.  Capital  expenditures  for 1999 are expected to approximate  $2.2
million,  primarily  related to ongoing new  equipment  purchases  and  software
development  for the Company's  information  technology  systems and major plant
repairs.  Future  requirements for new information  technology and other capital
expenditures  are expected to be funded by cash flow from operations and capital
leases.  During  1997,  the  Company  announced  a stock  repurchase  program to
repurchase  up to 1,000,000  shares of its common  stock.  During the second and
third quarters 1997 the Company purchased 572,300 shares of its common stock for
$4.7 million.  The Company's bank credit facilities impose certain  restrictions
on the repurchase of common stock.
                 On April 20, 1998,  the Company  acquired all of the issued and
outstanding  stock  of  Reeves  for  approximately   $42.6  million,   including
transaction expenses. In November, 1998, the Company acquired certain net assets
and the business of KanTel, the lead-taking and telemarketing  operation of H.I.
Inc., a related party,  for  approximately  $2.4 million in cash and convertible
subordinated  notes.  In  connection  with the Reeves  acquisition,  the Company
obtained a $42 million,  as amended,  secured  syndicated  bank credit  facility
(also,  the "Bank  Group").  On June 30, 1999, the Company was in default on the
restrictive  covenant to its $42 million secured syndicated bank credit facility
with regard to minimum  cash flow,  as defined.  (It should be noted that entire
shortfall in the minimum cash flow  requirement  is solely  attributable  to the
Company's  installed home  improvement  business.) The Company is negotiating to
obtain a waiver to this default.  The Company has been advised by the Bank Group
that its $42 secured  syndicated bank credit facility has been reassigned to the
workout section of each of the participating banks. The contemplated  conditions
to obtaining a waiver  include:  1) a $4 million  prepayment  of the $18 million
term notes by September  15, 1999;  2) the net proceeds from the sale of assets,
as defined,  to reduce the $18 million  term notes which  amounts can be used to
reduce the prepayments  required in 1) above; 3) a $2.5 million reduction to the
borrowing base  availability  (at June 30, 1999, the Company had $3.7 million in
excess  borrowing  base  availability);  and,  4) as a  condition  precedent,  a
definitive  agreement  for the sale of at least  $4.6  million  of the  Marquise
accounts receivable. The Company has initiated several cash stimulation programs
to commence to address the foregoing requirements. Notwithstanding the Company's
inability  to  predict  with  certitude   whether  it  can  meet  the  foregoing
contemplated  requirements  within the specified time period,  the Bank Group to
date has not agreed to adjust the third quarter cash flow  restrictive  covenant
which requires a cumulative cash flow of $7 million or to adjust its end of year
restrictive   covenants.   Based  on  the  operating  results  of  the  Company,


