SEC Filing | Comfort Systems USA

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1998

REGISTRATION NO. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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COMFORT SYSTEMS USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

DELAWARE 1711 76-0526487
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)

FRED M. FERREIRA
CHIEF EXECUTIVE OFFICER
THREE RIVERWAY
SUITE 200
HOUSTON, TEXAS 77056
(713) 830-9600
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)
------------------

COPIES TO:

WILLIAM D. GUTERMUTH RICHARD C. TILGHMAN, JR.
BRACEWELL & PATTERSON, L.L.P. PIPER & MARBURY L.L.P.
SOUTH TOWER PENNZOIL PLACE 36 SOUTH CHARLES STREET
711 LOUISIANA STREET, SUITE 2900 BALTIMORE, MARYLAND 21201
HOUSTON, TEXAS 77002-2781 (410) 539-2530
(713) 221-1316

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

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CALCULATION OF REGISTRATION FEE

- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------

Common Stock, $0.01 par
value
per share.............. 4,065,924 $23.0625 $93,770,373 $27,663
- ---------------------------------------------------------------------------------------------------------
Restricted Voting Common
Stock, $0.01 par value
per share.............. 182,500 $23.0625 $4,208,907 $1,242
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based upon the average of the high and low sale
prices on May 14, 1998.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

================================================================================

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION
MAY 15, 1998

3,694,282 SHARES
[LOGO] -- COMFORT

COMMON STOCK
------------------------

Of the 3,694,282 shares of Common Stock offered hereby, 900,000 shares are
being sold by Comfort Systems USA, Inc. (the "Company") and 2,794,282 shares
are being sold by certain stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The Company will
not receive any of the proceeds from the sale of shares by the Selling
Stockholders. The Common Stock is traded on The New York Stock Exchange
("NYSE") under the symbol "FIX." On May 12, 1998, the last reported sale
price of the Common Stock on the NYSE was $23.25 per share. See "Price Range of
Common Stock."
------------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 8 HEREOF.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

====================================================================================================================
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
- --------------------------------------------------------------------------------------------------------------------

Per share............. $ $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total(2).............. $ $ $ $
====================================================================================================================

(1) Before deducting expenses of the offering estimated at $500,000 payable by
the Company.

(2) The Company and certain Selling Stockholders have granted the Underwriters a
30-day option to purchase up to an additional 554,142 shares of Common Stock
solely to cover over-allotments, if any. To the extent that the option is
exercised, the Underwriters will offer the additional shares at the Price to
Public shown above. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ ,
$ and $ , respectively. See "Underwriting."
------------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, subject to the
rights of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about
, 1998.

BT ALEX. BROWN
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SANDERS MORRIS MUNDY

THE DATE OF THIS PROSPECTUS IS , 1998.

[photos of buildings and HVAC systems]

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended ("Securities Act")
and Section 21E of the Exchange Act. Such forward-looking statements are made
only as of the date of this prospectus and involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company, or industry results, to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such risk, uncertainties and other
important factors include, among others, risks associated with acquisitions,
fluctuations in operating results because of acquisitions and variations in
stock prices, changes in government regulations, competition, and risks entailed
in the operations and growth of the newly acquired businesses.
------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH
THE COMMON STOCK OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON
STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."

PROSPECTUS SUMMARY

IN CONNECTION WITH ITS INITIAL PUBLIC OFFERING ON JULY 2, 1997 (THE
"IPO"), COMFORT SYSTEMS USA, INC. ACQUIRED 12 COMPANIES (THE "FOUNDING
COMPANIES") ENGAGED PRINCIPALLY IN THE COMMERCIAL AND INDUSTRIAL HEATING,
VENTILATION AND AIR CONDITIONING ("HVAC") BUSINESS. SINCE THE IPO AND THROUGH
MAY 12, 1998, THE COMPANY HAS ACQUIRED 51 ADDITIONAL COMPANIES IN THE HVAC AND
COMPLEMENTARY BUSINESSES. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO THE
"COMPANY" HEREIN INCLUDE THE COMPANY AND ALL OF THE ACQUIRED COMPANIES.

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED
HISTORICAL, PRO FORMA COMBINED, PRO FORMA AND INDIVIDUAL HISTORICAL FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.

UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN TO COMMON STOCK INCLUDE
BOTH COMMON STOCK, $0.01 PAR VALUE, AND RESTRICTED VOTING COMMON STOCK, $0.01
PAR VALUE (THE "RESTRICTED COMMON STOCK").

AMONG THE SHARES OFFERED BY THIS PROSPECTUS ARE 182,500 SHARES OF
RESTRICTED VOTING COMMON STOCK HELD BY CERTAIN SELLING STOCKHOLDERS. THE SHARES
OF RESTRICTED COMMON STOCK CONVERT AUTOMATICALLY INTO SHARES OF COMMON STOCK
UPON THEIR SALE IN THIS OFFERING.

THE COMPANY

The Company is a leading national provider of comprehensive HVAC
installation, as well as maintenance, repair and replacement services. Founded
in December 1996, the Company is consolidating the fragmented commercial and
industrial HVAC markets and performs most of its services within manufacturing
plants, office buildings, retail centers, apartment complexes, and healthcare,
education and government facilities. In addition to standard HVAC services, the
Company also provides specialized applications such as process cooling, control
systems, electronic monitoring and process piping. Approximately 94% of the
Company's pro forma combined 1997 revenues were derived from commercial and
industrial customers, with approximately 55% of pro forma combined revenues
attributable to installation services and 45% attributable to maintenance,
repair and replacement services.

On July 2, 1997, the Company completed the IPO and simultaneously acquired
the 12 Founding Companies. These companies had locations in ten states and
annualized revenues in 1996 of $167.5 million. Subsequent to the IPO and through
May 12, 1998, the Company acquired 51 HVAC and complementary businesses
(collectively with the Founding Companies, the "Acquired Companies"). These
Acquired Companies had locations in 13 additional states and annualized revenues
of $420 million. These 51 acquisitions included 12 "tuck-in" operations that
have been or currently are being integrated with existing Company operations.

The Company's commercial and industrial installation business targets
"design and build" projects where the Company is responsible for designing,
engineering and installing a cost-effective, energy-efficient system, customized
to meet the specific needs of the building owner. Management believes that the
"design and build" segment represents a faster growing and more profitable
segment of the HVAC business than traditional "plan and spec" installation,
where projects are generally designed by third parties and awarded on a low-bid
basis.

The Company also provides maintenance, repair and replacement of HVAC
systems. Growth in this segment is driven by a number of factors, particularly
(i) the growth and aging of the installed base, (ii) the increasing energy
efficiency, sophistication and complexity of HVAC systems and (iii) the
increasing standards relating to indoor air quality and the reduction or
elimination of the refrigerants commonly used

in older HVAC systems. The energy efficiency and sophistication of new HVAC
systems are encouraging building owners to upgrade and reconfigure their current
HVAC systems. Moreover, the increasing sophistication and complexity of these
HVAC systems are leading many commercial and industrial building owners and
property managers to devote more resources to maintenance and to outsource
maintenance and repair through service agreements with HVAC service providers.
Service agreements lead to better utilization of personnel, link the customer
with the Company should a major repair or replacement be needed and result in
recurring revenues.

The Company plans to achieve its goal of becoming a leading national
provider of comprehensive HVAC services by improving operations, emphasizing
continued internal growth and expanding through acquisitions.

OPERATING STRATEGY. The key elements of the Company's strategy for
improving operations are:

FOCUS ON COMMERCIAL AND INDUSTRIAL MARKETS. The Company believes that
the commercial and industrial HVAC markets are attractive because of their
growth opportunities, diverse customer base, attractive margins and
potential for long-term relationships with building owners and managers,
general contractors and architects.

OPERATE ON DECENTRALIZED BASIS. The Company manages its subsidiaries
on a decentralized basis, with local management maintaining responsibility
for day-to-day operations, profitability and growth. While it maintains
strong operating and financial controls, the Company believes that its
decentralized operating structure allows local management of each the
Acquired Companies to capitalize on existing knowledge of local and
regional markets and customer relationships.

ACHIEVE OPERATING EFFICIENCIES. The Company has begun and will
continue to use its growing purchasing power to gain volume discounts on
products and services such as HVAC components, raw materials, service
vehicles, advertising, bonding, insurance and benefits. The Company has
national purchasing agreements with two principal manufacturers of HVAC
equipment and with various other suppliers and service providers. Moreover,
the Company has commenced reviewing operations at the local and regional
operating levels to identify those "best practices" that can be
successfully implemented throughout its operations.

ATTRACT AND RETAIN QUALITY EMPLOYEES. The Company seeks to attract
and retain quality employees by providing them (i) an enhanced career path
from working for a larger public company, (ii) additional training,
education and apprenticeships to allow talented employees to advance to
higher-paying positions, (iii) the opportunity to realize a more stable
income and (iv) attractive benefits packages. Most of the Acquired
Companies began participating in the Company's national insurance benefits
program on May 1, 1998, which provides a better benefits package for most
employees.

INTERNAL GROWTH. A key component of the Company's strategy is to continue
the internal growth at the acquired companies and subsequently acquired
businesses. The key elements of the Company's internal growth strategy are:

CAPITALIZE ON SPECIALIZED TECHNICAL AND MARKETING STRENGTHS. The
Company believes it will be able to expand the services it offers in its
local markets by leveraging the specialized technical and marketing
strengths of individual acquired companies. As examples, the Company has
utilized the technical expertise and corresponding customer relationships
from certain operations to obtain new assignments for other Acquired
Companies involving work for a national private corrections company, a
large, recognized hotel chain, and a major auto parts distributor.

ESTABLISH REGIONAL AND NATIONAL MARKET COVERAGE. The Company believes
that significant demand exists from large regional and national companies
to utilize the services of a single HVAC service provider and believes
existing local and regional relationships can be expanded as it develops a
nationwide network. As examples, the Company has combined resources of
certain of its Acquired Companies to obtain multi-location service
agreements for a category superstore retailer in Colorado, another in the
Mid-Atlantic states, as well as for a major telecommunications company in
Ohio. In addition, the Company has initiated two joint marketing and
service alliances involving regional energy utilities and certain Acquired
Companies. Under these alliances, the Acquired Companies and

the energy utilities jointly market and provide products and services to
residential and commercial customers that are intended to improve HVAC
system energy efficiency and overall performance. The Company is pursuing
similar alliance opportunities elsewhere in the country.

ACQUISITIONS. The Company believes that, due to the highly fragmented
nature of the HVAC industry, it has significant opportunities to continue its
growth through acquisitions. The key elements of the Company's acquisition
strategy are:

ENTER NEW GEOGRAPHIC MARKETS. In new markets, the Company targets one
or more leading local or regional companies providing HVAC services. The
Company chooses businesses that are located in attractive markets, are
financially stable, are experienced in the industry and have capable
management. Since its IPO, the Company has increased the number of states
in which it has operating facilities from 10 to 23 states.

EXPAND WITHIN EXISTING MARKETS. Once the Company has entered a
market, it seeks to acquire other well-established HVAC businesses
operating within that region and also pursues "tuck-in" acquisitions of
smaller companies, whose operations can be integrated into an existing
operation to leverage the Company's infrastructure. Through May 12, 1998,
the Company has acquired 12 businesses that have been or currently are
being integrated into existing operations.

ACQUIRE COMPLEMENTARY BUSINESSES. The Company opportunistically
acquires companies providing complementary services to the same customer
base, such as commercial and industrial control systems and electrical and
plumbing services. This will enable the Company to offer, on a
comprehensive basis and from a single provider, HVAC, mechanical and
electrical services in selected markets.

Comfort Systems USA, Inc. was incorporated in 1996 in Delaware. The
Company's executive
offices are located at Three Riverway, Suite 200, Houston, Texas 77056, and its
telephone number is
(713) 830-9600.

THE OFFERING

Common Stock offered by the
Company......................... 900,000 shares
Common Stock offered by Selling
Stockholders.................. 2,794,282 shares(1)
Common Stock to be outstanding
after the offering............ 31,192,780 shares(2)(3)
Use of proceeds................. To repay outstanding indebtedness under the
Company's revolving line of credit (the "Credit
Facility").
NYSE symbol..................... FIX

(1) Includes 182,500 shares of Restricted Common Stock. Each share of Restricted
Common Stock is entitled to 0.55 of one vote on all matters submitted to
stockholders. Restricted Common Stock is convertible into one share of
Common Stock under certain circumstances. See "Description of Capital
Stock -- Common Stock and Restricted Common Stock."

(2) Excludes 3,067,638 shares of Common Stock issuable upon exercise of
currently outstanding options granted at a weighted average exercise price
of $14.88 per share. See "Management -- 1997 Long-Term Incentive Plan" and
" -- 1997 Non-Employee Directors' Stock Plan."

(3) Includes 2,560,412 shares of Restricted Common Stock.

RECENT DEVELOPMENTS

From April 1, 1998, through May 12, 1998, the Company has acquired 13
additional HVAC service companies with annualized revenues of approximately $115
million. The Company paid approximately $29.6 million in cash, issued 1,495,648
shares of Common Stock and issued $15.4 million in convertible subordinated
notes as consideration for these companies. The Company accounted for these
acquisitions as purchase transactions.

In April 1998, the Credit Facility was amended to increase borrowing
capacity and to provide for additional banks to lend to the Company. The amended
Credit Facility provides the Company with an unsecured revolving line of credit
of $175 million.

RECYCLE THIS PAGE

SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following Pro Forma Combined and Pro Forma financial information should
be read in conjunction with the Unaudited Pro Forma Financial Statements and the
Notes thereto and the historical Consolidated Financial Statements of the
Company and the Notes thereto contained elsewhere in this Prospectus. The Pro
Forma Combined and Pro Forma results of operations presented below are not
necessarily indicative of the results the Company would have obtained had these
events actually then occurred or of the Company's future results.

THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
STATEMENT OF OPERATIONS DATA:
PRO FORMA COMBINED(1)(2):
Revenues........................ $ 324,609 $117,838
Cost of services................ 234,336 89,410
----------------- --------------
Gross profit.................... 90,273 28,428
Selling, general and
administrative expenses........ 55,966(3) 20,695
Goodwill amortization(4)........ 3,593 1,170
----------------- --------------
Operating income................ 30,714 6,563
Other income (expense), net..... (461)(5) (531)
----------------- --------------
Income before income taxes...... 30,253 6,032
Provision for income taxes...... 12,721 2,654
----------------- --------------
Net income(11).................. $ 17,532 $ 3,378
================= ==============
Net income per share:
Basic...................... $ 0.72 $ 0.12
================= ==============
Diluted.................... $ 0.72 $ 0.12
================= ==============
Shares used in computing net
income per share:
Basic...................... 24,309 27,887
================= ==============
Diluted.................... 24,502 28,318
================= ==============

THREE MONTHS
YEAR ENDED ENDED MARCH
DECEMBER 31, 1997 31, 1998
----------------- --------------
PRO FORMA(6):
Revenues........................ $506,089 $129,238
Cost of services................ 381,101 99,765
----------------- --------------
Gross profit.................... 124,988 29,473
Selling, general and
administrative expenses........ 79,819(7) 22,269(8)
Goodwill amortization(4)........ 5,099 1,287
----------------- --------------
Operating income................ 40,070 5,917
Other income (expense), net..... (2,337)(9) (777)(10)
----------------- --------------
Income before income taxes...... 37,733 5,140
Provision for income taxes...... 16,152 2,262
----------------- --------------
Net income(11).................. $ 21,581 $ 2,878
================= ==============
Net income per share:
Basic...................... $ 0.79 $ 0.10
================= ==============
Diluted.................... $ 0.78 $ 0.10
================= ==============
Shares used in computing net
income per share:
Basic...................... 27,438 28,796
================= ==============
Diluted.................... 27,631 29,227
================= ==============

MARCH 31, 1998
------------------------------
HISTORICAL AS ADJUSTED(12)
----------- ---------------
BALANCE SHEET DATA:
Working capital................. $ 64,829 $ 64,829
Total assets.................... 361,776 361,776
Total debt, including current
portion........................ 50,935(13) 31,554(13)
Stockholders' equity............ 241,714 261,095

(SEE FOOTNOTES ON FOLLOWING PAGE)

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

(1) The Pro Forma Combined Statement of Operations Data: (i) assume that the
IPO and the concurrent acquisitions of the Founding Companies were
consummated on January 1, 1997, (ii) give effect to the retroactive
restatement to January 1, 1997, of the companies accounted for as
poolings-of-interest (the "Pooled Companies"), except one company which
was considered immaterial and has not been included in the retroactive
statement for all periods presented and (iii) include the companies
acquired subsequent to the IPO through December 31, 1997, accounted for as
purchases (the "Purchased Companies") from the date of their respective
acquisition. This presentation is not intended to be in accordance with the
regulations regarding financial statement presentation promulgated by the
Securities and Exchange Commission.

(2) The Pro Forma Combined Statement of Operations Data: (i) assume that the
IPO and the acquisitions of the Founding Companies were consummated on
January 1, 1997, (ii) give effect to the retroactive restatement to January
1, 1997, of the Pooled Companies and (iii) include the Purchased Companies
acquired subsequent to the IPO through March 31, 1998, from the date of
their respective acquisition. This presentation is not intended to be in
accordance with the regulations regarding financial statement presentation
promulgated by the Securities and Exchange Commission.

(3) Includes (i) certain reductions in salaries, bonuses and benefits to the
former owners which they agreed would take effect as of the date of
acquisitions of the Acquired Companies (the "Compensation Differential")
through December 31, 1997, of $9.2 million, (ii) excludes the
non-recurring, non-cash compensation charge of $11.6 million (the
"Compensation Charge") recorded by the Company in the first quarter of
1997 related to Common Stock issued to management of and consultants to the
Company, (iii) includes a $0.4 million increase in compensation expense to
reflect the ongoing salaries received by corporate management of the
Company as though those salaries were being paid prior to the IPO and (iv)
excludes $0.6 million of acquisition-related costs incurred in the
acquisition of the Pooled Companies.

(4) Consists of the amortization of goodwill using a 40-year life.

(5) Certain of the Acquired Companies were S Corporations prior to their
acquisition by the Company. Prior to the acquisitions by the Company,
various Acquired Companies made distributions to their stockholders which
representd substantially all of their previously taxed undistributed
earnings (the "S Corporation Distributions") which were funded through
borrowings by the Acquired Companies. Accordingly, pro forma interest
expense has been increased to include the interest expense on borrowings of
$11.0 million that would have been necessary to fund certain S Corporation
distributions of the Founding Companies through December 31, 1997.

(6) The Pro Forma Statement of Operations Data: (i) assume that the IPO and the
acquisitions of the Founding and Purchased Companies through March 31,
1998, were consummated on January 1, 1997, and (ii) give effect to the
retroactive restatement to January 1, 1997, of the Pooled Companies.

(7) Includes (i) the Compensation Differential of $14.3 million related to the
Acquired Companies through March 31, 1998, (ii) excludes the Compensation
Charge, (iii) includes a $0.4 million increase in compensation expense to
reflect the ongoing salaries received by corporate management of the
Company as though those salaries were being paid prior to the IPO and (iv)
excludes $0.6 million of acquisition-related costs incurred in the
acquisition of the Pooled Companies.

(8) Includes the Compensation Differential of $0.5 million related to the
Acquired Companies through March 31, 1998.

(9) Includes the interest expense on (i) borrowings of $22.8 million that would
have been necessary to fund certain S Corporation Distributions of the
Acquired Companies through March 31, 1998 (ii) $16.6 million of cash
consideration related to the acquisition of certain Acquired Companies
purchased from January 1, 1998 through March 31, 1998, and (iii) the
subordinated convertible notes issued in connection with the acquisition of
certain Acquired Companies purchased from January 1, 1998 through March 31,
1998.

(10) Includes the interest expense on (i) borrowings of $11.8 million that would
have been necessary to fund certain S Corporation Distributions of the
Acquired Companies through March 31, 1998 (ii) $16.6 million of cash
consideration related to the acquisition of certain Acquired Companies
purchased from January 1, 1998 through March 31, 1998, and (iii) the
subordinated convertible notes issued in connection with the acquisition of
certain Acquired Companies purchased from January 1, 1998 through March 31,
1998.

(11) Includes the incremental provision for federal and state income taxes
relating to the other statements of operations adjustments and for income
taxes on Acquired Companies, and Pooled Companies which were C Corporations
prior to the acquisition by the Company.

(12) Adjusted to include the issuance and sale of 900,000 shares of Common Stock
offered hereby by the Company and, application of the estimated net
proceeds therefrom as described in the "Use of Proceeds."

(13) From April 1, 1998, through May 12, 1998, the Company acquired 13
additional HVAC service companies with annualized revenues of approximately
$115 million. The Company paid approximately $29.6 million in cash, issued
1,495,648 shares of Common Stock and issued $15.4 million in convertible
subordinated notes as consideration for these companies. Following these
acquisitions and as of May 12, 1998, $75.6 million was outstanding under
the Credit Facility. After application of the estimated net proceeds $56.2
million would have been outstanding under the Credit Facility at May 12,
1998.