<PAGE>



specifically its installed home improvement  business,  for the first six months
and July 1999,  it is not likely that the  Company  will be in  compliance  with
these restrictive  covenants.  While the Bank Group has informally expressed its
intentions,  as it has in the past,  to work with the  Company,  there can be no
assurance that at the conclusion of the negotiations the Company will be able to
negotiate terms and conditions  that it can reasonably  attain for the immediate
future  periods;  and,  therefore,  will continue to be dependent on the ongoing
forbearance of the Bank Group.  Accordingly,  the Company has  reclassified  all
$38.3 million of its  outstanding  debt to the Bank Group to current  portion of
long-term debt on its balance sheet. In addition,  the Company is in preliminary
discussions with Sears, its licensor in respect to Diamond Exteriors's installed
home improvement businesses,  to explore the feasibility of accelerating payment
of  credit  participation  accounts  receivable  - one  of  the  Company's  cash
stimulation  programs  - and  other  financial  accommodations  with a  view  to
alleviating the cash flow constraints resulting from the operating losses of the
installed home improvement  business.  As these  discussions are preliminary and
exploratory,  there  can be no  assurance  that the  Company  will  obtain  such
financial  accommodations  from Sears or in amounts and on terms  sufficient for
the Company's  purposes.  Given the Company's  current  financial  condition and
continuing  operating  losses of its installed home  improvement  business,  the
Company has retained  special  legal  counsel and is in the process of retaining
financial  and  operating  crisis  consultants  to advice the Company of all its
financial,  operating  and legal  alternatives  as it attempts to stabilize  its
current situation.
                 The Company believes that it has sufficient operating cash flow
from  its  working  capital  base and bank  lines of  credit  to meet all of its
obligations  for  the  foreseeable  future  if it is able  to  obtain  financial
accommodations  from its bank  lenders and Sears,  which may include  additional
advances and forbearance on the Company's current  obligations.  There can be no
assurance,  however,  that  the  bank  lenders  or  Sears  will  agree  to  this
forbearance or additional advances or other financial accommodations.  Given the
Company's  installed home  improvement  segment's first six months and July 1999
operating losses,  the Company has had, by necessity,  and will continue to have
to moderate its capital spending, acquisition, and expansion activities (both of
complementary  new products and into new markets),  and further reduce operating
costs.  [If the Company is unable to obtain financial  accommodations  or timely
reduce its operating costs, it may not be able to pay all of its obligations and
may have to consider other  alternatives,  including relief under the Bankruptcy
Code.] It is not likely the Company will activate its stock  repurchase  program
announced in 1997.
                 In November  1995,  the Company  commenced  the  operations  of
Marquise.   Marquise's  primary  objective  is  to  support,  along  with  other
designated   third-party  finance  companies,   the  Company's  requirement  for
providing financing to its installed home improvement businesses' customers. The
Company is continually  mindful of the risks associated with consumer  financing
and plans to increase its consumer  finance  receivable  portfolio at a measured
pace commensurate with its available  resources and acceptable levels for losses
on finance  receivables.  Marquise  has been  capitalized  and  funded  with the
Company's  excess  operating cash flow and  borrowings  under the Company's bank
lines of credit. In December 1997,  Marquise obtained a $10 million secured line
of credit and, at June 30, 1999,  had  borrowed  $4.4  million.  Pursuant to the
terms of Marquise's bank line of credit, the credit line will not be extended by
the  existing  bank and the  amounts  borrowed  are now due.  Marquise is in the
process of selling its consumer  finance  loans in order to fully repay its bank
loan.  Marquise  is  attempting  to obtain a new bank line of  credit,  on terms
similar to the previous bank line, for its consumer  lending  business.  At June


<PAGE>



30, 1999, Marquise has approximately $9.2 million in net finance receivables. At
June  30,  1999,   Marquise  had  approximately  $200  thousand  in  outstanding
commitments  of the fixed rate,  secured  loans.  Marquise is  dependent  on the
Company's  existing  cash  balances,  bank  lines  of  credit,  and the  sale of
Marquise's  consumer loan finance  receivables as market  conditions may warrant
from time to time as well as expected  excess cash flow from its installed  home
improvement  businesses if it is to continue to satisfy the  Company's  consumer
financing cash requirement at historical levels.
                 From its inception in June 1993, the Company has generated cash
flow from operations of approximately $25.1 million.  Cash flows from operations
have  been  used  to fund  and  leverage  the  Company's  investing  activities,
including  acquisitions,  Marquise  consumer  lending  activities,  and  capital
expenditures; and its financing activities, including the repurchase of 42.2% of
common stock in September 1994 from management, and repurchase of 6.3% of common
stock in 1997. At June 30, 1999, the Company had approximately  $27.5 million in
cash and cash equivalents and trade  receivables and negative working capital of
$21.0 million after  reclassification  of $28.3 million of long-term  Bank Group
debt to current liabilities.  At June 30, 1999, the Company had $55.4 million in
total debt  including  $42.7  million  borrowed  under its bank lines of credit.
Through July 31, 1999,  the Company was fully  borrowed under its available bank
lines of credit.
                 The Nasdaq  National Market has minimum  maintenance  standards
for continued listing  including,  among others, a $4 million Net Tangible Asset
threshold.   At  June  30,  1999,   the  Company's  Net  Tangible   Assets  were
approximately $6 million.  If the Company continues to incur losses in the third
and fourth  quarters 1999,  there can be no assurance that the Company's  common
stock will continue to be listed and traded on the Nasdaq.