RISK FACTORS

AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS
PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING AN INVESTMENT IN THE COMMON STOCK.

ABSENCE OF COMBINED OPERATING HISTORY. The Company was founded in 1996 but
conducted no operations and generated no revenues prior to July 2, 1997. The
Acquired Companies operated as separate independent entities prior to being
acquired by the Company, and there can be no assurance that the Company will be
able to integrate the operations of these businesses successfully or to
institute the necessary systems and procedures, including accounting and
financial reporting systems, to manage the combined enterprise on a profitable
basis. The Company's management group has been assembled only recently, and
there can be no assurance that the management group will be able to manage the
combined entity effectively or to implement the Company's operating strategy,
internal growth strategy and acquisition program successfully. The pro forma
combined financial results of the Acquired Companies cover periods when the
Acquired Companies were not under common control or management and, therefore,
may not be indicative of the Company's future financial or operating results.
The inability of the Company to integrate the Acquired Companies successfully
would have a material adverse effect on the Company's business, financial
condition and results of operations and would make it unlikely that the
Company's acquisition program will be successful. See "Business -- Strategy"
and "Management."

RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. The Company intends
to continue to grow significantly through the acquisition of additional HVAC and
complementary businesses. The Company expects to face competition for
acquisition candidates, which may limit the number of acquisition opportunities
and may lead to higher acquisition prices. There can be no assurance that the
Company will be able to identify, acquire or manage profitably additional
businesses or to integrate successfully any acquired businesses into the Company
without substantial costs, delays or other operational or financial problems.
Further, acquisitions involve a number of special risks, including potentially
lower margins, failure of the acquired business to achieve expected results,
diversion of management's attention, failure to retain key personnel of the
acquired business and risks associated with unanticipated events or liabilities,
some or all of which could have a material adverse effect on the Company's
business, financial condition and results of operations. Customer
dissatisfaction or performance problems at a single Acquired Company could have
an adverse effect on the reputation of the Company generally and render
ineffective the Company's national sales and marketing initiatives. The Company
may consider acquiring additional complementary businesses in the electrical,
process piping and plumbing industries, and there can be no assurance that these
complementary businesses can be successfully integrated. See
"Business -- Strategy."

RISKS RELATED TO ACQUISITION FINANCING. The timing, size and success of
the Company's acquisition efforts and the associated capital commitments cannot
be readily predicted. The Company intends to continue to finance future
acquisitions by using shares of its Common Stock for a significant portion of
the consideration to be paid. If the Common Stock does not maintain a sufficient
market value, or if potential acquisition candidates are otherwise unwilling to
accept Common Stock as part of the consideration for the sale of their
businesses, the Company may be required to utilize more of its cash resources,
if available, to initiate and maintain its acquisition program. If the Company
does not have sufficient cash resources, its growth could be limited unless it
is able to obtain additional capital through debt or equity financings. The
Company has a bank line of credit of $175 million for working capital and
acquisitions. As of May 12, 1998, borrowings under the Credit Facility were
$75.6 million, which was used for acquisitions and to repay existing
indebtedness of the Acquired Companies. The Credit Facility is subject to
customary financial covenants and drawing conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

RISKS RELATED TO OPERATING AND INTERNAL GROWTH STRATEGY. Key elements of
the Company's strategy are to improve the profitability of the Acquired
Companies and to continue to expand their revenues. The Company seeks to improve
the profitability of the Acquired Companies by various means, including
increased purchasing efficiencies and a reduction, in some cases, of duplicative
operating costs and

overhead. The Company's ability to increase the revenues of the Acquired
Companies is affected by various factors, including demand for new or
replacement HVAC systems, the level of new construction, the Company's ability
to expand the range of services offered to customers of individual Acquired
Companies, the Company's ability to develop regional and national accounts and
other marketing programs in order to attract new customers and the Company's
ability to attract and retain a sufficient number of qualified HVAC technicians
and other necessary personnel. Many of these factors are beyond the control of
the Company, and there can be no assurance that the Company's operating and
internal growth strategies will be successful or that it will be able to
generate cash flow adequate for its operation and to support internal growth.
See "Business -- Strategy."

COMPETITION. The HVAC industry is highly competitive and is served by
small, owner-operated private companies and several large companies. Certain of
these competitors may have lower overhead cost structures and may, therefore, be
able to provide their services at lower rates than the Company. The HVAC
industry is currently undergoing rapid consolidation on both a national and a
regional level by other companies which have acquisition objectives which are
the same as or similar to the Company's objectives. These companies and other
consolidators may have greater financial resources than the Company to finance
acquisition and internal growth opportunities and might be willing to pay higher
prices than the Company for the same acquisition opportunities. Additionally,
some HVAC equipment manufacturers and public utilities are active in the
maintenance, repair and replacement segment of the HVAC industry. These
companies generally are better capitalized, have greater name recognition and
may be able to provide these services at a lower cost than the Company.
Consequently, the Company may encounter significant competition in its efforts
to achieve both its acquisition and internal growth objectives as well as its
operating strategy to increase the profitability of the Acquired Companies. See
"Business -- Competition."

AVAILABILITY OF HVAC TECHNICIANS. The timely provision of high-quality
installation service and maintenance, repair and replacement of HVAC systems by
the Company requires an adequate supply of skilled HVAC technicians.
Accordingly, the Company's ability to increase its productivity and
profitability will be limited by its ability to employ, train and retain the
skilled technicians necessary to meet the Company's service requirements. From
time to time, there are shortages of qualified HVAC technicians, and there can
be no assurance that the Company will be able to maintain an adequate skilled
labor force necessary to operate efficiently, that the Company's labor expenses
will not increase as a result of a shortage in the supply of skilled technicians
or that the Company will not have to curtail its planned internal growth as a
result of labor shortages. See "Business -- Employees" and " -- Recruiting,
Training and Safety."

SEASONAL AND CYCLICAL NATURE OF THE HVAC INDUSTRY. The HVAC industry is
subject to seasonal variations. Specifically, the demand for new installations
is generally lower during the winter months due to reduced construction activity
during inclement weather and less use of air conditioning during colder months.
Demand for HVAC maintenance, repair and replacement services is generally higher
in the second and third calendar quarters due to the increased use of air
conditioning during warmer months. Accordingly, the Company expects its revenues
and operating results generally will be lower in the first and fourth quarters.
Historically, the construction industry has been highly cyclical. As a result,
the Company's volume of business may be adversely affected by declines in new
installation projects in various geographic regions of the United States. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Cyclicality."

REGULATION. HVAC systems are subject to various environmental statutes and
regulations, including the Clean Air Act and those regulating the production,
servicing and disposal of certain ozone depleting refrigerants used in HVAC
systems. There can be no assurance that the regulatory environment in which the
Company operates will not change significantly in the future. Various local,
state and federal laws and regulations impose licensing standards on technicians
who install and service HVAC systems. The Company's failure to comply with these
laws and regulations could subject it to substantial fines and the loss of its
licenses. See "Business -- Governmental Regulation and Environmental Matters."

RELIANCE ON KEY PERSONNEL. The Company is highly dependent on the
continuing efforts of its executive officers and the senior management of the
Acquired Companies, and the Company likely will depend on the senior management
of any other significant business it acquires in the future. The business or
prospects of the Company could be affected adversely if any of these persons
does not continue in his management role until the Company is able to attract
and retain qualified replacements. See "Management."

YEAR 2000 COMPLIANCE. The Company is currently implementing a Year 2000
program to ensure that the Company's computer systems and applications will
function properly beyond 1999. The Company expects its Year 2000 date conversion
program will be successfully completed on a timely basis. There can, however, be
no assurance that this will be the case. The Company does not expect to incur
significant expenditures to address this issue. The ability of third parties
with whom the Company transacts business to address adequately their Year 2000
issues is outside of the Company's control. There can be no assurance that the
failure of the Company or such third parties to address adequately their
respective Year 2000 issues will not have a material adverse effect on the
Company's financial condition or results of operations.

POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON
STOCK. The market price of the Common Stock might be adversely affected by the
sale, or availability for sale, of substantial amounts of the Common Stock in
the public market. As of May 12, 1998 there were 30,292,780 shares of Common
Stock outstanding. The 3,694,282 shares offered hereby, as well as the 7,015,000
shares sold in the IPO and 618,374 of the shares issued in acquisitions are
freely tradeable. The remaining outstanding shares may be resold publicly only
following their registration under the Securities Act of 1933, as amended (the
"Securities Act"), or pursuant to an available exemption from registration
(such as provided by Rule 144 following a one year holding period for previously
unregistered shares), or upon the expiration of contractual restrictions with
the Company. In connection with the Offering, each Selling Shareholder has
agreed with the underwriters that he or she will not sell or otherwise dispose
of any Company stock for a period of 180 days from the date of the Offering.
Giving effect to this Offering, during the second quarter of 1998, 1,509,232
shares will become eligible for sale, subject to the restrictions in Rule 144.
In addition, certain other shares become tradeable under Rule 144 or pursuant to
the expiration of contractual restrictions during the next five years. In 1998,
88,890 additional shares become eligible for sale in the third quarter, and
3,101,494 shares become eligible for sale in the fourth quarter. In 1999,
108,185 shares become eligible for sale in the first quarter, 1,772,720 shares
become eligible for sale in the second quarter, 108,581 shares become eligible
for sale in the third quarter, and 413,294 shares become eligible for sale in
the fourth quarter. In 2000, 716,253 shares become eligible for sale in the
first quarter, 1,886,179 shares become eligible for sale in the second quarter,
and 297,320 shares become eligible for sale in the fourth quarter. After 2000,
3,811,738 additional shares become eligible for sale on various dates as
contractual restrictions expire. The Company also has outstanding options to
purchase up to a total of 2,832,638 shares of Common Stock which vest ratably
over five years from their date of grant. In addition, up to 5,270,431 shares
remain issuable pursuant to the Company's shelf registration statement on Form
S-1 filed on April 24, 1998 for use in connection with acquisitions and will be
freely traded, after their issuance, by persons not affiliated with the Company
unless the Company contractually restricts their resale. See "Shares Eligible
for Future Sale."

POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Company's
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation"), authorizes the Board of Directors to issue, without
stockholder approval, one or more series of preferred stock having such
preferences, powers and relative, participating, optional and other rights
(including preferences over the Common Stock respecting dividends and
distributions and voting rights) as the Board of Directors may determine. The
issuance of this "blank-check" preferred stock could render more difficult or
discourage an attempt to obtain control of the Company by means of a tender
offer, merger, proxy contest or otherwise. In addition, the Certificate of
Incorporation provides for a classified Board of Directors, which may also have
the effect of inhibiting or delaying a change in control of the Company. Certain
provisions of the Delaware General Corporation Law may also discourage takeover
attempts that have not been approved by the Board of Directors. See
"Description of Capital Stock."

USE OF PROCEEDS

The net proceeds from the sale of the 900,000 shares of Common Stock
offered by the Company hereby, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be $19.4 million
($31.6 million if the Underwriters' over-allotment option is exercised in full).

The net proceeds to the Company of $19.4 million will be used to reduce
outstanding indebtedness under the Company's Credit Facility. See "Management's
Discussion and Analysis of Financial Results -- Liquidity and Capital
Resources."

The Company will not receive any of the proceeds from the sale of shares by
Selling Stockholders.

DIVIDEND POLICY

The Company intends to retain all of its future earnings, if any, to
finance the expansion of its business and for general corporate purposes,
including future acquisitions, and does not anticipate paying any cash dividends
on its Common Stock for the foreseeable future. In addition, the Company's
Credit Facility includes restrictions on the ability of the Company to pay
dividends without the consent of the lender.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock has traded on the NYSE since the IPO. The
following table sets forth the high and low sale prices for the Common Stock for
the periods indicated, as reported by the NYSE.

HIGH LOW
--------- ---------
1997:
Second quarter (beginning June
27)............................. $16 1/8 $13
Third quarter................... $21 9/16 $15 1/2
Fourth quarter.................. $20 1/16 $15
1998:
First quarter................... $22 1/4 $18 1/8
Second quarter (through May
12)............................. $24 3/4 $21 3/16

At May 12, 1998, there were approximately 299 holders of record of the
Company's Common Stock.

CAPITALIZATION

The following table sets forth the current maturities of long-term
obligations and capitalization at March 31, 1998 of the Company on a historical
basis and as adjusted to give effect to the issuance and sale of 900,000 shares
of Common Stock offered hereby by the Company and application of the estimated
net proceeds therefrom as described in the "Use of Proceeds." This table
should be read in conjunction with the historical Consolidated Financial
Statements of the Company and the Unaudited Pro Forma Financial Statements of
the Company and the Notes thereto included elsewhere in this Prospectus.

MARCH 31, 1998
---------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
Current maturities of long-term debt
obligations(1)..................... $ 150 $ 150
========== ===========
Long-term obligations, less current
maturities(1)...................... $ 50,785(2) $ 31,404(2)
Stockholders' equity:
Preferred Stock: $0.01 par
value, 5,000,000 shares
authorized; none issued or
outstanding.................... -- --
Common Stock: $0.01 par value,
52,969,912 shares authorized;
28,796,085 shares issued and
outstanding and 29,696,085
shares issued and outstanding,
as adjusted.................... 288 297
Additional paid-in capital...... 231,355 250,727
Retained earnings............... 10,071 10,071
---------- -----------
Total stockholders'
equity.................. 241,714 261,095
---------- -----------
Total
capitalization.... $ 292,499 $ 292,499
========== ===========

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

(1) For a description of the Company's debt, see Note 6 of Notes to the
Company's Consolidated Financial Statements to Consolidated Financial
Statements.

(2) From April 1, 1998, through May 12, 1998, the Company acquired 13 additional
HVAC service companies with annualized revenues of approximately $115
million. The Company paid approximately $29.6 million in cash, issued
1,495,648 shares of Common Stock and issued $15.4 million in convertible
subordinated notes as consideration for these companies. Following these
acquisitions and as of May 12, 1998, $75.6 million was outstanding under the
Credit Facility. After application of the estimated net proceeds, $56.2
million would have been outstanding under the Credit Facility at May 12,
1998.

SELECTED FINANCIAL DATA

The following Historical, Pro Forma Combined and Pro Forma financial
information should be read in conjunction with the Company's Unaudited Pro Forma
Financial Statements and the Notes thereto and the historical Consolidated
Financial Statements and the Notes thereto and certain historical financial
statements of the Acquired Companies and the Notes thereto contained elsewhere
in this Prospectus. The following historical consolidated financial information
has been derived from (i) the audited financial statements of the Company as of
December 31, 1996 and 1997 and for the years ended 1995, 1996 and 1997 and (ii)
the unaudited financial statements of the Company as of December 31, 1993, 1994
and 1995 and March 31, 1998 and for the years ended 1993 and 1994 and for the
three months ended March 31, 1998. The Pro Forma Combined and Pro Forma results
of operations presented below have been prepared as described in the
accompanying notes to this table. These Pro Forma Combined and Pro Forma results
of operations are not necessarily indicative of the results the Company would
have obtained had these events actually then occurred or of the Company's future
results.

THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
HISTORICAL(1):

Revenues......................... $ 52,195 $ 67,254 $ 65,167 $ 96,296 $ 237,709 $117,838
Operating income................. 822 1,638 1,717 5,076 4,531 6,563
Net income (loss)................ 685 1,203 1,293 3,590 (2,830) 3,378
PRO FORMA COMBINED(2)(3):
Revenues......................... $ 324,609 $117,838
Operating income(5).............. 30,714(4) 6,563
Net income(12)................... 17,532(6) 3,378
Net income per share:
Basic....................... $ 0.72 $ 0.12
Diluted..................... $ 0.72 $ 0.12
Shares used in computing net
income
per share:
Basic....................... 24,309 27,887
Diluted..................... 24,502 28,318
PRO FORMA(7):
Revenues......................... $ 506,089 $129,238
Operating income(5).............. 40,070(8) 5,917(9)
Net income(12)................... 21,581(10) 2,878(11)
Net income per share:
Basic....................... $ 0.79 $ 0.10
Diluted..................... $ 0.78 $ 0.10
Shares used in computing net
income
per share:
Basic....................... 27,438 28,796
Diluted..................... 27,631 29,227

MARCH 31, 1998
DECEMBER 31, --------------------------
----------------------------------------------------- AS
1993 1994 1995 1996 1997 HISTORICAL ADJUSTED(13)
--------- --------- --------- --------- --------- ----------- ------------
BALANCE SHEET DATA:
HISTORICAL:
Working capital.................. $ 3,645 $ 3,904 $ 7,048 $ 9,515 $ 57,275 $ 64,829 $ 64,829
Total assets..................... 14,918 18,164 24,874 31,479 287,780 361,776 361,776
Total debt, including current
portion........................ 2,406 2,001 3,502 3,929 21,211 50,935(14) 31,554(14)
Stockholders' equity............. 3,550 4,305 7,707 11,357 212,668 241,714 261,095

(SEE FOOTNOTES ON FOLLOWING PAGE)

- ------------
(1) The historical financial information for the fiscal years ended 1993
through 1997 and the three months ended March 31, 1998, reflect the
historical financial statements of the Company, restated for the effects of
the Pooled Companies and the Founding and Purchased Companies from their
respective acquisition dates through December 31, 1997 and through March
31, 1998 for the three months ended March 31, 1998.

(2) The Pro Forma Combined Statement of Operations Data: (i) assume that the
IPO and the concurrent acquisitions of the Founding Companies were
consummated on January 1, 1997, (ii) give effect to the retroactive
restatement to January 1, 1997, of the Pooled Companies, except one company
which was considered immaterial and has not been included in the
retroactive restatement for all periods presented and (iii) include the
Purchased Companies through December 31, 1997, from the date of their
respective acquisition. This presentation is not intended to be in
accordance with the regulations regarding financial statement presentation
promulgated by the Securities and Exchange Commission.

(3) The Pro Forma Combined Statement of Operations Data: (i) assume that the
IPO and the acquisitions of the Founding Companies were consummated on
January 1, 1997, (ii) give effect to the retroactive restatement to January
1, 1997, of the Pooled Companies and (iii) include the Purchased Companies
acquired subsequent to the IPO through March 31, 1998, from the date of
their respective acquisition. This presentation is not intended to be in
accordance with the regulations regarding financial statement presentation
promulgated by the Securities and Exchange Commission.

(4) Includes (i) the Compensation Differential through December 31, 1997, of
$9.2 million, (ii) excludes the Compensation Charge of $11.6 million
recorded by the Company in the first quarter of 1997 related to Common
Stock issued to management of and consultants to the Company, (iii)
includes a $0.4 million increase in compensation expense to reflect the
ongoing salaries received by corporate management of the Company as though
those salaries were being paid prior to the IPO and (iv) excludes $0.6
million of acquisition-related costs incurred in the acquisition of the
Pooled Companies.

(5) Includes the amortization of goodwill using a 40-year life.

(6) Includes the interest expense on borrowings of $11.0 million that would
have been necessary to fund certain S Corporation Distributions of the
Founding Companies through December 31, 1997.

(7) The Pro Forma Statement of Operations Data: (i) assume that the IPO and the
acquisitions of the Founding and Purchased Companies through March 31,
1998, were consummated on January 1, 1997, and (ii) give effect to the
retroactive restatement to January 1, 1997, of the Pooled Companies.

(8) Includes (i) the Compensation Differential of $14.3 million related to the
Acquired Companies through March 31, 1998, (ii) excludes the Compensation
Charge, (iii) includes a $0.4 million increase in compensation expense to
reflect the ongoing salaries received by corporate management of the
Company as though those salaries were being paid prior to the IPO and (iv)
excludes $0.6 million of acquisition-related costs incurred in the
acquisition of the Pooled Companies.

(9) Includes the Compensation Differential of $0.5 million related to the
Acquired Companies through March 31, 1998.

(10) Includes the interest expense on (i) borrowings of $22.8 million that would
have been necessary to fund certain S Corporation Distributions of the
Acquired Companies through March 31, 1998 (ii) $16.6 million of cash
consideration related to the acquisition of certain Acquired Companies
purchased from January 1, 1998 through March 31, 1998, and (iii) the
subordinated convertible notes issued in connection with the acquisition of
certain Acquired Companies purchased from January 1, 1998 through March 31,
1998.

(11) Includes the interest expense on (i) borrowings of $11.8 million that would
have been necessary to fund certain S Corporation Distributions of the
Acquired Companies through March 31, 1998, (ii) $16.6 million of cash
consideration related to the acquisition of certain Acquired Companies
purchased from January 1, 1998 through March 31, 1998, and (iii) the
subordinated convertible notes issued in connection with the acquisition of
certain Acquired Companies purchased from January 1, 1998 through March 31,
1998.

(12) Includes the incremental provision for federal and state income taxes
relating to the other statements of operations adjustments an for income
taxes on Acquired Companies, and Pooled Companies which were C Corporations
prior to the acquisition by the Company.

(13) Adjusted to include the issuance and sale of 900,000 shares of Common Stock
offered hereby by the Company and, application of the estimated net
proceeds therefrom as described in the "Use of Proceeds."

(14) From April 1, 1998, through May 12, 1998, the Company acquired 13
additional HVAC service companies with annualized revenues of approximately
$115 million. The Commpany paid approximately $29.6 million in cash, issued
1,495,648 shares of Common Stock and issued $15.4 million in convertible
subordinated notes as consideration for these companies. Following these
acquisitions and as of May 12, 1998, $75.6 million was outstanding under
the Credit Facility. After application of the estimated net proceeds, $56.2
million would have been outstanding under the Credit Facility at May 12,
1998.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion should be read in conjunction with the
consolidated historical and pro forma financial statements of the Company and
related notes thereto included elsewhere in this Prospectus. This discussion
contains forward-looking statements regarding the business and industry of the
Company within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are based on the current plans and expectations of the
Company and involve risks and uncertanties that could cause actual future
activities and results of operations to be materially different from those set
forth in the forward-looking statements. Important factors that could cause
actual results to differ include risks set forth in "Risk Factors."

The Company is a leading national provider of comprehensive HVAC
installation, as well as maintenance, repair and replacement services. Founded
in December 1996, the Company is consolidating the fragmented commercial and
industrial HVAC markets and performs most of its services within manufacturing
plants, office buildings, retail centers, apartment complexes, and healthcare,
education and government facilities. In addition to standard HVAC services, the
Company also provides specialized applications such as process cooling, control
systems, electronic monitoring and process piping. Certain locations also
perform related services such as electrical and plumbing. Approximately 94% of
the Company's pro forma combined 1997 revenues were derived from commercial and
industrial customers, with approximately 55% of pro forma combined revenues
attributable to installation services and 45% attributable to maintenance,
repair and replacement services.

On July 2, 1997, the Company completed its IPO and simultaneously acquired
the 12 Founding Companies. Subsequent to the IPO, and through December 31, 1997,
the Company acquired 27 additional HVAC and complementary businesses. Of these
additional acquisitions, 14 are the Pooled Companies and the remaining 13
acquisitions have been accounted for as purchases. The historical financial
statements of the Company have not been retroactively restated to give effect to
the operations of certain of the Pooled Companies which are considered
immaterial poolings based upon the relative significance of their individual
operations. Subsequent to December 31, 1997 and through March 31, 1998, the
Company acquired 11 additional HVAC businesses, all of which have been accounted
for as purchases.

Pro forma combined and historical results are not necessarily indicative of
future results of the Company because, among other things, the Acquired
Companies were not under common control or management prior to their
acquisition. The Company's results of operations historically have been subject
to seasonal fluctuations.

The timing and magnitude of acquisitions, assimilation costs and the
seasonal nature of the HVAC industry may materially affect operating results.
Accordingly, the operating results for any period are not necessarily indicative
of the results that may be achieved for any subsequent period.

PRO FORMA COMBINED RESULTS OF OPERATIONS

The following unaudited pro forma combined information is presented
supplementally to reflect the pro forma results of operations as if the
acquisition of the Founding Companies occurred on January 1, 1996, as reflected
in the Company's publicly disclosed earnings announcements. Therefore, the
accompanying unaudited pro forma combined statements of operations and the
related management's discussion and analysis of the Company for the three months
ended March 31, 1998 and 1997, respectively, and for the years ended December
31, 1997 and 1996, respectively, include the combined operations of the Pooled
Companies and the Founding Companies from January 1, 1996, and the Purchased
Companies acquired through date of presentation from the dates of their
acquisitions. One of the Pooled Companies is considered immaterial and has not
been restated for all periods presented.

The Acquired Companies, were managed prior to their acquisitions as
independent private companies. Therefore, historical selling, general, and
administrative expenses for the periods presented in the consolidated financial
statements of the Company reflect compensation and related benefits the owners
of those businesses received prior to acquisition. Historical selling, general
and administrative expenses also include the Compensation Charge recorded by the
Company in the first quarter of 1997 related to Common Stock issued to
management of and consultants to the Company prior to the IPO. The pro forma
combined results of operations reflect: (i) the Compensation Differential of the
Founding and Pooled Companies which the former owners of those companies agreed
would take effect as of the date of the acquisitions, (ii) pro forma combined
compensation expense of $215,000 for the three months ended March 31, 1997 and
$430,000 for the six months ended June 30, 1997, to reflect the ongoing salaries
received by corporate management as though those salaries were being paid prior
to the IPO, (iii) interest expense on borrowings of $11.0 million that would
have been necessary to fund various S Corporation Distributions of the Founding
Companies as if they had occurred at the beginning of each period presented,
(iv) the elimination of the Compensation Charge referred to above and (v) the
elimination of acquisition-related costs incurred in the acquisition of the
Pooled Companies. In addition, an incremental tax provision has been recorded as
if all applicable Purchased and Founding Companies and the Pooled Companies that
were C Corporations, had been subject to federal and state income taxes.

PRO FORMA COMBINED

YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------ ------------------------------------------
1996 1997 1997 1998
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Revenues............................. $ 263,863 100.0% $ 324,609 100.0% $ 65,906 100.0% $ 117,838 100.0%
Cost of services..................... 191,879 72.7 234,336 72.2 48,609 73.8 89,410 75.9
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 71,984 27.3 90,273 27.8 17,297 26.2 28,428 24.1
Selling, general and administrative
expenses........................... 41,745 15.8 55,966 17.2 12,760 19.4 20,695 17.6
Goodwill amortization................ 3,495 1.3 3,593 1.1 874 1.3 1,170 1.0
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income..................... 26,744 10.1 30,714 9.5 3,663 5.6 6,563 5.6
Other income (expense), net.......... (863) (0.3) (461) (0.1) (246) (0.4) (531) (0.5)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before taxes.................. 25,881 9.8 30,253 9.3 3,417 5.2 6,032 5.1
Provision for income taxes........... 11,077 -- 12,721 -- 1,420 -- 2,654 --
--------- --------- --------- --------- --------- --------- --------- ---------
Pro forma combined net income........ $ 14,804 5.6% $ 17,532 5.4% $ 1,997 3.0% $ 3,378 2.9%
========= ========= ========= ========= ========= ========= ========= =========

Pro forma combined net income per
share:
Basic............................ $ 0.65 $ 0.72 $ 0.09 $ 0.12
Diluted.......................... $ 0.65 $ 0.72 $ 0.09 $ 0.12
Shares used in computing pro forma
combined net income per share:
Basic............................ 22,760 24,309 22,760 27,887
Diluted.......................... 22,760 24,502 22,760 28,318

THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997

PRO FORMA COMBINED REVENUES. Pro forma combined revenues increased $51.9
million, or 78.8%, to $117.8 million for the first quarter of 1998. Revenues
increased approximately 20% for the Founding Companies in the first quarter of
1998 primarily due to greater demand for specialized multi-unit installation
services in Texas and in the Northeast, strong general activity in the Houston
market and higher demand for industrial design and build operations in the
Company's Tennessee-based operations. Revenues from the Purchased Companies
acquired subsequent to the IPO through the end of the first quarter of 1998
contributed approximately 80% of the increase in revenues in the first quarter
of 1998.

PRO FORMA COMBINED GROSS PROFIT. Pro forma combined gross profit increased
$11.1 million, or 64.3%, to $28.4 million for the first quarter of 1998,
primarily due to increased revenues at the Founding

Companies, the addition of the Purchased Companies, and incremental increases at
some Pooled Companies. As a percentage of revenues, pro forma combined gross
profit decreased from 26.2% in the first quarter of 1997 to 24.1% in the first
quarter of 1998 as a result of two principal factors. Acquisitions during the
first quarter of 1998 included companies with significant amounts of project
activity at gross margins are somewhat lower than the Company's historical
average. In addition, the Company continued to realize lower than normal gross
margins on certain "design and build" installation projects which were
undertaken as a strategic enhancement to the Company's portfolio of "design and
build" projects.

PRO FORMA COMBINED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
("SG&A"). Pro forma combined SG&A, excluding goodwill amortization, increased
$7.9 million, or 62.2%, to $20.7 million for the first quarter of 1998. The
Company's establishment as a public company in 1997 resulted in $1.6 million of
corporate office and management expenses in the first quarter of 1998, as
compared to a pro forma charge of $0.2 million in the first quarter of 1997 to
reflect the ongoing salaries received by corporate management as though those
salaries were being paid prior to the IPO. The remaining increases in SG&A were
due principally to the addition of the Purchased Companies. As a percentage of
revenues, SG&A decreased from 19.4% to 17.6% in the first quarter of 1998 due to
the Company's ability to increase revenues without a commensurate increase in
SG&A.

PRO FORMA COMBINED OTHER INCOME (EXPENSE), NET. Pro forma combined other
expense, net increased to $0.5 million primarily due to the increase in interest
expense related to the acquisition of the Purchased Companies in 1998.

1997 COMPARED TO 1996

PRO FORMA COMBINED REVENUES. Pro forma combined revenues increased $60.7
million, or 23.0%, to $324.6 million for 1997. This increase includes $16.7
million for the Purchased Companies acquired in 1997 which are not included in
the 1996 results. Excluding this amount, revenues increased 16.7% from 1996 to
1997 primarily because of (i) significant "design and build" projects in the
Company's Phoenix operations for a new medical center and a semiconductor
fabrication facility, (ii) broad growth in commercial and industrial "design
and build" activities in the Tennessee operations, (iii) increased demand for
the Company's services in the Grand Rapids, Michigan market, (iv) greater demand
for specialized multi-unit installation services in Texas and the Northeast, and
(v) increased demand for the Company's commercial service capabilities in the
Cincinnati market.

PRO FORMA COMBINED GROSS PROFIT. Pro forma combined gross profit increased
$18.3 million, or 25.4%, to $90.3 million for 1997, primarily due to increased
sales volume. Gross profit from Purchased Companies, which are not included in
1996 results, accounted for approximately 4% of the pro forma combined gross
profit in 1997. Pro forma combined gross profit as a percentage of revenues
increased from 27.3% in 1996 to 27.8% in 1997. This increase in gross profit
margin was primarily attributable to an overall improvement from the Company's
operations in Mobile, Alabama, associated with its specialized "design and
build" HVAC installation capabilities, and slightly higher gross margins
resulting from the installation and service of commercial and industrial
controls systems at two companies. These increases in gross profit margin were
partially offset by lower than normal margins on certain "design and build"
installation projects, which were undertaken as a strategic enhancement to the
Company's portfolio of "design and build" projects.

PRO FORMA COMBINED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma
combined SG&A, excluding goodwill amortization and non-recurring acquisition
related costs, increased $14.2 million, or 34.1%, to $56.0 million for 1997.
Approximately $2.5 million of this increase was attributable to the Purchased
Companies, which are not included in 1996 results. The Company's establishment
as a public company in 1997 resulted in $2.2 million of corporate office and
management expenses in 1997, which were not included in 1996 as the Company was
not yet public. The remaining increases in SG&A were due principally to
additions of personnel and infrastructure to support growth in revenues.

PRO FORMA COMBINED OTHER INCOME (EXPENSE), NET. Pro forma combined other
expense, net decreased due to the increase in interest income of $0.7 million
resulting from the temporary investment of the unused net proceeds from the IPO.

HISTORICAL RESULTS OF OPERATIONS

The following historical consolidated financial information represents the
operations of the Company restated for the effects of the Pooled Companies for
all periods presented and the Founding Companies and Purchased Companies from
their respective date of acquisitions. The historical financial statements of
the Company have not been retroactively restated to give effect to the
operations of certain of the Pooled Companies which are considered immaterial
poolings. The following historical financial information for 1997 includes the
non-recurring, non-cash Compensation Charge of $11.6 million recorded by the
Company in the first quarter of 1997, as well as non-recurring
acquisition-related costs, and reflects normal recurring corporate costs of the
Company subsequent to the IPO. This Compensation Charge is not deductible for
federal and state income taxes.

HISTORICAL THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- --------------------
1995 1996 1997 1997
-------------------- -------------------- -------------------- --------------------
(IN THOUSANDS) (UNAUDITED)

Revenues............................. $ 65,167 100.0% $ 96,296 100.0% $ 237,709 100.0% $ 26,401 100.0%
Cost of services..................... 48,743 74.8 72,123 74.9 171,941 72.3 19,809 75.0
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 16,424 25.2 24,173 25.1 65,768 27.7 6,592 25.0
Selling, general and administrative
expenses........................... 14,707 22.6 19,097 19.8 59,386 25.0 19,486 73.8
Goodwill amortization................ -- -- -- -- 1,851 0.8 -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss).............. 1,717 2.6 5,076 5.3 4,531 1.9 (12,894) (48.8)
Other income (expense), net.......... 79 0.1 (69) (0.1) 69 0.0 4 --
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before taxes........... 1,796 2.7 5,007 5.2 4,600 1.9 (12,890) (48.8)
Provision (benefit) for income
taxes.............................. 503 -- 1,417 -- 7,430 -- (749) --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................... $ 1,293 2.0% $ 3,590 3.7% $ (2,830) (1.2)% $ (12,141) (46.0)%
========= ========= ========= ========= ========= ========= ========= =========

1998
--------------------

Revenues............................. $ 117,838 100.0%
Cost of services..................... 89,410 75.9
--------- ---------
Gross profit......................... 28,428 24.1
Selling, general and administrative
expenses........................... 20,695 17.6
Goodwill amortization................ 1,170 1.0
--------- ---------
Operating income (loss).............. 6,563 5.6
Other income (expense), net.......... (531) (0.5)
--------- ---------
Income (loss) before taxes........... 6,032 5.1
Provision (benefit) for income
taxes.............................. 2,654 --
--------- ---------
Net income (loss).................... $ 3,378 2.9%
========= =========

THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997

REVENUES. Revenues increased $91.4 million, or 346.3%, from $26.4 million
for the three months ended March 31, 1997, to $117.8 million for the three
months ended March 31, 1998. The increase in revenues was primarily due to the
acquisition of the Founding Companies and Purchased Companies.

GROSS PROFIT. Gross profit increased $21.8 million, or 331.2%, from $6.6
million for the three months ended March 31, 1997 to $28.4 million for the three
months ended March 31, 1998. This increase was primarily due to the acquisitions
described above. As a percentage of revenues, gross profit decreased from 25.0%
for the three months ended March 31, 1997 to 24.1% for the three months ended
March 31, 1998, as a result of two principal factors. Acquisitions during the
first quarter of 1998 included companies with significant amounts of project
activity at gross margins somewhat lower than the Company's historical average.
In addition, the Company continued to realize lower than normal gross margins on
certain "design and build" installation projects which were undertaken as a
strategic enhancement to the Company's portfolio of "design and build"
projects.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A, excluding goodwill
amortization, for the three months ended March 31, 1997 includes the $3.0
million Compensation Differential which will be eliminated prospectively.
Additionally, the Company recorded the Compensation Charge of $11.6 million in
the first quarter of 1997. Excluding the Compensation Differential, the
Compensation Charge and goodwill

amortization, SG&A increased $15.7 million, to $20.7 million for the three
months ended March 31, 1998. Most of this increase was related to the Founding
Companies and Purchased Companies acquired since the IPO along with corporate
office and management expenses associated with the Company's establishment as a
public company.

OTHER INCOME (EXPENSE), NET Other expense, net increased to $0.5 million,
primarily due to the increase in interest expense related to the acquisition of
the Purchased Companies in 1998.

1997 COMPARED TO 1996

REVENUES. Revenues increased $141.4 million, or 146.9%, to $237.7 million
for 1997. The acquisition of the Founding Companies on July 2, 1997, and the
acquisition of the Purchased Companies in the second half of 1997, accounted for
88.2% of the 1997 increase in revenues. The remaining increase in revenues was
primarily attributable to increased demand for the Company's commercial service
capabilities in the Cincinnati market.

GROSS PROFIT. Gross profit increased $41.6 million, or 172.1%, to $65.8
million in 1997. The acquisition of the Founding Companies and Purchased
Companies accounted for 81.5% of the increase. Gross profit as a percentage of
revenues increased as a result of the Founding Companies' positive impact on the
overall gross profit percentage in the second half of 1997 and an overall
improvement from the Pooled Companies compared to the prior year. The Company's
operations in Mobile, Alabama contributed the largest margin increase among the
Pooled Companies due to higher margins associated with its specialized "design
and build" HVAC installation capabilities.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A, excluding goodwill
amortization, increased $40.3 million, or 211.0%, to $59.4 million for 1997.
Approximately one-half of this increase was related to the acquisition of the
Founding and Purchased Companies. Historical SG&A for 1997 included the non-
recurring, non-cash Compensation Charge of $11.6 million recorded by the Company
in the first quarter of 1997. The Company's establishment as a public company in
1997 resulted in $2.8 million of corporate office and management expenses in
1997, which were not included in 1996 as the Company was not yet public.
Approximately $0.6 million of SG&A represented non-recurring acquisition costs
related to the Pooled Companies. The remaining increase related to increases in
personnel and infrastructure to support growth at certain of the Pooled
Companies. SG&A in 1997 does not reflect the reduction in management
compensation and benefits as a result of the acquisitions of the Pooled
Companies.

1996 COMPARED TO 1995

REVENUES. Revenues increased $31.1 million, or 47.8%, to $96.3 million in
1996. Certain Pooled Companies that were not included in 1995 results of
operations generated $12.3 million, or 39.5%, of the increase. The remaining
increase in revenues was primarily attributable to increased demand for the
Company's commercial service capabilities in the Memphis market and commercial
installation service capabilities in the Mobile, Alabama market.

GROSS PROFIT. Gross Profit increased $7.7 million, or 47.2%, to $24.2
million for 1996. Certain Pooled Companies that were not included in 1995
results of operations generated $4.1 million, or 52.7%, of the increase. The
remaining increase in gross profit was primarily a result of increased demand
for the Company's commercial service capabilities in the Memphis market area and
an improvement in gross profit margins in the Cincinnati operations.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A, excluding goodwill
amortization, increased $4.4 million, or 29.8%, to $19.1 million for 1996 from
$14.7 million for 1995. Certain Pooled Companies representing $2.3 million, or
52.6%, of the increase was generated by Pooled Companies not included in 1995
results of operations. Most of the remaining increase was due to the addition of
personnel in the Cincinnati market area to capitalize on revenue growth
opportunities. SG&A for the Pooled Companies in 1995 and 1996 reflects the
compensation and related benefits those owners received from their respective
businesses prior to acquisition by the Company.

LIQUIDITY AND CAPITAL RESOURCES -- HISTORICAL

For the three months ended March 31, 1998, net cash used in operating
activities was $4.0 million due to a decrease in accounts payable of $4.3
million and an increase in accounts receivables of $1.6 million. Accounts
payable balances decreased from the date of acquisition at various locations as
certain companies took advantage of the consolidated cash management system to
receive cash discounts for early payments. Cash provided from operations for the
three months ended March 31, 1997 was $1.1 million, primarily as a result of an
increase in accounts payable.

Cash used in investing activities was $16.9 million for the three months
ended March 31, 1998, primarily in connection with the acquisition of the
Acquired Companies for $15.4 million, net of cash acquired. Cash flows used in
investing activities for the three months ended March 31, 1997 was $0.4 million,
primarily for additions to equipment.

Cash provided by financing activities for the three months ended March 31,
1998 was $12.0 million and was primarily attributable to the net borrowings of
long-term debt. Net cash provided in financing activities for the three months
ended March 31, 1997 was $0.5 and was primarily attributable to borrowings of
long-term debt.

At March 31, 1998, working capital was $64.8 million and total debt
outstanding was $50.9 million.

Net cash used in operating activities was $1.7 million in 1997 due to a
decrease in accounts payable of $3.8 million and an increase in accounts
receivables of $10.9 million. Accounts payable balances decreased from the date
of acquisition as various Acquired Companies took advantage of the Company's
newly-installed consolidated cash management system to receive cash discounts
for early payments. Cash provided by operating activities was $3.3 million and
$1.0 million, in 1996 and 1995, respectively, primarily as a result of net
income for the years.

Cash used in investing activities was $57.5 million for 1997, primarily as
a result of the acquisition of the Founding Companies and Purchased Companies
for $54.1 million, net of cash acquired. Cash used in investing activities was
$1.8 million and $0.7 million, in 1996 and 1995, respectively, primarily for
additions to equipment.

Cash provided by financing activities for 1997 was $67.7 million and was
primarily attributable to the $79.9 million of net proceeds received by the
Company from the IPO, partially offset by a net reduction in debt of $10.7
million in the second half of 1997. Of these net proceeds, $45.3 million was
used to pay the cash portion of the purchase prices for the Founding Companies.
Net cash used in financing activities in 1996 was $0.8 million due to a net
reduction in outstanding debt. Net cash provided by financing activities in 1995
was $1.1 million due to a net increase in outstanding debt of $1.3 million.

Subsequent to March 31, 1998, and through May 12, 1998, the Company
completed the acquisition of 13 companies for approximately $29.6 million in
cash, 1,495,648 shares of Common Stock and approximately $15.4 million in
convertible subordinated notes. These acquisitions were accounted for as
purchase transactions.