YEAR 2000 STATE OF READINESS
            Please  refer to the  Company's  1998  Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations  included in its 1998
Annual  Report to  Shareholders  for a  detailed  description  of the  Company's
approach to and organization of the Year 2000 ("Y2K")  problem.  The information
provided below  constitutes a "Year 2000 Readiness  Disclosure"  for purposes of
the Year 2000 Information Readiness and Disclosure Act.
            The  Company  expects to  implement  successfully  the  systems  and
programming  changes  necessary to address Y2K internal IT and non-IT  readiness
issues,  as well as  third-party  readiness  issues.  While the Company does not
believe that the costs  associated  with preparing for Y2K readiness will have a
material  adverse  affect on the Company's  results of operations  and financial
condition,  there  can be no  assurances  that  there  will be no delay  in,  or
increased costs associated with, the implementation of such changes required for
readiness.
            The assessment,  planning,  and preparation phases are substantially
complete.  As of July 31, 1999, the  implementation  phase is approximately  90%
complete and costs incurred  through June 30, 1999 approximate  $300,000.  Total
costs for Y2K readiness  are  estimated to range from $300,000 to $400,000.  The
Company's  programs for purchasing  hardware and software,  which began in early
1997, have addressed many Y2K issues. The Company's IT initiatives have replaced
substantially  all key software with new industry  software,  such as Oracle ERP
applications  and Vantive for  lead-taking  activities,  and have  installed new
hardware  such as  Compaq  and  Bay  Networks.  Reeves,  a key  subsidiary,  has
completed the upgrading of its AS/400 BPCS system to a Y2K-certified revision of
the software.
            The low-tech nature of the Company's products and services minimizes
the risk of Y2K compliance  except for the Company's  Foreline  subsidiary.  The
cost of the readiness  program for security  products is not significant nor are



<PAGE>


future readiness product costs, including customer satisfaction,  expected to be
significant.
            The  Company  has  developed  a Y2K  process  for  dealing  with key
suppliers,  third-party  finance  companies,  distributors  and  other  business
partners.  As part of its Y2K  readiness,  the Company is  preparing  to replace
suppliers or eliminate  suppliers from  consideration,  which to date it has not
done, for new business if the supplier is not prepared for Y2K.
            While  the  Company  is  essentially  complete  with its  Year  2000
implementation plan, the Company's efforts for the remainder of the project will
be devoted to ongoing  identification and analysis of the most likely worst-case
scenarios for third-party  relationships  affected by Y2K. These scenarios could
include possible infrastructure  collapse, for example, the failure of power and
water supplies, transportation disruptions,  unforeseen product shortages due to
hoarding of products and failure of  communications  and financial systems - any
of which could have a material  effect on the  Company's  ability to deliver its
products and services to its customers.  While the Company has contingency plans
for most issues under its control,  infrastructure problems outside its control,
such as product  supplies and  third-party  financing  could result in delays in
delivering  its  product  and  services.  The  Company  would  expect  that most
utilities and service  providers  would be able to restore  service  within days
although more  pervasive  system  problems for  suppliers and finance  companies
could  last for two to four weeks or more  depending  on the  completion  of the
systems  and the  effectiveness  of  their  contingency  plans.  If the  Company
encounters  unforeseen  complications or issues not previously  addressed in the
comprehensive  plan,  additional  resources  will be  committed  to complete the
project  by Fall  1999.  Since  the use of  additional  services  is  considered
unlikely, no estimates as to their costs have been made at this time.
            There is no assurance,  despite its Y2K readiness efforts,  that the
Company  will be  successful  in its  efforts to  identify  and  address all Y2K
issues.  Even if the  Company  were to  complete  all  its  assessment  efforts,
implement  remediation  plans  believed to be adequate  and develop  contingency
plans  believed to be adequate,  problems may not be  identified or corrected in
time to prevent adverse consequences to the Company.  The foregoing  discussions
regarding  estimated  completion dates,  costs, risks and other  forward-looking
statements  regarding  Y2K are  based  on the  Company's  best  estimates  given
information that is currently available and is subject to change. Actual results
may differ materially from these estimates.