In July 1997, the Company entered into the Credit Facility with Bank One,
Texas, N.A. which was amended and restated in September 1997 primarily to
provide for additional banks to lend to the Company. The Credit Facility was
further amended in April 1998 to increase borrowing capacity and to provide for
additional banks to lend to the Company. The Credit Facility provides the
Company with an unsecured revolving line of credit of $175 million. The Company
has a choice of two interest rate options when borrowing under the Credit
Facility. Under one option, the interest rate is determined based on the higher
of the Federal Funds Rate plus one-half percentage point or the bank's prime
rate. Under the other interest rate option, borrowings bear interest based on
designated short-term Eurodollar rates (which generally approximate the London
Interbank Offer Rate or LIBOR) plus 0.75 to 1.5 percentage points, depending on
the ratio of the Company's debt to earnings before interest, taxes, depreciation
and amortization ("EBITDA") for the preceding twelve months. For purposes of
this ratio, EBITDA may include the preceding twelve months' results for any
companies acquired during the last year. In addition, commitment fees of 0.125%
to 0.325% per annum, also depending on the ratio of debt to EBITDA, are payable
on the unused portion of

the Credit Facility. The Credit Facility prohibits the payment of dividends by
the Company without lender's approval and requires the Company to comply with
certain financial covenants. The Credit Facility expires on April 14, 2001, at
which time, all amounts outstanding under the facility are due. As of December
31, 1997 and March 31 1998, $15.3 million and $43.8 million, respectively, was
outstanding under the Credit Facility. As of May 12, 1998, $75.6 million was
outstanding under the Credit Facility. The Company intends to reduce the balance
outstanding under the Credit Facility with the net proceeds to the Company from
this offering.

The Company intends to pursue additional acquisition opportunities, the
cash portion of which will be financed with borrowings under the Credit Facility
as well as cash flow from operations. The Company anticipates that cash flow
from operations will provide cash in excess of the Company's normal working
capital needs, debt service requirements and planned capital expenditures for
equipment. Should the Company accelerate or revise its acquisition program, the
Company may need to seek financing in addition to the Credit Facility through
the public or private sale of equity or debt securities. There can be no
assurance that the Company can secure such financing if and when needed, or that
such financing will be available on terms the Company deems acceptable.

YEAR 2000

The Company is currently implementing a Year 2000 program to ensure that
the Company's computer systems and applications will function properly beyond
1999. The Company expects its Year 2000 date conversion program will be
successfully completed on a timely basis. There can, however, be no assurance
that this will be the case. The Company does not expect to incur significant
expenditures to address this issue. The ability of third parties with whom the
Company transacts business to address adequately their Year 2000 issues is
outside of the Company's control. There can be no assurance that the failure of
the Company or such third parties to address adequately their respective Year
2000 issues will not have a material adverse effect on the Company's financial
condition or results of operations.

SEASONALITY AND CYCLICALITY

The HVAC industry is subject to seasonal variations. Specifically, the
demand for new installation and replacement is generally lower during the winter
months due to reduced construction activity during inclement weather and less
use of air conditioning during the colder months. Demand for HVAC services is
generally higher in the second and third calendar quarters due to increased
construction activity and increased use of air conditioning during the warmer
months. Accordingly, the Company expects its revenues and operating results
generally will be lower in the first and fourth calendar quarters.

Historically, the construction industry has been highly cyclical. As a
result, the Company's volume of business may be adversely affected by declines
in new installation projects in various geographic regions of the United States.

BUSINESS

The Company is a leading national provider of comprehensive HVAC
installation, as well as maintenance, repair and replacement services. Founded
in December 1996, the Company is consolidating the fragmented commercial and
industrial HVAC markets, and performs most of its services within manufacturing
plants, office buildings, retail centers, apartment complexes, and healthcare,
education and government facilities. In addition to standard HVAC services, the
Company also provides specialized applications such as process cooling, control
systems, electronic monitoring and process piping. Certain locations also
perform related services such as electrical and plumbing. Approximately 94% of
the Company's pro forma combined 1997 revenues were derived from commercial and
industrial customers.

On July 2, 1997, the Company completed the IPO and simultaneously acquired
the 12 Founding Companies. These companies had locations in ten states and
annualized revenues in 1996 of $167.5 million. Subsequent to the IPO and through
May 12, 1998, the Company acquired 51 HVAC and complementary businesses. These
Acquired Companies had locations in 13 additional states and annualized revenues
of $420 million. These acquisitions included 12 "tuck-in" operations that have
been or currently are being integrated with existing Company locations.

INDUSTRY OVERVIEW

Based on available industry data, the Company believes that the HVAC
industry is highly fragmented with over 40,000 companies, most of which are
small, owner-operated businesses with limited access to capital for
modernization and expansion. The HVAC industry as a whole is estimated to
generate annual revenues in excess of $75 billion, over $35 billion of which is
in the commercial and industrial markets. HVAC systems have become a necessity
in virtually all commercial and industrial buildings as well as homes. Because
most commercial buildings are sealed, HVAC systems provide the primary method of
circulating fresh air in such buildings. Older industrial facilities often have
poor air quality as well as inadequate air conditioning, and older HVAC systems
result in significantly higher energy costs than do modern systems. In many
instances, the replacement of an aging system with a modern, energy-efficient
system will significantly reduce a building's operating costs while also
improving air quality and the effectiveness of the HVAC system. These factors
are causing facility owners to consider replacement of older systems.

Growth in the HVAC industry is being positively affected by a number of
factors, particularly (i) the growth or aging of the installed base, (ii) the
increasing efficiency, sophistication and complexity of HVAC systems and (iii)
the increasing standards relating to indoor air quality, and the reduction or
elimination of the refrigerants commonly used in older HVAC systems. These
factors are expected to increase demand for the reconfiguration or replacement
of existing HVAC systems. The Company believes that these factors also mitigate
the effect on the HVAC industry of the cyclicality inherent in the traditional
construction industry.

The Company believes that the majority of business owners in the HVAC
industry have limited access to capital for expansion of their businesses and
that relatively few have attractive liquidity options. In addition, the
increasing complexity of HVAC systems has led to a need for better trained
technicians to install, monitor and service these systems. The cost of
recruiting, training and retaining a sufficient number of qualified technicians
makes it more difficult for smaller HVAC companies to expand their businesses.
The Company believes that significant opportunities exist for a
well-capitalized, national company to excel in the HVAC industry.

The HVAC industry can be broadly divided into the installation segment and
the maintenance, repair and replacement segment.

INSTALLATION SEGMENT. The installation segment consists of "design and
build" and "plan and spec" projects. In "design and build" projects, the
commercial HVAC firm is responsible for designing, engineering and installing a
cost-effective, energy-efficient system customized to the specific needs of the
building owner. Costs and other project terms are normally negotiated between
the building owner or its representative and the HVAC firm. Firms which
specialize in "design and build" projects generally have

specially-trained HVAC engineers, CAD/CAM design systems and in-house sheet
metal and prefabrication capabilities. These firms utilize a consultative
approach with customers and tend to develop long-term relationships with
building owners and developers, general contractors, architects and property
managers. "Plan and spec" installation refers to projects where an architect
or a consulting engineer designs the HVAC systems and the installation project
is "put out for bid." The Company believes that "plan and spec" projects
usually take longer to complete than "design and build" projects because the
preparation of the system design by a third party and resulting bid process
often take months to complete. Furthermore, in "plan and spec" projects, the
HVAC firm is not responsible for project design and any changes must be approved
by several parties, thereby increasing overall project time and cost.
Approximately 55% of the Company's pro forma combined 1997 revenues related to
installation services, and a majority of revenues from installation projects
were performed on a "design and build" basis.

MAINTENANCE, REPAIR AND REPLACEMENT SEGMENT. This segment includes the
maintenance, repair, replacement, reconfiguration and monitoring of previously
installed HVAC systems and controls. The growth and aging of the installed base
of HVAC systems and the increasing demand for more efficient, sophisticated and
complex systems and controls have fueled growth in this segment. The increasing
sophistication and complexity of these HVAC systems is leading many commercial
and industrial building owners and property managers to increase attention to
maintenance and to outsource maintenance and repair, often through service
agreements with HVAC service providers. In addition, increasing restrictions are
being placed on the use of certain types of refrigerants used in HVAC systems,
which, along with indoor air quality concerns, may increase demand for the
reconfiguration and replacement of existing HVAC systems. State-of-the-art
control and monitoring systems feature electronic sensors and microprocessors.
These systems require specialized training to install, maintain and repair, and
the typical building engineer has not received this training. Increasingly, HVAC
systems in commercial and industrial buildings are being remotely monitored
through PC-based communications systems to improve energy efficiency and
expedite problem diagnosis and correction. Approximately 45% of the Company's
pro forma combined 1997 revenues related to maintenance, repair and replacement
services.

STRATEGY

The Company has implemented an operating strategy that emphasizes continued
internal growth and expansion through acquisitions.

OPERATING STRATEGY. The key elements of the Company's strategy for
improving operations are:

FOCUS ON COMMERCIAL AND INDUSTRIAL MARKETS. The Company focuses
principally on the commercial and industrial markets with particular
emphasis on the "design and build" installation segment and the
maintenance, repair and replacement segments. The Company believes that the
commercial and industrial HVAC markets are attractive because of their
growth opportunities, diverse customer base, reduced weather exposure as
compared to residential markets, attractive margins and potential for
long-term relationships with building owners, property managers, general
contractors and architects.

OPERATE ON A DECENTRALIZED BASIS. The Company manages its
subsidiaries on a decentralized basis, with local management maintaining
responsibility for day-to-day operations, profitability and growth. While
it maintains strong operating and financial controls, the Company believes
that its decentralized operating structure allows local management to
capitalize on existing knowledge of local and regional markets and on
customer relationships.

ACHIEVE OPERATING EFFICIENCIES. The Company believes there are
opportunities to achieve operating efficiencies and cost savings through
purchasing economies and the adoption of "best practices" operating
programs. The Company has begun and will continue to use its growing
purchasing power to gain volume discounts on products and services such as
HVAC components, raw materials, service vehicles, advertising, bonding,
insurance and benefits. The Company has national purchasing agreements with
two principal manufacturers of HVAC equipment and with various other
suppliers and service providers. Moreover, the Company has commenced
reviewing its operations at

the local and regional operating levels to identify those "best
practices" that can be successfully implemented throughout its operations.

INTERNAL GROWTH. A key component of the Company's strategy is to continue
the internal growth at the Company's subsidiaries. The key elements of the
Company's internal growth strategy are:

CAPITALIZE ON SPECIALIZED TECHNICAL AND MARKETING STRENGTHS. The
Company believes it will be able to continue to expand the services it
offers in its markets by leveraging the specialized technical and marketing
strengths of individual Acquired Companies. As examples, the Company has
utilized the technical expertise and corresponding customer relationships
from certain operations to obtain new assignments for other Acquired
Companies involving work for a national private corrections company, a
large, recognized hotel chain, and a major auto parts distributor. The
Company also believes its growing geographical coverage will enable it to
serve existing customers' needs in new regions that may have been beyond
the service area of the Company's operations that originated the existing
customer relationship. In addition, a number of Acquired Companies
currently focus primarily on installation and, therefore, have only limited
maintenance, repair and replacement operations. The Company believes there
are significant opportunities for these Acquired Companies to provide
maintenance, repair and replacement services, particularly by offering
these services to customers for whom those companies have already designed
and built systems. Several of the Acquired Companies have specific
expertise in HVAC control and monitoring systems, process cooling,
replacement and other services.

ESTABLISH REGIONAL AND NATIONAL MARKET COVERAGE. The Company believes
that significant demand exists from large regional and national companies
to utilize the services of a single HVAC service company capable of
providing comprehensive commercial and industrial services on a regional or
national basis. Many of the Acquired Companies already provide local or
regional coverage to companies with nationwide locations, such as
commercial real estate developers and managers, retailers and
manufacturers. The Company believes it can expand these existing
relationships as it develops a regional and nationwide network to provide
these customers with a single source for all of their HVAC needs to promote
consistent service, improve control and reduce cost. As examples, the
Company has combined resources of certain of its Acquired Companies to
obtain multi-location service agreements for one category superstore
retailer in Colorado, another in the Mid-Atlantic states, as well as for a
major telecommunications company in Ohio. In addition, the Company has
initiated two joint marketing and service alliances involving regional
energy utilities and certain of its Acquired Companies. Under these
alliances, the Acquired Companies and the energy utilities jointly market
and provide products and services to residential and commercial customers
that are intended to improve HVAC system energy efficiency and overall
performance. The Company is pursuing similar alliance opportunities
elsewhere in the country.

ACQUISITIONS. Based on available industry data, the Company believes the
HVAC industry is highly fragmented, with small, owner-operated businesses with
limited capital resources outnumbering larger enterprises. The key elements of
the Company's acquisition strategy are:

ENTER NEW GEOGRAPHIC MARKETS. In new markets, the Company targets one
or more leading local or regional companies providing HVAC services with
the customer base, technical skills and infrastructure necessary to be a
core business into which other HVAC and/or complementary service operations
can be consolidated or "tucked-in." The Company chooses businesses that
are located in attractive markets, are financially stable, are experienced
in the industry and have a strong management team. Since the IPO, the
Company has expanded its locations from 10 to 23 states.

EXPAND WITHIN EXISTING MARKETS. Once the Company has entered a
market, it seeks to acquire other well-established HVAC businesses to
expand its market penetration and range of services offered. The Company
also pursues "tuck-in" acquisitions of smaller companies, whose
operations can be integrated into an existing operation to leverage the
existing infrastructure of the previously Acquired Company. Through May 12,
1998, the Company has acquired 12 businesses that have been or currently
are being integrated into existing operations.

ACQUIRE COMPLEMENTARY BUSINESSES. The Company opportunistically
acquires companies providing complementary services to the same customer
base, such as commercial and industrial control systems, electrical and
plumbing services. This is intended to enable the Company to offer, on a
comprehensive basis and from a single provider, HVAC, mechanical and
electrical services in selected markets.

ACQUISITION PROGRAM

The Company believes it is regarded by acquisition candidates as an
attractive acquirer because of (i) the Company's strategy of becoming a
national, comprehensive and professionally managed HVAC service provider focused
on commercial and industrial markets, (ii) the Company's decentralized operating
strategy, (iii) the Company's increased visibility and access to financial
resources as a public company, (iv) the potential for increased profitability
due to certain centralized administrative functions, enhanced systems
capabilities and access to increased marketing resources, and (v) the potential
for the owners of the businesses being acquired to participate in the Company's
planned internal growth and growth through acquisitions, while realizing
liquidity.

As consideration for acquisitions, the Company typically will use various
combinations of its Common Stock, cash and notes. The consideration for each
future acquisition will vary on a case-by-case basis. The major factors in
establishing the purchase price for each acquisition include historical
operating results, future prospects of the acquiree and the ability of a
business to complement the services offered by the Company.

OPERATIONS AND SERVICES PROVIDED

The Company provides a wide range of installation, maintenance, repair and
replacement services for HVAC and related systems in commercial, industrial and,
to a lesser extent, residential properties. Daily operations are managed on a
local basis by the management team at each Acquired Company. In addition to
senior management, Acquired Companies' personnel generally include design
engineers, sales personnel, customer service personnel, installation service
technicians, sheet metal and prefabrication technicians, estimators and
administrative personnel. The Company manages the Acquired Companies on a
decentralized basis, with local management maintaining responsibility for
day-to-day operating decisions. The Company is in the process of centralizing
certain administrative functions to enable the management of the Acquired
Companies to increase focus on pursuing new business opportunities and improving
operating efficiencies. Administrative functions which the Company has begun to
centralize include Company-wide training and safety programs, insurance
programs, cash management programs, purchasing programs and employee benefits
programs.

INSTALLATION SEGMENT. The Company's installation business comprised
approximately 55% of the Company's 1997 pro forma combined revenues. This
segment consists of the design, engineering, integration, installation and
start-up of HVAC and related systems. The commercial and industrial installation
services performed by the Company consist primarily of "design and
build"systems for manufacturing plants, office buildings, retail centers,
apartment complexes, and health care, education and government facilities. In a
"design and build" project, the customer typically has an overall design for
the facility prepared by an architect or a consulting engineer who then enlists
the Company's engineering personnel to prepare a specific design for the HVAC
system. The Company determines the needed capacity, energy efficiency and type
of controls that best suit the proposed facility. The Company's engineer then
estimates the amount of time, labor, materials and equipment needed to build the
specified system. Materials and equipment for a typical commercial or industrial
project include ductwork, compressors,

blowers, chillers, cooling towers, air handling equipment and the associated
pumps and piping necessary to complete the system. The Company utilizes CAD/CAM
systems in the design and engineering phases of the project to calculate the
material and labor costs of the project. The drawings are prepared in a format
appropriate for submission to local building inspectors. The final design,
terms, price and timing of the project are then negotiated with the customer or
its representatives, after which any necessary modifications are made to the
system.

Once an agreement has been reached, the Company orders the necessary
materials and equipment for delivery to meet the project schedule. In most
instances, the Company fabricates in its own facilities the ductwork and piping
and assembles certain components for the system based on the mechanical drawing
specifications, thereby eliminating the need to subcontract ductwork or piping
fabrication. The Company's CAD/CAM systems are capable of automatically cutting
ductboard, sheet metal and piping, thereby reducing the amount of labor
necessary to produce the ductwork and piping for the system. Project specific
components are then fabricated at the Company's facilities in sections small
enough to be transported to the job site. This practice enables the Company to
limit the amount of fieldwork required for installation and reduce the labor
associated with the installation process and, therefore, meet the shorter time
requirements increasingly demanded by commercial and industrial customers. The
Company installs the system at the project site, working closely with the
general contractor. Most commercial and industrial installation projects last
from two weeks to one year and generate revenues from $25,000 to $2,000,000 per
project. These projects are generally billed periodically as costs are incurred
and, in most cases, with a 10% retainage held back until completion and
successful start-up of the HVAC system.

The Company also performs selected "plan and spec" installation services
when a bidder prequalification process has been used by the customer to limit
the number of potential bidders for an attractive project. The Company may bid
on more of these projects when "design and build" projects are in lower demand
and when additional on-the-job training is needed for apprentice or
less-experienced technicians.

The Company also installs process cooling systems, control and monitoring
systems and industrial process piping. Process cooling systems are utilized
primarily in industrial facilities to provide heating and/or cooling to precise
temperature and climate standards for products being manufactured and for the
manufacturing equipment. Control systems are used in HVAC and process cooling
systems to maintain pre-established temperature or climate standards for
commercial or industrial facilities. These systems use direct digital technology
integrated with computer terminals. HVAC control systems are capable not only of
controlling a facility's entire HVAC system, often on a room-by-room basis, but
can be programmed to integrate energy management, security, fire, card key
access, lighting and overall facility monitoring. This monitoring can be
performed on-site or remotely through a PC-based communications system. The
monitoring system will communicate an exception when the HVAC system is
operating outside pre-established parameters. Diagnosis of potential problems
can be performed from the computer terminal which often can remotely adjust the
control system. Industrial process piping is utilized in manufacturing
facilities to convey required raw material, support utilities and finished
products.

MAINTENANCE, REPAIR AND REPLACEMENT SEGMENT. The Company's maintenance,
repair and replacement segment comprised approximately 45% of the Company's 1997
pro forma combined revenues, and includes the maintenance, repair, replacement,
reconfiguration and monitoring of HVAC systems and industrial process piping.
Approximately two-thirds of the Company's maintenance, repair and replacement
segment revenues were derived from reconfiguring existing HVAC systems for
commercial and industrial customers. Reconfiguration often utilizes consultative
expertise similar to that provided in the "design and build" installation
market. The Company believes that the reconfiguration of an existing system
results in a more cost-effective, energy-efficient system that better meets the
specific needs of the building owner. The reconfiguration also enables the
Company to utilize its design and engineering personnel as well as its sheet
metal and pre-fabrication facilities.

Maintenance and repair services are provided either in response to service
calls or pursuant to a service agreement. Service calls are coordinated by
customer service representatives or dispatchers that use computer and
communication technology to process orders, arrange service calls, communicate
with

customers, dispatch technicians and invoice customers. Service technicians work
from service vehicles equipped with commonly used parts, supplies and tools to
complete a variety of jobs.

Commercial and industrial service agreements usually have terms of one to
three years, with automatic annual renewals, and typically provide fees from
$3,000 to $20,000 per year. The Company also provides remote monitoring of
temperature, pressure, humidity and air flow for HVAC systems. If the system is
not operating within the specifications set forth by the customer and cannot be
remotely adjusted, a service crew is dispatched to analyze and repair the
system.

SOURCES OF SUPPLY

The raw materials and components used by the Company include HVAC system
components, ductwork, steel, sheet metal and copper tubing and piping. These raw
materials and components are generally available from a variety of domestic or
foreign suppliers at competitive prices. Delivery times are typically short for
most raw materials and standard components, but during periods of peak demand,
may extend to a month or more. Chillers for large units typically have the
longest delivery time and generally have lead times of up to six months. The
major components of HVAC systems are compressors and chillers that are
manufactured primarily by York Heating and Air Conditioning Corporation
("York"), Carrier Corporation and Trane Air Conditioning Company. The major
suppliers of control systems are Honeywell Inc., Johnson Controls Inc., York and
Andover Control Corporation. The Company does not have any significant contracts
guaranteeing the Company a supply of raw materials or components.

SALES AND MARKETING

The Company has a diverse customer base, with no single customer accounting
for more than 5% of pro forma combined 1997 revenues. Management and a dedicated
sales force at the Acquired Companies have been responsible for developing and
maintaining successful long-term relationships with key customers. Customers of
the Acquired Companies generally include building owners and developers and
property managers, as well as general contractors, architects and consulting
engineers. The Company intends to continue its emphasis on developing and
maintaining long-term relationships with its customers by providing superior,
high-quality service in a professional manner. Moreover, the dedicated sales
force will receive additional technical and sales training to enhance the
comprehensive selling skills necessary to serve the HVAC needs of their
customers.

The Company also intends to capitalize on cross-marketing and business
development opportunities that management believes will be available to the
Company as a regional or national provider of comprehensive commercial and
industrial HVAC and related services. Management believes that it will be able
to leverage the diverse technical and marketing strengths of individual Acquired
Companies to expand the services offered in other local markets. Eventually, the
Company intends to offer comprehensive services from many of its regional
locations.

EMPLOYEES

As of April 30, 1998, the Company had 4,953 employees, including 270
management personnel, 3,983 engineers and service and installation technicians,
199 sales personnel and 501 administrative personnel. As it executes its
internal growth and acquisition strategies, the Company expects the number of
employees to increase. Certain of the Acquired Companies have collective
bargaining agreements that cover, in the aggregate, approximately 529 employees.
The Company has not experienced any strikes or work stoppages and believes its
relations with employees covered by collective bargaining agreements are good.

RECRUITING, TRAINING AND SAFETY

The Company's continued success will depend, in part, on its ability to
continue to attract, retain and motivate qualified service technicians, field
supervisors and project managers. The Company believes that its success in
retaining qualified employees will be based on the quality of its recruiting,
training, compensation, employee benefits programs and opportunities for
advancement. The Company recruits at local technical schools and community
colleges where students focus on learning basic HVAC and related

skills. Additionally, the Company provides on-the-job training, apprenticeship
programs, attractive benefit packages, steady employment and opportunities for
advancement.

The Company intends to establish "best practices"safety programs
throughout its operations to ensure that all technicians comply with safety
standards established by the Company and federal, state and local laws and
regulations. Additionally, the Company intends to implement a "best
practices"safety program to provide employees with incentives to improve safety
performance and decrease workplace accidents. The Company intends to implement
job site safety meetings which will provide additional guidance in safety
related matters such as proper lifting techniques and eye safety in an effort to
reduce the number of preventable accidents. The Company's employment screening
process seeks to determine that prospective employees have the requisite skills,
sufficient background references and acceptable driving records, if applicable.

RISK MANAGEMENT, INSURANCE AND LITIGATION

The primary risks in the Company's operations are bodily injury, property
damage and injured workers' compensation. The Company has obtained and intends
to maintain liability insurance for bodily injury and third party property
damage which it considers sufficient to insure against these risks, subject to
self-insured amounts.

The Company is subject to certain claims and lawsuits arising in the normal
course of business and maintains various insurance coverages to minimize
financial risk associated with these claims. The Company has provided accruals
for probable losses and legal fees associated with certain of these actions in
its consolidated financial statements. In the opinion of management, uninsured
losses, if any, resulting from the ultimate resolution of these matters will not
have a material effect on the Company's financial position or results of
operations.

The Company's subsidiaries typically warrant labor for the first year after
installation on new HVAC systems and pass through to the customer manufacturers'
warranties on equipment. The Company's subsidiaries generally warrant labor for
30 days after servicing existing HVAC systems. The Company does not expect
warranty claims to have a material adverse effect on its financial position or
results of operations.

COMPETITION

The HVAC industry is highly competitive. The Company believes that
purchasing decisions in the commercial and industrial markets are based on (i)
long-term customer relationships, (ii) quality, timeliness and reliability of
services provided, (iii) competitive price, (iv) range of services provided and
(v) scale of operation. The Company believes its strategy of becoming a leading
national provider of comprehensive HVAC installation services as well as
maintenance, repair and replacement of HVAC systems directly addresses these
factors. Specifically, the Company's strategy to focus on the highly
consultative "design and build" installation segment and the maintenance,
repair and replacement segment, as well as its strategy to operate on a
decentralized basis, should promote the development and strengthening of
long-term customer relationships. In addition, the Company's focus on
attracting, training and retaining quality employees by utilizing professionally
managed recruiting, training and benefits programs should allow it to offer high
quality, comprehensive HVAC services at a competitive price.

Most of the Company's competitors are small, owner-operated companies that
typically operate in a limited geographic area. There are, however, several
public companies focused on providing HVAC services in some of the same service
lines provided by the Company. In addition, there are several private companies
attempting to consolidate HVAC companies on a regional or national basis. Also,
some HVAC equipment manufacturers and public utilities are active in the
maintenance, repair and replacement segment of the HVAC industry. Certain of the
Company's competitors and potential competitors may have greater financial
resources than the Company to finance acquisition and development opportunities,
to pay higher prices for the same opportunities or to develop and support their
own operations.

FACILITIES AND VEHICLES

All of the Company's facilities are leased. The Acquired Companies
collectively lease offices, warehouses and shop facilities at their various
locations. Leased premises range in size from 500 square feet to over 50,000
square feet. The Company believes that its facilities are sufficient for its
current needs.

The Company operates a fleet of various owned or leased service trucks,
vans and support vehicles. The Company believes that these vehicles generally
are well-maintained and adequate for its current operations. The Company expects
it will be able to purchase vehicles at lower prices due to its increased
purchasing volume.

GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS

The Company's operations are subject to various federal, state and local
laws and regulations, including; (i) licensing requirements applicable to
service technicians, (ii) building and HVAC codes and zoning ordinances, (iii)
regulations relating to consumer protection, including those governing
residential service agreements and (iv) regulations relating to worker safety
and protection of the environment. The Company believes it has all required
licenses to conduct its operations and is in substantial compliance with
applicable regulatory requirements. Failure of the Company to comply with
applicable regulations could result in substantial fines or revocation of the
Company's operating licenses.

Many state and local regulations governing the HVAC services trades require
permits and licenses to be held by individuals. In some cases, a required permit
or license held by a single individual may be sufficient to authorize specified
activities for all of the Company's service technicians who work in the state or
county that issued the permit or license. The Company intends to implement a
policy to ensure that, where possible, any such permits or licenses that may be
material to the Company's operations in a particular geographic region are held
by at least two Company employees within that region.

The Company's operations are subject to the federal Clean Air Act, as
amended (the "Clean Air Act"), which governs air emissions and imposes
specific requirements on the use and handling of chlorofluorocarbons ("CFCs")
and certain other refrigerants. Clean Air Act regulations require the
certification of service technicians involved in the service or repair of
equipment containing these refrigerants and also regulate the containment and
recycling of these refrigerants. These requirements have increased the Company's
training expenses and expenditures for containment and recycling equipment. The
Clean Air Act is intended ultimately to eliminate the use of CFCs in the United
States and to require alternative refrigerants to be used in replacement HVAC
systems. As a result, the number of conversions of existing HVAC systems which
utilize CFCs to systems using alternative refrigerants is expected to increase.

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth information concerning the Company's
directors, executive officers and key employees.

NAME AGE POSITION
- ---------------------------------------- --- ---------------------------------------------------------------

Fred M. Ferreira........................ 55 Chairman of the Board, Chief Executive Officer and President
Michael Nothum, Jr...................... 43 Executive Vice President, Chief Operating Officer and Director
J. Gordon Beittenmiller................. 39 Senior Vice President, Chief Financial Officer and Director
Reagan S. Busbee........................ 34 Senior Vice President
William George, III..................... 33 Vice President, General Counsel and Secretary
Brian S. Atlas.......................... 46 Chief Executive Officer of Atlas Comfort Services USA, Inc. and
Director
Thomas J. Beaty......................... 44 President of Accurate Air Systems, Inc., and Director
Robert R. Cook.......................... 43 President of Tech Heating and Air Conditioning, Inc., and
Director
Alfred J. Giardenelli, Jr............... 50 President of Eastern Heating & Cooling, Inc. and Director
Salvatore P. Giardina................... 48 Treasurer of F&G Mechanical Corporation and Director
Steven S. Harter........................ 35 Director
Charles W. Klapperich................... 51 President of Western Building Services, Inc. and Director
Samuel M. Lawrence, III................. 46 Chief Executive Officer of S. M. Lawrence Company Inc. and
Director
Larry Martin............................ 56 Director
John Mercadante, Jr..................... 53 Director
John C. Phillips........................ 56 President of Contract Service, Inc. and Director
Robert J. Powers........................ 58 President of Quality Air Heating & Cooling, Inc. and Director

Fred M. Ferreira has served as Chief Executive Officer and President of the
Company since January 1997, has been a director of the Company since March 1997
and has been Chairman of the Board and a Class I director since the IPO. Mr.
Ferreira was responsible for introducing the consolidation opportunity in the
commercial and industrial HVAC industry to Notre and was primarily responsible
for the organization of the Company. From 1995 through 1996, Mr. Ferreira was a
private investor. He served as Chief Operating Officer and a director of
Allwaste, Inc., a publicly-traded environmental services company ("Allwaste"),
from 1994 to 1995, and was President of Allwaste Environmental Services, Inc.,
the largest division of Allwaste, from 1991 to 1994. From 1989 to 1990, Mr.
Ferreira served as President of Allied Waste Industries, Inc., an environmental
services company. Prior to that time, Mr. Ferreira served as Vice
President -- Southern District, and in various other positions, with Waste
Management, Inc., an environmental services company. Mr. Ferreira also serves as
a director of LandCARE USA, Inc.

Michael Nothum, Jr. has been a Class II director of the Company since the
IPO and became its Chief Operating Officer and Executive Vice President in
January 1998. He has been employed by Tri-City Mechanical, Inc., a wholly-owned
subsidiary of the Company, since 1979, serving as President since 1992.

J. Gordon Beittenmiller has served as Senior Vice President and Chief
Financial Officer of the Company since February 1997, as Treasurer, Assistant
Secretary and director since March 1997 and has been a Class II director since
the IPO. From 1994 to February 1997, Mr. Beittenmiller was Corporate Controller
of Keystone International, Inc. ("Keystone"), a publicly-traded manufacturer
of industrial valves and actuators, and served Keystone in other financial
positions from 1991 to 1994. From 1987 to

1991, he was Vice President -- Finance of Critical Industries, Inc., a
publicly-traded manufacturer and distributor of specialized safety equipment.
From 1982 to 1987, he held various positions with Arthur Andersen LLP. Mr.
Beittenmiller is a certified public accountant.

Reagan S. Busbee has served as Senior Vice President of the Company since
January 1997. From 1992 through 1996, Mr. Busbee served as Vice President of
Chas. P. Young, Co., a financial printer and a wholly-owned subsidiary of
Consolidated Graphics Inc., a publicly-traded consolidator of the printing
industry. From August 1986 to May 1992, he was a certified public accountant
with Arthur Andersen LLP.

William George, III has served as Vice President, General Counsel and
Secretary of the Company since March 1997. From October 1995 to February 1997,
Mr. George was a Vice President and General Counsel of American Medical
Response, Inc., a publicly-traded consolidator of the healthcare transportation
industry. From September 1992 to September 1995, Mr. George practiced corporate
and antirtrust law at Ropes & Gray, a law firm.

Brian S. Atlas has been a Class I director of the Company since the IPO.
Since 1974, he has been employed by Atlas Comfort Services USA Inc., a
wholly-owned subsidiary of the Company, serving as its Chief Executive Officer
since 1983.

Thomas J. Beaty has been a Class II director of the Company since the IPO.
He founded and has served as President of Accurate Air Systems, Inc., a
wholly-owned subsidiary of the Company, since 1980.

Robert R. Cook has been a Class I director of the Company since the IPO. He
founded and has served as President of Tech Heating and Air Conditioning, Inc.,
a wholly-owned subsidiary of the Company, since 1979.

Alfred J. Giardenelli, Jr. has been a Class III director of the Company
since the IPO. He has been the President of Eastern Heating & Cooling, Inc., a
wholly-owned subsidiary of the Company, since 1982.

Salvatore P. Giardina has been a Class III director of the Company since
February 1998. He has been the Treasurer of F & G Mechanical Corporation, a
wholly-owned subsidiary of the Company, and its predecessor in interest, since
1976.

Steven S. Harter has been a director of the Company since December 1996 and
is the director (Class III) elected by the holders of the Restricted Common
Stock. Mr. Harter is President of Notre, a consolidator of highly fragmented
industries. Prior to becoming President of Notre, Mr. Harter was Senior Vice
President of Notre Capital Ventures, Ltd. ("Notre I") from June 1993 through
July 1995. From April 1989 to June 1993, Mr. Harter was Director of Mergers and
Acquisitions for Allwaste. From May 1984 to April 1989, Mr. Harter was a
certified public accountant with Arthur Anderson LLP. Mr. Harter also serves as
a director of Coach USA, Inc., Metals USA, Inc. and HomeUSA, Inc.

Charles W. Klapperich has been a Class I director of the Company since the
IPO. He founded and has served as President of Western Building Services, Inc.,
a wholly-owned subsidiary of the Company, since 1980.

Samuel M. Lawrence III has been a Class III director of the Company since
the IPO. He has been employed by S. M. Lawrence Company, Inc., a wholly-owned
subsidiary of the Company, since 1977, serving as its Chairman and Chief
Executive Officer since 1992.

Larry Martin has been a Class II director of the Company since the IPO. Mr.
Martin, a co-founder of Sanifill, Inc., an environmental service provider
("Sanifill"), has served as its President and Co-Chief Executive Officer since
October 1989. Prior to that time, Mr. Martin served in various positions in the
environmental services and contracting industries. Mr. Martin currently serves
on the Board of Directors of USA Waste Services, Inc., an environmental services
company.

John Mercadante, Jr. has been a Class I director of the Company since the
IPO. Mr. Mercadante co-founded Leisure Time Tours, Inc. in 1970 and was
President of Cape Transit Corp., both of which are motor coach companies that
were acquired by Coach USA, Inc. ("Coach") at the time of Coach's initial
public offering in May 1996. Mr. Mercadante has served as President and a
director of Coach since its initial public offering.

John C. Phillips has been a Class II director of the Company since the IPO.
He co-founded Contract Service, Inc., a wholly-owned subsidiary of the Company,
in 1969, serving as President and General Manager since 1969.

Robert J. Powers has been a Class III director of the Company since the
IPO. He has been employed by Quality Air Heating & Cooling, Inc., a wholly-owned
subsidiary of the Company, since 1977, serving as its President since 1988.

The Board of Directors is divided into Class I, Class II and Class III,
each of which is composed of five directors serving staggered three-year terms,
expiring at the annual meeting of stockholders in 1998, 1999 and 2000,
respectively. At each annual meeting of stockholders, one class of directors
will be elected for a full term of three years to succeed that class of
directors whose terms are expiring. All officers serve at the discretion of the
Board of Directors.

The Board of Directors has established an Audit Committee, a Compensation
Committee, an Acquisition Committee, a Small Acquisitions Committee and an
Executive Committee. The members of the Audit Committee and the Compensation
Committee are Messrs. Harter, Mercadante and Martin. The members of the
Acquisitions Committee are Messrs. Ferreira, Atlas, Beittenmiller, Harter and
Lawrence, and of the Small Acquisitions Committee are Messrs. Ferreira, Atlas
and Harter. The members of the Executive Committee are Messrs. Ferreira,
Beittenmiller, Powers, Mercadante and Nothum.

DIRECTORS' COMPENSATION

Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as directors. Each director
who is not an employee of the Company or one of its subsidiaries receives a fee
of $2,000 for attendance at each Board of Directors meeting and $1,000 for each
committee meeting (unless held on the same day as a Board of Directors meeting).
Directors are also reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board of Directors or committees thereof.

In addition, the Company's 1997 Non-Employee Directors' Stock Plan (the
"Directors' Plan"), which was adopted by the Board of Directors and approved
by the Company's stockholders in March 1997, provides for (i) the automatic
grant to each non-employee director serving at the consummation of the Company's
IPO of an option to purchase 10,000 shares, (ii) the automatic grant to each
non-employee director of an option to purchase 10,000 shares upon such person's
initial election as a director and (iii) an automatic annual grant to each
non-employee director of an option to purchase 5,000 shares at each annual
meeting of stockholders thereafter at which such director is re-elected or
remains a director, unless such annual meeting is held within three months of
such person's initial election as a director. All options have an exercise price
per share equal to the fair market value of the Common Stock on the date of
grant and are immediately vested and expire on the earlier of ten years from the
date of grant or one year after termination of service as a director. The
Directors' Plan also permits non-employee directors to elect to receive, in lieu
of cash directors' fees, shares or credits representing "deferred shares" at
future settlement dates, as selected by the director. The number of shares or
deferred shares received will equal the number of shares of Common Stock which,
at the date the fees would otherwise be payable, will have an aggregate fair
market value equal to the amount of such fees. A total of 250,000 shares of
Common Stock are available for awards under the Directors' Stock Plan.

COMPENSATION OF EXECUTIVE OFFICERS

The following tables set forth information with respect to compensation
paid to or accrued on behalf of the Chief Executive Officer and the four other
most highly-paid executive officers of the Company in 1997 (the "Named
Executive Officers") beginning on June 27, 1997 in connection with the IPO,
unless otherwise noted.

SUMMARY COMPENSATION TABLE

LONG TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
NAME AND --------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) OTHER(2) OPTIONS COMPENSATION(3)
- ---------------------------------------- --------- --------- --------- ------------------- ---------------

Fred M. Ferreira........................ 1997 $ 76,154 -- 200,000 --
Chairman of the Board,
Chief Executive Officer
and President
Michael Nothum, Jr...................... 1997 $ 76,154 $ 4,500 25,000 $ 900
Chief Operating Officer,
Executive Vice President and Director
J. Gordon Beittenmiller................. 1997 $ 76,154 -- 100,000 --
Senior Vice President,
Chief Financial Officer,
Treasurer and Director
Reagan S. Busbee........................ 1997 $ 63,462 -- 100,000 --
Senior Vice President
William George, III..................... 1997 $ 76,154 $ 31,000 75,000 --
Vice President
and General Counsel

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

(1) Annual base salary in 1997 was $150,000 for each of the Named Executive
Officers except for Mr. Busbee, whose base salary was $125,000.

(2) Reflects an automobile allowance of $750 per month for Mr. Nothum and
partial reimbursement of relocation expenses for Mr. George prior to the
IPO.

(3) Reflects matching contributions under a 401(K) plan.

1997 LONG-TERM INCENTIVE PLAN

No stock options were granted to, or exercised by or held by any executive
officer in 1996. In March 1997, the Board of Directors and the Company's
stockholders approved the Company's 1997 Long-Term Incentive Plan (the
"Plan"). The purpose of the Plan is to provide directors, officers, key
employees, consultants and other service providers with additional incentives by
increasing their ownership interests in the Company. Individual awards under the
Plan may take the form of one or more of: (i) either incentive stock options
("ISOs") or non-qualified stock options ("NQSOs"), (ii) stock appreciation
rights ("SARs"), (iii) restricted or deferred stock, (iv) dividend equivalents
and (v) other awards not otherwise provided for, the value of which is based in
whole or in part upon the value of the Common Stock.

The Compensation Committee administers the Plan and selects the individuals
who will receive awards and establish the terms and conditions of those awards.
The maximum number of shares of Common Stock that may be subject to outstanding
awards, determined immediately after the grant of any award, may not exceed the
greater of 2,500,000 shares or 13% of the aggregate number of shares of Common
Stock outstanding. Shares of Common Stock which are attributable to awards which
have expired, terminated or been canceled or forfeited are available for
issuance or use in connection with future awards.

The Plan will remain in effect until terminated by the Board of Directors.
The Plan may be amended by the Board of Directors without the consent of the
stockholders of the Company, except that any amendment,

although effective when made, will be subject to stockholder approval if
required by any Federal or state law or regulation or by the rules of any stock
exchange or automated quotation system on which the Common Stock may then be
listed or quoted.

At the closing of the IPO, NQSOs to purchase a total of 500,000 shares of
Common Stock were granted as follows: 200,000 shares to Mr. Ferreira, 100,000
shares to Mr. Beittenmiller, 100,000 shares to Mr. Busbee, 75,000 shares to Mr.
George and 25,000 shares to Mr. Nothum. In addition, options to purchase
3,067,638 shares have been granted to certain other employees of the Company.
Each of the foregoing options has an exercise price equal to either the IPO
price or the public market price on the date of grant. These options will vest
at the rate of 20% per year, commencing on the first anniversary of the date of
grant and will expire at the earlier of seven years from the date of grant or
three months following termination of employment.