SEASONALITY
                 The Company's  results of operations may fluctuate from year to
year or quarter to quarter  due to a variety of  factors.  The  Company  expects
lower  levels of sales and  profitability  during the period  from  mid-November
through  mid-March,  impacting  the first and fourth  quarter of each year.  The
Company believes that this seasonality is caused by 1) winter weather in certain
of the Company's  markets located in the northeastern and north central U.S. and
by rainy weather, each of which limits the Company's ability to install exterior
home improvement products;  and, 2) reduced demand for commercial and industrial
fencing and related products.

Certain statements  contained herein,  including without limitation,  statements
addressing  the beliefs,  plans,  objectives  estimates or  expectations  of the
Company or future  results  or events  constitute  "forward-looking  statements"
within the meaning of the Private  Securities  Litigation Reform Act of 1995, as
amended.  Such  forward-looking  statements  involve  known  or  unknown  risks,


<PAGE>



including, but not limited to, general economic and business conditions, matters
related to the licensing  agreement between Diamond  Exteriors,  Inc. and Sears,
Roebuck and Co., warranty  exposure,  the Company's reliance on home consultants
and on the availability of qualified independent  installers,  lead activity and
costs related  thereto,  the outcome of discussions  with the Bank Group,  other
potential  lenders,  and Sears  regarding  forbearance  and possible  additional
extensions of credit, and conditions in the installed home improvement industry.
There can be no  assurance  that the  actual  future  results,  performance,  or
achievements expressed or implied by such forward-looking statements will occur.
Users of  forward-looking  statements  are  encouraged  to review  Item 7 of the
Company's  most  recent  annual  report on Form 10-K,  its filings on Form 10-Q,
management's  discussion and analysis in the Company's most recent annual report
to stockholders, the Company's filings on Form 8-K, and other federal securities
law filings for a  description  of other  important  factors that may affect the
Company's business, results of operations and financial condition.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

                 No material  changes from the disclosures in the Company's Form
10-K for the fiscal year ended December 31, 1998.



<PAGE>


                           PART II. OTHER INFORMATION

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES

                 Please see the  discussion in Part I, Item 2, under  "Liquidity
and Capital Resources" regarding the Company's default on its secured syndicated
bank facilities and regarding Marquise.

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

                 On May 13,  1999,  the  Company  held  its  Annual  Meeting  of
Shareholders.  By a majority of shares  represented at the Annual  Meeting,  the
shareholders  elected  directors to serve one-year terms as follows:  Messrs. C.
Stephen Clegg, James F. Bere, Jr., James M. Gillespie, Jacob Pollock, William R.
Griffin and George A. Stinson.

                 Shares were voted as follows:

                                         Number of Shares of Common Stock
                                         --------------------------------
Election of Directors                     For                        Withheld
---------------------                     ---                        --------
James F. Bere, Jr.                     8,116,936                      28,695
Stephen Clegg                          8,116,936                      28,695
James M. Gillespie                     8,116,936                      28,695
Jacob Pollock                          8,116,936                      28,695
William R. Griffin                     8,116,936                      28,695
George A. Stinson                      8,116,936                      28,695

                 Also  at the  Annual  Meeting  of  Shareholders,  a vote of the
shareholders of the Company present in person or by proxy was taken by ballot to
increase the number of shares of the Company's  common stock  reserved under the
Incentive Stock Option Plan by 500,000 shares.

                 Shares were voted as follows:

                                        Number of Shares of Common Stock
                                        --------------------------------
                                    For              Against          Abstain
                                    ---              -------          -------
To increase the number of
shares reserved                   6,346,258           804,648        994,725



<PAGE>



ITEM 6.  EXHIBITS

                 (a)  Exhibits

                                  (27)             Financial Data Schedule.

                 (b) A  report   on   Form  8-K   was  filed  on  July  8,  1999
                 announcing  the   execution  of  the  amendment  and  extension
                 through  December  31,  2001 of the licensing agreement between
                 Diamond  Exteriors and  Sears,  Roebuck  and  Co. dated January
                 1, 1996.


<PAGE>



                                   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.


                                             DIAMOND HOME SERVICES, INC.




                                                 /S/ Richard G. Reece
Date:  August 16, 1999                       By:_________________________
                                                 Richard G. Reece
                                                 Vice President and
                                                 Chief Financial Officer
                                                 (For the Registrant and as
                                                 Principal Financial Officer)