EMPLOYEE STOCK PURCHASE PLAN

On September 18, 1997, the Board of Directors approved, subject to
stockholder approval, the 1998 Employee Stock Purchase Plan (the "Purchase
Plan"). The purpose of the Purchase Plan is to provide a convenient way for
employees to become stockholders of the Company and to align their interests
more closely with those of the stockholders. The maximum number of shares of
Common Stock available for issuance under the Purchase Plan is 300,000 (subject
to adjustment for stock splits and similar changes). The Purchase Plan is
designed to enable eligible employees to purchase shares of Common Stock at a
discount through payroll deductions. As of January 15, 1998, the deadline to
enroll for participation during the first option period, there were
approximately 250 employees enrolled in the Purchase Plan, and approximately
3,000 employees were eligible to participate in the Purchase Plan.

Purchases occur twice a year at the end of six-month option periods which
begin February 1, and August 1 of each year. The first option period under which
participants could register to purchase shares commenced February 1, 1998 and
shares will not actually be eligible for purchase under the Purchase Plan until
July 31, 1998, the last day of the first option period. The purchase price for
Common Stock under the Purchase Plan is 85% of the lesser of the fair market
value of the Common Stock on the first day of the option period and the fair
market value of the Common Stock on the last day of the option period. The
Purchase Plan permits eligible employees to purchase up to 2,000 shares of
Common Stock in any six-month option period through payroll deductions, which
may be equal to 2%-8% of the participant's total compensation for that period
and may not be less than $10.00 per payroll period nor exceed $2,000 during any
option period. In no event may a participant be granted options to purchase
Common Stock under the Purchase Plan which would allow the fair market value
(determined on the first day of the current option period) of total options
exercisable and Common Stock purchased during a calendar year under the Purchase
Plan and any other qualified employee stock purchase plan of the Company and its
subsidiaries to exceed $25,000. Payroll deductions are held in book accounts for
each participant and do not accrue interest.

Participants who are directors, executive officers or 10% or more
stockholders of the Company are subject to special requirements set forth in the
Purchase Plan concerning their participation. No executive officer or
non-executive director has elected to participate in the Purchase Plan. The
Committee has the right to amend or modify the Purchase Plan in its sole
discretion, except that the Committee cannot make changes that would affect
grants already made (unless required by law) and it cannot materially change
eligibility requirements, change the definition of employer, increase the number
of shares subject to options or materially increase the benefits to participants
under the Purchase Plan without prior stockholder approval. The Purchase Plan
may be terminated at any time in the sole and absolute discretion of the
Committee and must be terminated by the Committee at any time the number of
shares of Common Stock authorized for purposes of the Purchase Plan is not
sufficient to meet all purchase requirements, unless a pro rata allocation can
be made in accordance with the terms of the Purchase Plan.

EMPLOYMENT AGREEMENTS; COVENANTS NOT TO COMPETE; CHANGE OF CONTROL;
INDEMNIFICATION

On June 27, 1997, each of Messrs. Ferreira, Beittenmiller, George and
Busbee entered into an employment agreement with the Company providing for an
annual base salary of $150,000, except for Mr. Busbee, whose annual base salary
is $125,000. Each employment agreement is for a term of three years, and unless
terminated or not renewed by the Company or not renewed by the employee, the
term will continue thereafter on a year-to-year basis on the same terms and
conditions existing at the time of renewal. The agreement provides that, in the
event of a termination of employment by the Company without cause, the employee
will be entitled to receive from the Company an amount equal to the greater of
salary for the remaining term or one year's salary, payable in one lump sum on
the effective date of termination. In the event of a change in control of the
Company (as defined in the employment agreement) during the initial three-year
term, if the employee is not given at least five days' notice, of the
successor's intent to continue the employee's employment after such change in
control, the employee may elect to terminate his employment and receive in one
lump sum three times the amount he would receive pursuant to a termination
without cause during such initial term. The non-competition provisions of the
employment agreement do not apply to a termination without such notice. In the
event the employee is given at least five days' notice of the successor's intent
to continue the employee's employment after such change in control, the employee
may elect to terminate his employment and receive in one lump sum two times the
amount he would receive pursuant to a termination without cause during such
initial term. In such event, the non-competition provisions of the employment
agreement would apply for two years from the effective date of termination. Each
employment agreement contains a covenant not to compete with the Company for two
years immediately following termination of employment or, in the case of a
termination by the Company without cause in the absence of a change in control,
for a period of one year following termination of employment.

On June 27, 1997, Mr. Nothum entered into an employment agreement providing
for an annual base salary of $150,000. His employment agreement is for a term of
five years, and unless terminated or not renewed, the term will continue
thereafter on a year-to-year basis on the same terms and conditions existing at
the time of renewal. The agreement provides that, in the event of a termination
of employment by the Founding Company without cause during the first three years
of the employment term (the "Initial Term"), the employee will be entitled to
receive from the Founding Company an amount equal to his then current salary for
the remainder of the Initial Term or for one year, whichever is greater. In the
event of a termination of employment with cause during the final two years of
the initial five-year term of the employment agreement, the employee will be
entitled to receive an amount equal to his then current salary for one year. In
either case, payment is due in one lump sum on the effective date of
termination. Mr. Nothum's employment agreement also contains change of control
and competition provisions identical to those described above.

Each executive officer and director of the Company who was in office at the
time of the IPO has entered into an Indemnification Agreement with the Company
whereby the Company indemnifies each against actions taken in good faith on
behalf of the Company.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information concerning the grant of stock
options during the last fiscal year to each of the Named Executive Officers. No
stock appreciation rights were granted during the last fiscal year.

POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION --------------------
NAME GRANTED(1) FISCAL YEAR PRICE DATE 5% 10%
- ------------------------------------- ----------- -------------- --------- ----------- --------- ---------

Fred M. Ferreira..................... 200,000 7.9% $ 13.00 6/27/04 $1,060,000 $2,468,000
Michael Nothum, Jr. ................. 25,000 1.0% 13.00 6/27/04 132,500 308,500
J. Gordon Beittenmiller.............. 100,000 4.0% 13.00 6/27/04 530,000 1,234,000
Reagan S. Busbee..................... 100,000 4.0% 13.00 6/27/04 530,000 1,234,000
William George, III.................. 75,000 3.0% 13.00 6/27/04 397,500 925,500

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

(1) All of these stock options, which were granted pursuant to the Company's
1997 Long Term Incentive Plan, were granted at the fair market value of the
underlying option shares on the date of grant.

(2) The dollar amounts under these columns are the result of calculations at the
5% and 10% annual appreciation rates set by the Securities and Exchange
Commission for illustrative purposes and are not intended to forecast future
financial performance or possible future appreciation in the price of the
Company's common shares.

OPTION EXERCISES IN LAST FISCAL YEAR

The following table sets forth information concerning the fiscal year-end
value of unexercised stock options held by the Named Executive Officers during
the last fiscal year. There were no option exercises by Named Executive Officers
during 1997.

AGGREGATED FISCAL YEAR-END OPTION VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ------------- ----------- -------------

Fred M. Ferreira..................... -- 200,000 $-- $ 1,350,000
Michael Nothum, Jr. ................. -- 25,000 -- 168,750
J. Gordon Beittenmiller.............. -- 100,000 -- 675,000
Reagan S. Busbee..................... -- 100,000 -- 675,000
William George, III.................. -- 75,000 -- 506,250

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

(1) These numbers are based upon the fair market value of one share of the
Company's Common Stock on December 31, 1997 ($19.75), less the exercise
price of in-the-money options at the end of 1997.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Harter, Mercadante and Martin, none of whom is or was an executive
officer or employee of the Company during 1997, other than Mr. Harter who served
as President of the Company for the first six days of January 1997 when the
Company had no operations, served on the Compensation Committee during 1997. Mr.
Harter is a member of the Coach USA, Inc. compensation committee of its Board of
Directors, and Mr. Mercadante is an executive officer of that company.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ORGANIZATION OF THE COMPANY

In connection with the formation of the Company, the Company issued to
Notre a total of 2,969,912 shares of Common Stock for an aggregate cash
consideration of $29,699. Mr. Harter is the President of Notre and a director of
the Company. In March 1997, Notre exchanged 2,742,912 shares of Common Stock for
an equal number of shares of Restricted Common Stock. Notre advanced $2.0
million to provide funds necessary to effect the acquisition of the Founding
Companies and the IPO. All of Notre's advances were repaid from the net proceeds
of the IPO.

In January and February 1997, the Company issued a total 786,435 shares of
Common Stock at $.01 per share to various executive officers, as follows: Mr.
Ferreira -- 479,435 shares, Mr. Beittenmiller -- 116,000 shares, Mr.
Busbee -- 116,000 shares and Mr. George -- 75,000 shares. The Company also
granted options to purchase 10,000 shares of Common Stock under the Directors'
Plan, effective upon the consummation of the IPO, to Mr. Harter, a director of
the Company, and to Messrs. Mercadante and Martin, who became directors of the
Company upon the closing of the IPO.

The Company sold 7,015,000 shares of Common Stock at a price of $13.00 per
share in its IPO. Proceeds from the IPO were used by the Company to acquire the
Founding Companies: Accurate Air Systems, Inc., a Texas corporation
("Accurate"), Atlas Comfort Services USA, Inc., a Texas corporation
("Atlas"), Contract Service, Inc., a Utah corporation ("CSI/Bonneville"),
Eastern Heating & Cooling, Inc., a New York corporation ("Eastern"), Freeway
Heating & Air Conditioning Inc., a Utah corporation ("Freeway"), Quality Air
Heating & Cooling, Inc., a Michigan corporation ("Quality"), S.M. Lawrence
Company, Inc., a Tennessee corporation ("Lawrence"), Seasonair, Inc., a
Maryland corporation ("Seasonair"), Standard Heating & Air Conditioning
Company, an Alabama corporation ("Standard"), Tech Heating and Air
Conditioning, Inc., an Ohio corporation ("Tech"), Tri-City Mechanical, Inc.,
an Arizona corporation ("Tri-City"), and Western Building Services, Inc., a
Colorado corporation ("Western"). The aggregate consideration paid by the
Company in these acquisitions consisted of $45.3 million in cash and 9,720,927
shares of Common Stock. In addition, Accurate distributed to Thomas J. Beaty
real property having a net book value of approximately $370,000.

The following table sets forth the consideration paid and total debt
assumed by the Company in the Mergers for each of the Founding Companies:

SHARES OF
COMMON TOTAL
FOUNDING COMPANY CASH STOCK DEBT
- ------------------ ------------------------ --------- ----------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Quality........... $ 10,082 2,207,158 $ 7,389
Tri-City.......... 8,680 1,557,962 3,500
Atlas............. 6,864 1,432,000 1,776
Lawrence.......... 4,500 1,197,796 300
Tech.............. 3,997 717,408 1,906
Accurate.......... 3,145 564,537 985
CSI/Bonneville.... 1,813 493,672 1,385
Western........... 2,022 362,939 777
Freeway........... 1,039 319,698 203
Seasonair......... 1,516 272,084 154
Standard.......... 947 291,457 433
Eastern........... 698 304,216 1,603
---------- --------- ----------
Total............. $ 45,303 9,720,927 $ 20,411
========== ========= ==========

Additionally, prior to their acquisition, the Founding Companies which were
C Corporations, except Atlas, made interim earnings distributions to their
stockholders of $1.5 million.

As consideration for their interests in the Founding Companies, certain
officers, directors, key employees and holders of more than 5% of the
outstanding shares of the Common Stock of the Company, together with their
spouses and trusts for which they act as trustees, received cash and shares of
Common Stock of the Company as follows:

SHARES OF
COMMON
NAME CASH STOCK
- ------------------------------------- ----------------------- ---------
(DOLLARS IN THOUSANDS)
Robert J. Powers..................... $ 8,143 1,461,496
Michael Nothum, Jr................... 4,236 760,287
Robert R. Cook....................... 3,997 717,408
Brian S. Atlas....................... 3,432 716,000
Thomas J. Beaty...................... 3,145 564,537
John C. Phillips..................... 1,310 403,305
Samuel M. Lawrence III............... 1,031 317,307
Alfred J. Giardenelli, Jr............ 698 304,216
Charles W. Klapperich................ 1,423 255,401

Pursuant to the agreements entered into in connection with these
acquisitions, the stockholders of the Founding Companies have agreed not to
compete with the Company for five years, commencing on the date of consummation
of the IPO.

LEASES OF REAL PROPERTY BY ACQUIRED COMPANIES

Atlas leases its office space in Houston, Texas, as well as single family
residences located in Austin, Texas, Phoenix, Arizona, and Antioch, Tennessee.
These properties are owned by M & B Interest, Inc. ("M & B"), a corporation
wholly owned by Mr. Brian S. Atlas, who is a director of the Company, and his
brother, Mr. Michael Atlas. The lease for the real property in Houston expired
on September 30, 1997 and provided for an annual rental of $90,000. The three
single family residences are leased on a month-to-month basis, at an annual
aggregate rental of $36,780. The Company has also agreed with M & B to lease a
recently constructed office and warehouse facility constructed by M & B in
Houston for an annual rental of $204,000. This new office and warehouse facility
replaced Atlas' existing facility. During construction of the new facility,
Atlas performed HVAC installation at prices comparable to those charged to other
customers. The Company believes that the rent for these properties does not
exceed fair market value.

Tri-City has entered into an agreement with a limited liability corporation
owned by Mr. Nothum, Jr., who is Chief Operating Officer and a director of the
Company, and his father to lease office, operations and warehouse facilities for
a ten year term at annual rental of $530,100. Tri-City provides liability
insurance on the property and is responsible for any increase in real property
taxes due to its improvement of the leased property. The lease will expire in
April 2007. During construction of the new facility, Tri-City performed HVAC
installation at prices comparable to those charged to other customers. The
Company believes that the rent for these properties does not and will not exceed
fair market value.

Lawrence leases its office space, warehouse and fabrication facility in
Jackson, Tennessee from the father of Mr. Lawrence, who is Lawrence's Chief
Executive Officer and a director of the Company. The lease expired on December
31, 1998 and provides for an annual rental of $125,100. Additionally, Lawrence
provides liability insurance on the property and pays ad valorem taxes,
utilities and maintenance costs. The Company believes that the rent for this
property does not exceed fair market value.

Accurate leases two parcels of real property in Houston, Texas owned by Mr.
Beaty, who is a director of the Company. One of the leased premises is used by
Accurate for office and warehouse space. The lease on one of these premises
expires on June 30, 2002 and provides for an annual rental of $38,000. The other
leased premise is used by Accurate as a sheet metal shop under a lease dated
July 1, 1997, that will expire on June 30, 2002 and that provides for an annual
rental of $46,700. The rental rate on these premises in subsequent years of the
lease term will be adjusted in accordance with the Consumer Price Index.
Additionally, Accurate will pay all utility, taxes and insurance costs on both
leased premises. Accurate has

options to renew each lease for two additional five-year terms. The Company
believes that the rent for both properties does not and will not exceed fair
market value. Accurate previously owned the property it uses for its sheet metal
shop. Prior to its acquisition, Accurate distributed this property having a net
book value of approximately $370,000 to Mr. Beaty.

Eastern leases its office and warehouse space in Albany, New York from 60
Loudonville Road Associates ("Loudonville"), a partnership of Mr. Giardenelli,
who is a director of the Company, and his brother. The lease provides for annual
rental of $55,000 and payment by Eastern of taxes, maintenance, repairs,
utilities and insurance costs on the leased premises. The Company believes that
the rent for this property does not exceed the fair market value. The lease
expires on December 31, 1999. Prior to expiration, however, Eastern intends to
enter into a 10-year lease with Loudonville for a new building and to terminate
the existing lease. Eastern has agreed to install the HVAC systems in the new
building at a price which the Company believes to be at a fair market value. The
Company's annual rental in the new building will be at fair market value, as
determined by an appraisal.

CSI/Bonneville leases its offices and warehouse space in Salt Lake Valley,
Utah from J & J Investments, a joint venture partly owned by Mr. Phillips, who
is a director of the Company. This lease expires on February 28, 2002 and
provides for an annual rental in 1997 of $120,720, increasing annually by 5%.
CSI/Bonneville is responsible for ad valorem taxes, maintenance, insurance and
third-party management costs related thereto. CSI/Bonneville has options to
renew the lease for two additional five-year terms at a fair market value
determined by an appraisal. The Company believes that the rent for this property
does not exceed fair market value.

Tech leases its office space in Solon, Ohio from Mr. Cook, who is a
director of the Company. The lease expires on April 2, 2000, and provides for an
annual rental of $84,000. Tech is responsible for its utility costs, 15% of
common utility costs and 50% of the landlord's costs of servicing and
maintaining the premises and providing comprehensive liability insurance for the
leased premises. The Company believes that the rent for such property does not
exceed fair market value.

During 1997, Quality leased its warehouse facility in Grand Rapids,
Michigan from Mr. Powers, who is a director of the Company. Construction of the
warehouse facility was financed with the proceeds of a public bond issue. The
lease expires on April 30, 2005, and provides for an annual rental of the
greater of $216,000 or Mr. Powers' costs for the leased warehouse, including
bond debt service or mortgage payments, utilities, insurance, ad valorem taxes,
maintenance and repairs. Quality has an option to renew the lease for one
additional three-year term on the same terms. The Company believes that the rent
for such property does not exceed fair market value. Quality has guaranteed the
payment of two series of public bonds issued in 1985 and 1990, respectively, by
the Michigan Strategic Fund on behalf of two real property development entities
owned by Mr. Powers, the proceeds of which were used to fund the construction of
Quality's leased warehouse facility and a second adjacent warehouse. After the
IPO, these bonds were repaid. In December 1997, Mr. Power sold his interest in
the leased facility to a third party, and at that time Quality entered into a
new lease for the premises which reduced Quality's cost for the premises.

F&G Mechanical Corporation, a Delaware corporation ("F&G") which is a
wholly-owned subsidiary of the Company, leases its office and warehouse space in
Secaucus, New Jersey from Salpat Realty, Inc., a corporation which is owned in
part by Mr. Giardina. The lease expires on December 31, 2002, and provides for
an annual rental of $146,790. F&G is responsible for ad valorem taxes,
maintenance and insurance related thereto. The Company believes that the rent
for such property does not exceed fair market value.

The Company has adopted a policy that, whenever possible, it will not own
any real estate. Accordingly, in connection with future acquisitions, the
Company may require the distribution of real property owned by acquired
companies to their stockholders and the leaseback of such property at fair
market value.

OTHER TRANSACTIONS

Atlas was the obligor on two promissory notes payable to Brian Atlas, who
is a director of the Company and his brother, Michael Atlas, in the outstanding
principal amount of $63,537 to each, providing

for aggregate monthly installments of $4,812, including interest at the rate of
10%, though June 1999. Shortly after the IPO the Company paid all such
indebtedness.

On October 31, 1996, Lawrence loaned $75,000 to Charles Lawrence at an
interest rate of 8%. This note was payable on demand or October 31, 2001, and
was repaid shortly following the IPO. Charles Lawrence is a brother of Samuel M.
Lawrence III, who is a director of the Company.

On December 27, 1996, Accurate borrowed $630,000 from Mr. Beaty, who is a
director of the Company. Interest was payable monthly at the rate of 9% on the
outstanding balance. The note matured on June 30, 1997 and was repaid at that
time.

CSI/Bonneville owed Mr. Phillips, who is a director of the Company, and
another stockholder of CSI/Bonneville $424,000 and $105,000, respectively. Two
of the promissory notes, payable to Mr. Phillips and the other stockholder, are
in the principal amount of $80,000 and $20,000, respectively, and are payable on
demand. The remaining eight promissory notes are each payable ten years from the
date of the note, and mature at various times from 2002 to 2006. All of the
notes bear interest at 10%, with interest payable monthly and principal payable
at maturity. In 1996, CSI/Bonneville made interest payments to Mr. Phillips and
the other stockholders in the amount of $35,000 and $6,000, respectively. After
the IPO, the Company paid all such indebtedness.

During 1996, Mr. Klapperich, who is a director of the Company, received
advances from Western aggregating $173,500. On December 31, 1996, Western
credited against this amount a portion of a dividend payable in the amount of
$210,315, discharging the indebtedness of Mr. Klapperich to Western.

The Company paid an aggregate of $150,000 of the legal fees incurred by the
owners of the Founding Companies in connection with the acquisition of their
companies.

Prior to its purchase by the Company, F&G had advanced an aggregate of $5.6
million to Sorce Properties LLC, a corporation that is owned in part by Mr.
Giardina, who is a director of the Company. At the time of the acquisition of
F&G, Sorce Properties LLC agreed that it would repay the debt within three
years, and Mr. Giardina pledged to F&G 180,262 shares of Company Common Stock
received in the transaction, as part of a pledge of an aggregate total of
360,524 shares of Company Common Stock to secure repayment of the indebtedness.
A note bearing 6% interest evidences the underlying indebtedness, and the
Company has agreed that it will only have recourse to the stock in the event
that the debt is not paid. The pledge agreement further provides that the
pledged shares may be released under certain circumstances if Mr. Giardina gives
F&G an unlimited personal guarantee of the indebtedness.

The Company has agreed to indemnify Notre for liabilities arising in
connection with actions taken by it in connection with its role as a promoter
prior to and during the IPO.

COMPANY POLICY

Any future transactions with directors, officers or holders of more than 5%
of the Common Stock of the Company or its subsidiaries will be approved by a
majority of disinterested members of the Board of Directors.

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of shares of Common Stock and Restricted Common Stock,
taken together, as of May 12, 1998 (i) individually by the Named Executive
Officers and each director of the Company, (ii) by all executive officers and
directors of the Company as a group, (iii) by each person known to the Company
to be the beneficial owner of more than five percent of the outstanding Common
Stock and Restricted Common Stock, taken together, and (iv) each of the Selling
Stockholders. Except as noted below, each of the persons listed has sole
investment and voting power with respect to the shares indicated.

SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING(1) SHARES OWNED AFTER OFFERING
--------------------- BEING ---------------------
DIRECTORS, OFFICERS AND 5% HOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------- --------- ------- -------- --------- -------

Robert J. Powers(2).................. 1,461,496 4.8 211,496 1,250,000 4.0
Steven S. Harter(3).................. 917,034 3.0 75,000 842,034 2.7
Michael Nothum, Jr.(4)............... 732,981 2.4 108,287 624,694 2.0
Robert R. Cook....................... 717,408 2.4 67,408 650,000 2.1
Brian S. Atlas(5).................... 716,000 2.4 107,400 608,600 2.0
Salvatore P. Giardina................ 713,514 2.4 0 713,514 2.3
Thomas J. Beaty...................... 544,537 1.8 81,680 462,857 1.5
Fred M. Ferreira(6).................. 519,535 1.7 77,915 441,620 1.4
John C. Phillips..................... 403,305 1.3 0 403,305 1.3
Samuel M. Lawrence, III.............. 317,307 1.0 31,307 286,000 *
Alfred J. Giardenelli, Jr............ 304,216 1.0 0 304,216 *
Charles W. Klapperich................ 255,401 * 38,310 217,091 *
J. Gordon Beittenmiller(7)........... 136,000 * 10,000 126,000 *
Reagan S. Busbee(7).................. 136,000 * 13,500 122,500 *
William George, III(8)............... 89,600 * 13,440 76,160 *
Larry Martin(9)...................... 42,692 * 0 42,692 *
John Mercadante, Jr.(9).............. 42,692 * 0 42,692 *
All executive officers and directors
as a group
(17 persons)....................... 8,049,718 26.5 835,743 7,213,975 23.1

OTHER SELLING STOCKHOLDERS
- -------------------------------------
Michael Nothum, Sr. and Jewel Nothum
as Trustees of the Northum Family
Trust U/T/A dated 12/15/98......... 778,981 2.6 400,000 378,981 1.2
Michael D. Atlas (10)................ 716,000 2.4 107,400 608,600 2.0
Ronald L. Stanfa..................... 477,500 1.6 42,500 435,000 1.4
Grover Lee Walker, III............... 315,955 1.0 63,191 252,764 *
John P. Walker, Jr................... 315,955 1.0 63,191 252,764 *
Larry B. Batchelor................... 272,759 * 81,828 190,931 *
William Richard True................. 272,759 * 81,828 190,931 *
David J. Fannon...................... 272,759 * 81,828 190,931 *
Richard A. Williamson................ 238,612 * 28,612 210,000 *
Franklin Holwerda.................... 208,785 * 80,000 128,785 *
William R. Lowrie.................... 177,147 * 53,144 124,003 *
Wayne A. Lowrie...................... 177,147 * 53,144 124,003 *
William L. Wallace................... 177,147 * 53,144 124,003 *
Charles H. Lawrence.................. 172,135 * 50,000 122,135 *
Seasonair, Inc. ESOP................. 163,794 * 45,082 118,712 *
John Harter, Trustee Victoria Harter
& Phyllis
Harter Educational Trust........... 159,104 * 30,000 129,104 *
Robert W. Arbuckle................... 153,200 * 22,980 130,220 *
Ernest T. Lawrence................... 149,135 * 50,000 99,135 *
Thomas B. Kime and Christine B., Jt
Ten.................................. 145,729 * 21,859 123,870 *
Craig S. Lemmon(7)................... 136,000 * 20,000 116,000 *
Scott A. Bowman...................... 128,746 * 38,624 90,122 *
Robert G. Clarke..................... 128,746 * 38,624 90,122 *
Randall Troost....................... 95,635 * 14,346 81,289 *

(TABLE CONTINUED ON FOLLOWING PAGE)

SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BENEFICIALLY
OFFERING(1) SHARES OWNED AFTER OFFERING
OTHER SELLING STOCKHOLDERS --------------------- BEING ---------------------
(CONTINUED) NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------- --------- ------- -------- --------- -------
James Mahler......................... 90,367 * 45,000 45,367 *
Alan W. Arbuckle..................... 83,121 * 8,000 75,121 *
Edward T. Alley...................... 73,438 * 22,031 51,407 *
Thomas B. Kime....................... 72,864 * 10,929 61,935 *
Christine B. Kime.................... 72,864 * 10,929 61,935 *
Gail Alley........................... 70,557 * 21,167 49,390 *
Robert A. Dood....................... 69,358 * 13,872 55,486 *
Bernard P. Malewitz.................. 69,358 * 6,936 62,422 *
Robert M. Fiumara.................... 67,211 * 17,211 50,000 *
Milburn Honeycutt(11)................ 68,000 * 15,000 53,000 *
Brian J. Vensel(11).................. 68,000 * 15,000 53,000 *
Cheryl Arbuckle Gove................. 57,901 * 28,000 29,901 *
Norman J. Pokorny Revocable Trust.... 54,145 * 25,000 29,145 *
James Harrison Hewes Carrington
Trust, James H. Carrington,
Trustee............................ 52,145 * 26,000 26,145 *
John W. Bouloubasis Jr.,............. 50,000 * 10,000 40,000 *
Emmett E. Moore...................... 50,000 * 35,000 15,000 *
Basil Bourque........................ 37,859 * 8,000 29,859 *
Sean F. McNamara..................... 37,859 * 12,500 25,359 *
Constance Drew....................... 34,800 * 20,000 14,800 *
Alan B. Osofsky...................... 34,013 * 10,000 24,013 *
Larry Andriunas...................... 34,026 * 10,208 23,818 *
Grover Lee Walker, Jr................ 32,405 * 32,405 -- *
Robert M. Arbuckle................... 22,024 * 5,000 17,024 *
Hildegard Andriunas.................. 21,754 * 6,526 15,228 *
Kenneth Kilgore...................... 20,000 * 20,000 -- *
James H. Line........................ 13,442 * 2,000 11,442 *
Deleta D. George..................... 400 * 400 -- *
Bradley Drew......................... 100 * 100 -- *
--------- -------- ---------
Total....................... 15,241,459 51.3 2,794,282 12,447,177 40.5
========= ======== =========

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

` The address of each of the persons listed is c/o the Company, Three
Riverway, Suite 200, Houston, Texas 77056.

* Less than 1%.

(1) Shares shown do not include shares that could be acquired upon exercise of
options which do not vest within 60 days.

(2) Includes 230,000 shares held by the Powers Family Foundation, a charitable
entity.

(3) Includes 902,034 shares of Restricted Common Stock held in a partnership as
to which Mr. Harter is a general partner and 15,000 shares of Common Stock
issuable upon exercise of options granted under the Directors' Plan. Does
not include 159,184 shares of Restricted Common Stock held in a trust for
Mr. Harter's minor children and as to which he disclaims beneficial
ownership.

(4) Includes (i) 6,000 shares of Common Stock issuable upon exercise of options
which vest within 60 days and (ii) an aggregate of 18,694 shares which are
held in irrevocable trusts for Mr. Nothum's minor children of which he is
trustee and as to which he disclaims beneficial ownership.

(5) Includes 99,000 shares held in trusts for B. Atlas' minor children, as to
which he disclaims beneficial ownership.

(6) Includes 40,000 shares of Common Stock issuable upon exercise of options
which vest within 60 days.

(7) Includes 20,000 shares of Common Stock issuable upon exercise of options
which vest within 60 days.

(8) Includes 15,000 shares of Common Stock issuable upon exercise of options
which vest within 60 days.

(9) Includes 15,000 shares of Common Stock issuable upon exercise of options
granted under the Directors' Plan.

(10) Includes 80,000 shares of Common Stock held in trust for M. Atlas' minor
children, as to which he disclaims beneficial ownership.

(11) Includes 10,000 shares of Common Stock issuable upon exercise of options
which vest within 60 days.

DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of 57,969,912 shares
of capital stock, consisting of 50,000,000 shares of Common Stock, 2,969,912
shares of Restricted Common Stock and 5,000,000 shares of Preferred Stock. As of
May 12, 1998 the Company had outstanding 30,292,780 shares of Common Stock,
which included 2,742,912 shares of Restricted Common Stock, and no shares of
Preferred Stock. The following discussion is qualified in its entirety by
reference to the Restated Certificate of Incorporation of Comfort Systems, which
is included as an exhibit to the Registration Statement of which this Prospectus
is a part. This Offering includes 182,500 shares of Restricted Common Stock
which will become Common Stock upon their sale pursuant to this Offering.

COMMON STOCK AND RESTRICTED COMMON STOCK

The holders of Common Stock are each entitled to one vote for each share
held on all matters to which they are entitled to vote, including the election
of directors. The holders of Restricted Common Stock, voting together as a
single class, are entitled to elect one member of the Company's Board of
Directors and to 0.55 of one vote for each share held on all other matters on
which they are entitled to vote. Holders of Restricted Common Stock are not
entitled to vote on the election of any other directors. Upon consummation of
this Offering, the Board of Directors will be classified into three classes as
nearly equal in number as possible, with the term of each class expiring on a
staggered basis. The classification of the Board of Directors may make it more
difficult to change the composition of the Board of Directors and thereby may
discourage or make more difficult an attempt by a person or group to obtain
control of the Company. Cumulative voting for the election of directors is not
permitted. Any director, or the entire Board of Directors, may be removed at any
time, with cause, by of a majority of the aggregate number of votes which may be
cast by the holders of all of the outstanding shares of Common Stock and
Restricted Common Stock entitled to vote for the election of directors, except
that only the holder of the Restricted Common Stock may remove the director such
holder is entitled to elect.

Subject to the rights of any then outstanding shares of Preferred Stock,
holders of Common Stock and Restricted Common Stock are together entitled to
participate pro rata in such dividends as may be declared in the discretion of
the Board of Directors out of funds legally available therefor. Holders of
Common Stock and Restricted Common Stock together are entitled to share ratably
in the net assets of the Company upon liquidation after payment or provision for
all liabilities and any preferential liquidation rights of any Preferred Stock
then outstanding. Holders of Common Stock and holders of Restricted Common Stock
have no preemptive rights to purchase shares of stock of the Company. Shares of
Common Stock are not subject to any redemption provisions and are not
convertible into any other securities of the Company. Shares of Restricted
Common Stock are not subject to any redemption provisions and are convertible
into Common Stock as described below. All outstanding shares of Common Stock and
Restricted Common Stock are, and the shares of Common Stock to be issued
pursuant to this Offering will be, upon payment therefor, fully paid and
non-assessable.

Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (i) in the event of a disposition of such share
of Restricted Common Stock by the holder thereof (other than a distribution by a
holder to its partners or beneficial owners, or a transfer to a related party of
such holders (as defined in Sections 267, 707, 318 and/or 4946 of the Internal
Revenue Code of 1986, as amended)), (ii) in the event any person acquires
beneficial ownership of 15% or more of the total number of outstanding shares of
Common Stock, or (iii) in the event any person offers to acquire 15% or more of
the total number of outstanding shares of Common Stock. After July 1, 1998, the
Board of Directors may elect to convert any remaining shares of Restricted
Common Stock into shares of Common Stock in the event 80% or more of the
originally outstanding shares of Restricted Common Stock have been previously
converted into shares of Common Stock.

The Common Stock is listed on The New York Stock Exchange under the symbol
"FIX." The Restricted Common Stock is not publicly traded.

PREFERRED STOCK

The Preferred Stock may be issued from time to time by the Board of
Directors in one or more series. Subject to the provisions of the Company's
Certificate of Incorporation and limitations prescribed by law, the Board of
Directors is expressly authorized to adopt resolutions to issue the shares, to
fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any series of the Preferred
Stock, in each case without any further action or vote by the stockholders. The
Company has no current plans to issue any shares of Preferred Stock.

One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock and Restricted Common Stock as to dividend
rights, liquidation preference or both, may have full or limited voting rights
and may be convertible into shares of Common Stock. Accordingly, the issuance of
shares of Preferred Stock may discourage bids for the Common Stock or may
otherwise adversely affect the market price of the Common Stock.

STATUTORY BUSINESS COMBINATION PROVISION

The Company is subject to Section 203 of the Delaware General Corporation
Law which, with certain exceptions, prohibits a Delaware corporation from
engaging in any of a broad range of business combinations with any "interested
stockholder" for a period of three years following the date that such
stockholder became an interested stockholder, unless: (i) prior to such date,
the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and officers and (b) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer, or
(iii) on or after such date, the business combination is approved by the Board
of Directors and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. An "interested stockholder" is
defined as any person that is (a) the owner of 15% or more of the outstanding
voting stock of the corporation or (b) an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.

CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS

Pursuant to the Company's Certificate of Incorporation and as permitted by
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director has derived an improper personal benefit.

Additionally, the Certificate of Incorporation of the Company provides that
directors and officers of the Company shall be, and at the discretion of the
Board of Directors non-officer employees and agents may be, indemnified by the
Company to the fullest extent authorized by Delaware law, as it now exists or
may in

the future be amended, against all expenses and liabilities actually and
reasonably incurred in connection with service for or on behalf of the Company,
and further permits the advancing of expenses incurred in defense of claims.

The Certificate of Incorporation also provides that any action required or
permitted to be taken by the stockholders of the Company at an annual or special
meeting of stockholders must be effected at a duly called meeting and may not be
taken or effected by a written consent of stockholders in lieu thereof. The
Company's Bylaws provide that a special meeting of stockholders may be called
only by the Chief Executive Officer, by a majority of the Board of Directors, or
by a majority of the Executive Committee of the Board of Directors. The Bylaws
provide that only those matters set forth in the notice of the special meeting
may be considered or acted upon at that special meeting. To amend or repeal the
Company's Bylaws, an amendment or repeal thereof must first be approved by the
Board of Directors or by affirmative vote of the holders of at least 66 2/3% of
the total votes eligible to be cast by holders of voting stock with respect to
such amendment or repeal.

The Company's Bylaws establish an advance notice procedure with regard to
the nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors (the "Nomination
Procedure") and with regard to other matters to be brought by stockholders
before an annual meeting of stockholders of the Company (the "Business
Procedure"). The Nomination Procedure requires that a stockholder give prior
written notice, in proper form, of a planned nomination for the Board of
Directors to the Secretary of the Company. The requirements as to the form and
timing of that notice are specified in the Company's Bylaws. If the Chairman of
the Board of Directors determines that a person was not nominated in accordance
with the Nomination Procedure, such person will not be eligible for election as
a director. Under the Business Procedure, a stockholder seeking to have any
business conducted at an annual meeting must give prior written notice, in
proper form, to the Secretary of the Company. The requirements as to the form
and timing of that notice are specified in the Company's Bylaws. If the Chairman
of the Board of Directors determines that the other business was not properly
brought before such meeting in accordance with the Business Procedure, such
business will not be conducted at such meeting.

Although the Company's Bylaws do not give the Board of Directors any power
to approve or disapprove stockholder nominations for the election of directors
or of any other business desired by stockholders to be conducted at an annual or
any other meeting, the Company's Bylaws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular meeting if the proper procedures are not followed or (ii) may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York, 10005.

SHARES ELIGIBLE FOR FUTURE SALE

The Company has outstanding 30,292,780 shares of Common Stock. The
3,694,282 shares offered hereby, as well as the 7,015,000 shares sold in the IPO
and 618,374 shares issued in acquisitions are freely tradeable without
restriction unless acquired by affiliates of the Company. The remaining
outstanding shares of Common Stock or Restricted Common Stock either have not
been registered under the Securities Act, which means that they may be resold
publicly only upon registration under the Securities Act or in compliance with
an exemption from the registration requirements of the Securities Act, including
the exemption provided by Rule 144 thereunder, or are otherwise subject to
contractual restrictions on transfer.

In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired from
the Company or the date on which they were acquired from an affiliate, the
holder of such restricted securities (including an affiliate) is entitled to
sell a number of shares within any three-month period that does not exceed the
greater of (i) one percent of the then outstanding shares of the Common Stock or
(ii) the average weekly reported volume of trading of the Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain requirements pertaining to the manner of such sales, notices
of such sales and the availability of current public information concerning the
Company. Affiliates may sell shares not constituting restricted securities in
accordance with the foregoing volume limitations and other requirements but
without regard to the one year holding period. Under Rule 144(k), if a period of
at least two years has elapsed between the later of the date on which restricted
securities were acquired from the Company and the date on which they were
acquired from an affiliate, a holder of such restricted securities who is not an
affiliate at the time of the sale and has not been an affiliate for a least
three months prior to the sale is entitled to sell the shares immediately
without regard to the volume limitations and other conditions described above.

All of the stockholders of the Founding Companies, the Company's officers
and directors and certain stockholders, holding in the aggregate 13,960,874
shares of Common Stock, had agreed with the Company that they would not sell any
of their shares for a period of one year after the closing of the IPO. These
stockholders, however, had the right, in the event the Company proposed to
register under the Securities Act any Common Stock for its own account or for
the account of others, subject to certain exceptions, to require the Company to
include their shares in the registration, subject to the right of the Company to
exclude some or all of the shares in the offering upon the advice of the
managing underwriter. Pursuant to such rights, certain of those Stockholders are
selling certain of such shares in this Offering. In addition, with respect to
certain shares not sold in this Offering, certain of such stockholders have
certain limited demand registration rights to require the Company to register
shares held by them following the first anniversary of the closing of the IPO.
During the second quarter of 1998, 1,509,232 shares held or issued at the time
of the IPO will become eligible for sale, subject to the restrictions in Rule
144. In addition, other shares become tradable under Rule 144 or pursuant to the
expiration of contractual restrictions during the next five years. In 1998,
88,890 additional shares become eligible for sale in the third quarter, and
3,101,494 shares become eligible for sale in the fourth quarter. In 1999,
108,185 shares become eligible for sale in the first quarter, 1,772,720 shares
become eligible for sale in the second quarter, 108,581 shares become eligible
for sale in the third quarter, and 413,294 shares become eligible for sale in
the fourth quarter. In 2000, 716,253 shares become eligible for sale in the
first quarter, 1,886,179 shares become eligible for sale in the second quarter,
and 297,320 shares become eligible for sale in the fourth quarter. In 2001,
2,899,306 shares become eligible for sale. In 2002, 877,593 shares become
eligible for sale. In 2003, 34,839 shares become eligible for sale.

On April 27, 1998, the Company registered 8,000,000 shares of its Common
Stock under the Securities Act for use by the Company in connection with future
acquisitions. Any such shares that have been or may be issued thereunder will
generally be freely tradeable, unless acquired by persons who become affiliates
of the Company. The Company may contractually restrict the sale of shares issued
in connection with future acquisitions. As of May 12, 1998, 5,270,431 shares
remained available for use in future acquisitions under such shelf registration
statement. The piggyback registration rights described above do not apply to the
registration statement relating to those shares.

No prediction can be made as to the effect, if any, that the sale of shares
or the availability of shares for sale will have on the market price for the
Common Stock prevailing from time to time. Nevertheless, sales, or the
availability for sale, of substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the future ability of
the Company to raise equity capital or complete any additional acquisitions
using Common Stock.

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters") have severally agreed to
purchase from the Company and the Selling Stockholders the following respective
number of shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus.

NUMBER
UNDERWRITER OF SHARES
- ------------------------------------- ---------
BT Alex. Brown Incorporated..........
Bear, Stearns & Co. Inc..............
Donaldson, Lufkin & Jenrette
Securities Corporation.............
Sanders Morris Mundy Inc. ...........

---------
Total................................
=========

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby if
any of such shares are purchased.

The Company and the Selling Stockholders have been advised by the
Underwriters that the Underwriters propose to offer the shares of Common Stock
to the public at the initial public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
After commencement of the offering, the offering price and other selling terms
may be changed by the Underwriters.

The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 554,142
additional shares of Common Stock, respectively, at the offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it in the above table bears to , and the Company and such Selling Stockholders
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the Common Stock offered
hereby. If purchased, the Underwriters will offer such additional shares on the
same terms as those on which the 3,694,282 shares are being offered.

The Company has agreed that it will not sell or offer any shares of Common
Stock or options, rights or warrants to acquire any Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
BT Alex. Brown Incorporated, except for shares issued (i) in connection with
acquisitions; and (ii) pursuant to the exercise of options granted under the
Plans. Further, the Company's directors, officers and the Selling Stockholders
have agreed not to directly or indirectly sell or offer for sale

or otherwise dispose of any Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of BT Alex. Brown
Incorporated.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered by this
Prospectus will be passed upon for the Company by Bracewell & Patterson, L.L.P.,
Houston, Texas. Certain legal matters related to this offering will be passed
upon for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.

EXPERTS

The audited consolidated financial statements of Comfort Systems USA, Inc.
and the audited financial statement of the ten individual Founding Companies,
included in this Prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.

The audited combined financial statements of F&G Mechanical Corp. and
Affiliate included in this Prospectus have been audited by Marden, Harrison &
Kreuter, Certified Public Accountants, P.C., independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.

ADDITIONAL INFORMATION

The Company is subject to the information requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza Building,
450 Fifth Street, N.W., Room 1024, Washingtion, D.C. 20549 and its regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials can be obtained from the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains an Internet web site that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission. The address of that site is
http://www.sec.gov.

The Common Stock is listed on the New York Stock Exchange. Proxy
statements, reports and other information concerning the Company that are filed
under the Exchange Act can be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.

INDEX TO FINANCIAL STATEMENTS

PAGE
-----

COMFORT SYSTEMS USA, INC. (UNAUDITED)
PRO FORMA COMBINED FINANCIAL
STATEMENTS
Introduction to Unaudited Pro
Forma Combined Financial
Statements..................... F-3
Pro Forma Combined Statements of
Operations..................... F-4
Notes to Pro Forma Combined
Financial Statements........... F-6

COMFORT SYSTEMS USA, INC.
Report of Independent Public
Accountants.................... F-9
Consolidated Balance Sheets..... F-10
Consolidated Statements of
Operations..................... F-11
Consolidated Statements of
Stockholders' Equity........... F-12
Consolidated Statements of Cash
Flows.......................... F-13
Notes to Consolidated Financial
Statements..................... F-14

FOUNDING COMPANIES AND F&G MECHANICAL
CORP AND AFFILIATE
QUALITY AIR HEATING & COOLING, INC.
Report of Independent Public
Accountants.................... F-27
Balance Sheets.................. F-28
Statements of Operations........ F-29
Statements of Shareholders'
Equity......................... F-30
Statements of Cash Flows........ F-31
Notes to Financial Statements... F-32

ATLAS COMFORT SERVICES USA, INC.
AND SUBSIDIARY
Report of Independent Public
Accountants.................... F-37
Consolidated Balance Sheets..... F-38
Consolidated Statements of
Operations..................... F-39
Consolidated Statements of
Shareholders' Equity........... F-40
Consolidated Statements of Cash
Flows.......................... F-41
Notes to Consolidated Financial
Statements..................... F-42

TRI-CITY MECHANICAL, INC.
Report of Independent Public
Accountants.................... F-50
Balance Sheets.................. F-51
Statements of Operations........ F-52
Statements of Shareholders'
Equity......................... F-53
Statements of Cash Flows........ F-54
Notes to Financial Statements... F-55

S.M. LAWRENCE INC. AND RELATED
COMPANY
Report of Independent Public
Accountants.................... F-60
Combined Balance Sheets......... F-61
Combined Statements of
Operations..................... F-62
Combined Statements of
Shareholders' Equity........... F-63
Combined Statements of Cash
Flows.......................... F-64
Notes to Combined Financial
Statements..................... F-65

F-1

PAGE
-----
ACCURATE AIR SYSTEMS, INC.
Report of Independent Public
Accountants.................... F-71
Balance Sheets.................. F-72
Statements of Operations........ F-73
Statements of Shareholder's
Equity......................... F-74
Statements of Cash Flows........ F-75
Notes to Financial Statements... F-76
EASTERN HEATING AND COOLING, INC.
Report of Independent Public
Accountants.................... F-83
Balance Sheets.................. F-84
Statements of Operations........ F-85
Statements of Shareholder's
Equity......................... F-86
Statements of Cash Flows........ F-87
Notes to Financial Statements... F-88
CONTRACT SERVICE, INC.
Report of Independent Public
Accountants.................... F-93
Balance Sheets.................. F-94
Statements of Operations........ F-95
Statements of Shareholders'
Equity......................... F-96
Statements of Cash Flows........ F-97
Notes to Financial Statements... F-98
TECH HEATING AND AIR CONDITIONING,
INC. AND RELATED COMPANY
Report of Independent Public
Accountants.................... F-103
Combined Balance Sheets......... F-104
Combined Statements of
Operations..................... F-105
Combined Statements of
Shareholders' Equity........... F-106
Combined Statements of Cash
Flows.......................... F-107
Notes to Combined Financial
Statements..................... F-108
SEASONAIR, INC.
Report of Independent Public
Accountants.................... F-113
Balance Sheets.................. F-114
Statements of Operations........ F-115
Statements of Shareholders'
Equity......................... F-116
Statements of Cash Flows........ F-117
Notes to Financial Statements... F-118
WESTERN BUILDING SERVICES, INC.
Report of Independent Public
Accountants.................... F-123
Balance Sheets.................. F-124
Statements of Operations........ F-125
Statements of Shareholders'
Equity......................... F-126
Statements of Cash Flows........ F-127
Notes to Financial Statements... F-128
F&G MECHANICAL CORP AND AFFILIATE
Independent Auditors' Report.... F-133
Combined Balance Sheet.......... F-134
Combined Statement of Income and
Retained Earnings.............. F-135
Combined Statement of Cash
Flows.......................... F-136
Notes to Combined Financial
Statements..................... F-137

F-2

COMFORT SYSTEMS USA, INC.
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION

The following unaudited pro forma statements of operations assume that
Comfort Systems USA, Inc.'s initial public offering on July 2, 1997, (the
"IPO"), the acquisitions of the Founding Companies and the additional
companies acquired subsequent to the IPO through March 31, 1998, accounted for
as purchases (the "Purchased Companies") were consummated on January 1, 1997,
and gives effect to the retroactive restatement to January 1, 1997, of 13 of the
14 companies acounted for as poolings-of-interest ("the Pooled Companies").

The Company has preliminarily analyzed the savings that it expects to be
realized from reductions in salaries and certain benefits to the former owners.
To the extent the former owners of the Companies acquired since the IPO and
through March 31, 1998, (the "Acquired Companies"), have agreed prospectively
to reductions in salary, bonuses and benefits, these reductions have been
reflected in the pro forma statements of operations. With respect to other
potential cost savings, Comfort Systems has not and cannot quantify these
savings. It is anticipated that these savings will be offset by costs related to
the Company's corporate management and by the costs associated with being a
public company. However, because these costs cannot be accurately quantified at
this time, they have not been included in the pro forma financial information of
the Company.

The pro forma adjustments are based on estimates, available information and
certain assumptions and may be revised, as additional information becomes
available. The pro forma financial data do not purport to represent what the
Company's financial position or results of operations would actually have been
if such transactions in fact had occurred on those dates and are not necessarily
representative of the Company's financial position or results of operations for
any future period. Since the Company and the Acquired Companies were not under
common control or management, historical combined results may not be comparable
to, or indicative of, future performance. The unaudited pro forma financial
statements should be read in conjunction with the other financial statements and
notes thereto included elsewhere in this Prospectus.

F-3

COMFORT SYSTEMS USA, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

COMBINED PURCHASED
FOUNDING COMPANIES
COMPANIES THROUGH
COMFORT THROUGH ACQUISITION PRO FORMA
SYSTEMS JUNE 30, 1997 DATE ADJUSTMENTS PRO FORMA
-------- -------------- ------------ ------------ ------------

REVENUES............................. $237,709 $ 86,900 $181,480 $ -- $506,089
COST OF SERVICES..................... 171,941 62,395 146,765 -- 381,101
-------- -------------- ------------ ------------ ------------
Gross profit................ 65,768 24,505 34,715 -- 124,988
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 59,386 17,430 29,075 (26,072) 79,819
GOODWILL AND OTHER AMORTIZATION...... 1,851 -- -- 3,248 5,099
-------- -------------- ------------ ------------ ------------
Operating income............ 4,531 7,075 5,640 22,824 40,070
OTHER INCOME (EXPENSE):
Interest income.................. 1,149 167 530 -- 1,846
Interest expense................. (1,212) (403) (481) (2,394) (4,490)
Other............................ 132 227 83 (135) 307
-------- -------------- ------------ ------------ ------------
Other income (expense)...... 69 (9) 132 (2,529) (2,337)
-------- -------------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES........... 4,600 7,066 5,772 20,295 37,733
PROVISION FOR INCOME TAXES........... 7,430 537 195 7,990 16,152
-------- -------------- ------------ ------------ ------------
NET INCOME (LOSS).................... $ (2,830) $ 6,529 $ 5,577 $ 12,305 $ 21,581
======== ============== ============ ============ ============
NET INCOME (LOSS) PER SHARE:
Basic............................ $ (.16) $ .79
======== ============
Diluted.......................... $ (.16) $ .78
======== ============
SHARES USED IN COMPUTING NET INCOME
(LOSS) PER SHARE:
Basic............................ 17,515 27,438
======== ============
Diluted.......................... 17,708 27,631
======== ============

The accompanying notes are an integral part of these pro forma financial
statements.

F-4

COMFORT SYSTEMS USA, INC.
PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

PURCHASED
COMPANIES
THROUGH
COMFORT ACQUISITION PRO FORMA
SYSTEMS DATE ADJUSTMENTS PRO FORMA
-------- ------------ ------------ ------------

REVENUES............................. $117,838 $ 11,400 $ -- $129,238
COST OF SERVICES..................... 89,410 10,355 -- 99,765
-------- ------------ ------------ ------------
Gross profit............... 28,428 1,045 -- 29,473
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 20,695 2,080 (506) 22,269
GOODWILL AND OTHER AMORTIZATION...... 1,170 -- 117 1,287
-------- ------------ ------------ ------------
Operating income........... 6,563 (1,035) 389 5,917
OTHER INCOME (EXPENSE):
Interest income................. 194 60 -- 254
Interest expense................ (777) (62) (199) (1,038)
Other........................... 52 (112) 67 7
-------- ------------ ------------ ------------
Other income (expense)..... (531) (114) (132) (777)
-------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES........... 6,032 (1,149) 257 5,140
PROVISION FOR INCOME TAXES........... 2,654 27 (419) 2,262
-------- ------------ ------------ ------------
NET INCOME (LOSS).................... $ 3,378 $ (1,176) $ 676 $ 2,878
======== ============ ============ ============
NET INCOME (LOSS) PER SHARE:
Basic........................... $ .12 $ .10
======== ============
Diluted......................... $ .12 $ .10
======== ============
SHARES USED IN COMPUTING NET INCOME
(LOSS) PER SHARE:
Basic........................... 27,887 28,796
======== ============
Diluted......................... 28,318 29,227
======== ============

The accompanying notes are an integral part of these pro forma financial
statements.

F-5

COMFORT SYSTEMS USA, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)

1. GENERAL:

Comfort Systems USA, Inc. ("Comfort Systems" and collectively with its
subsidiaries, the "Company") was founded in 1996 to become a leading national
provider of HVAC services focusing primarily on commercial and industrial
markets. On July 2, 1997, Comfort Systems completed the initial public offering
(the "IPO") of its common stock (the "Common Stock") and simultaneously
acquired in separate concurrent transactions, twelve companies (collectively
referred to as the "Founding Companies"). For financial statement purposes,
Comfort Systems has been identified as the accounting acquirer. Subsequent to
the IPO, and through March 31, 1998, the Company acquired 38 HVAC and related
businesses. Of the 38 acquisitions, 14 were accounted for as
poolings-of-interests (the "Pooled Companies") and 24 were accounted for as
purchases (the "Purchased Companies").

2. BUSINESS COMBINATIONS:

The accompanying pro forma financial statements include allocations of the
respective purchase prices to the assets acquired and liabilities assumed based
on preliminary estimates of fair value and is subject to adjustment. The
preliminary allocations resulted in approximately $206.2 million of total pro
forma goodwill, which represents the excess of purchase price over the estimated
fair value of the net assets acquired for the Founding Companies and the
Purchased Companies.

3. PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS:

YEAR ENDED DECEMBER 31, 1997

(a) Includes (i) certain reductions in salaries, bonuses and benefits to
the former owners, to which they agreed would take effect as of the
date of acquisition of the Acquired Companies (the "Compensation
Differential") through March 31, 1998 of $14.3 million and (ii)
excludes $0.6 million of acquisition-related costs incurred in the
acquisition of the Pooled Companies. These reductions in salaries,
bonuses and benefits are in accordance with the terms of their
employment agreements.

(b) Includes the amortization of goodwill using a 40-year life.

(c) Certain of the Acquired Companies were S Corporations prior to their
acquisition by the Company. Prior to the acquisitions by the Company,
various Acquired Companies made distributions to their stockholders
which represented substantially all of their previously taxed
undistributed earnings (the "S Corporation Distributions") which
were funded through borrowings by the Acquired Companies. Accordingly,
pro forma interest expense has been increased to include the interest
expense on (i) borrowings of $22.8 million that would have been
necessary to fund certain S Corporation Distributions of the Acquired
Companies through March 31, 1998, (ii) $16.6 million of cash
consideration related to the acquisition of certain of the Acquired
Companies purchased from January 1, 1998 through March 31, 1998, and
(iii) the subordinated convertible notes issued in connection with the
acquisition of certain Acquired Companies purchased from January 1,
1998 through March 31, 1998.

(d) Includes the incremental provision for federal and state income taxes
relating to the other statements of operations adjustments and for
income taxes on Acquired Companies, and Pooled Companies which were C
Corporations prior to the acquisition by the Company.

(e) Excludes the non-recurring, non-cash compensation charge of $11.6
million (the "Compensation Charge") recorded by the Company in the
first quarter of 1997 related to Common Stock issued to management of
and consultants to the Company offset by the increase in compensation
expense to reflect the ongoing salaries received by corporate
management of the Company of $0.4 million as though those salaries
were being paid prior to the IPO. The issuances of Common

F-6

COMFORT SYSTEMS USA, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
Stock were made in contemplation of the IPO and acquisition of the
Founding Companies, and no future issuances of this nature are
anticipated.

(f) Includes the reversal of gains and losses from sales of fixed assets.

The following table summarizes unaudited pro forma statement of operations
adjustments (in thousands):

ADJUSTMENT
---------------------------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
--------- --------- --------- --------- --------- --------- ------------

SELLING, GENERAL AND ADMINISTRATION
EXPENSES........................... $ (14,946) $ -- $ -- $ -- $ (11,126) $ -- $(26,072)
GOODWILL AMORTIZATION................ -- 3,248 -- -- -- -- 3,248
--------- --------- --------- --------- --------- --------- ------------
INCOME (LOSS) FROM OPERATIONS........ 14,946 (3,248) -- -- 11,126 -- 22,824
OTHER INCOME (EXPENSE):
Interest expense................. -- -- (2,394) -- -- -- (2,394)
Other............................ -- -- -- -- -- (135) (135)
--------- --------- --------- --------- --------- --------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.... 14,946 (3,248) (2,394) -- 11,126 (135) 20,295
PROVISION FOR INCOME TAXES........... -- -- -- 7,990 -- -- 7,990
--------- --------- --------- --------- --------- --------- ------------
NET INCOME (LOSS).................... $ 14,946 $ (3,248) $ (2,394) $ (7,990) $ 11,126 $ (135) $ 12,305
========= ========= ========= ========= ========= ========= ============

THREE MONTHS ENDED MARCH 31, 1998

(a) Includes the Compensation Differential of $.5 million. These
reductions in salaries, bonuses and benefits are in accordance with
the terms of their employment agreements.

(b) Includes the amortization of goodwill using a 40-year life.

(c) Includes the interest expense on (i) borrowings of $11.8 million that
would have been necessary to fund certain S Corporation Distributions
of the Acquired Companies acquired subsequent to December 31, 1997,
(ii) the $16.6 million of cash consideration related to the
acquisition of certain Acquired Companies acquired subsequent to
December 31, 1997, and (iii) the subordinated convertible notes,
issued in connection with the acquisition of certain Acquired
Companies from January 1, 1998 through March 31, 1998.

(e) Includes the reversal of gains and losses from sales of fixed assets.

The following table summarizes unaudited pro forma combined statement of
operations adjustments (in thousands):

ADJUSTMENT
----------------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
--------- --------- --------- --------- --------- ------------

SELLING, GENERAL AND ADMINISTRATION
EXPENSES........................... $ (506) $ -- $ -- $ -- $ -- $ (506)
GOODWILL AMORTIZATION................ -- 117 -- -- -- 117
--------- --------- --------- --------- --------- ------------
INCOME (LOSS) FROM OPERATIONS........ 506 (117) -- -- -- 389
OTHER INCOME (EXPENSE):
Interest expense................. -- -- (199) -- -- (199)
Other............................ -- -- -- -- 67 67
--------- --------- --------- --------- --------- ------------
INCOME (LOSS) BEFORE INCOME TAXES.... 506 (117) (199) -- 67 257
PROVISION FOR INCOME TAXES........... -- -- -- (419) -- (419)
--------- --------- --------- --------- --------- ------------
NET INCOME (LOSS).................... $ 506 $ (117) $ (199) $ 419 $ 67 $ 676
========= ========= ========= ========= ========= ============

F-7

COMFORT SYSTEMS USA, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)

5. WEIGHTED AVERAGE SHARES:

The following table summarizes weighted average shares outstanding (in
thousands):

THREE MONTHS,
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ -------------
Shares issued in connection with the
acquisitions of the
Founding Companies................. 9,721 9,721
Shares sold pursuant to the IPO...... 6,100 6,100
Shares issued to Notre Capital
Ventures II, L.L.C., Comfort
Systems' management and
consultants........................ 4,240 4,240
Shares issued in connection with the
acquisitions of the
Pooled Companies................... 4,507 4,507
Shares issued in connection with the
underwriter's
overallotment...................... 434 915
Shares issued in connection with the
acquisitions of the Purchased
Companies.......................... 3,313 3,313
Less: Shares sold in the IPO that
were not used for the cash portion
of the acquisition of the Founding
Companies.......................... 877 --
------------ -------------
Weighted average shares
outstanding -- Basic............... 27,438 28,796
Weighted average portion of shares
related to stock options under the
treasury stock method.............. 193 431
------------ -------------
Weighted average shares
outstanding -- Diluted............. 27,631 29,227
============ =============

F-8

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Comfort Systems USA, Inc.

We have audited the accompanying consolidated balance sheets of Comfort
Systems USA, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Comfort Systems USA, Inc., and subsidiaries as of December 31, 1996 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Houston, Texas
February 25, 1998

F-9

COMFORT SYSTEMS USA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
--------- ---------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 6,141 $ 14,533 $ 5,687
Accounts receivable............. 16,899 73,826 97,983
Less -- Allowance............... 227 1,034 1,352
--------- ---------- ------------
Accounts receivable, net... 16,672 72,792 96,631
Other receivables............... 278 884 1,845
Inventories..................... 1,090 6,214 7,012
Prepaid expenses and other...... 1,743 4,428 6,483
Costs and estimated earnings in
excess of billings............ 1,476 12,050 15,640
--------- ---------- ------------
Total current assets....... 27,400 110,901 133,298
PROPERTY AND EQUIPMENT, net.......... 3,363 12,046 14,585
GOODWILL, net........................ -- 163,126 205,652
OTHER NONCURRENT ASSETS.............. 716 1,707 8,241
--------- ---------- ------------
Total assets............... $ 31,479 $ 287,780 $361,776
========= ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ 1,770 $ 869 $ 150
Accounts payable................ 6,074 22,805 29,854
Accrued compensation and
benefits...................... 2,604 5,622 8,842
Payable to
stockholders/affiliates....... 500 16 125
Billings in excess of costs and
estimated earnings............ 3,760 10,100 12,546
Income taxes payable............ 384 4,928 4,316
Other current liabilities....... 2,793 9,286 12,636
--------- ---------- ------------
Total current
liabilities................ 17,885 53,626 68,469
DEFERRED INCOME TAXES................ 502 960 561
LONG-TERM DEBT, NET OF CURRENT
MATURITIES......................... 1,317 20,326 50,785
PAYABLE TO STOCKHOLDERS/AFFILIATES... 342 -- --
OTHER LONG-TERM LIABILITIES.......... 76 200 247
--------- ---------- ------------
Total liabilities.......... 20,122 75,112 120,062
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par,
5,000,000 shares authorized,
none issued and outstanding... -- -- --
Common stock, $.01 par,
52,969,912 shares authorized,
4,628,545, 26,575,669 and
28,796,085 shares issued and
outstanding, respectively 46 266 288
Additional paid-in capital...... 96 205,709 231,355
Retained earnings............... 11,215 6,693 10,071
--------- ---------- ------------
Total stockholders'
equity..................... 11,357 212,668 241,714
--------- ---------- ------------
Total liabilities and
stockholders' equity.... $ 31,479 $ 287,780 $361,776
========= ========== ============

Reflects a 121.1387-for-one stock split effective on March 19, 1997

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

F-10

COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- ---------- ---------- ----------
(UNAUDITED)

REVENUES............................. $ 65,167 $ 96,296 $ 237,709 $ 26,401 $ 117,838
COST OF SERVICES..................... 48,743 72,123 171,941 19,809 89,410
--------- --------- ---------- ---------- ----------
Gross profit............... 16,424 24,173 65,768 6,592 28,428
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 14,707 19,097 58,811 19,486 20,695
GOODWILL AND OTHER AMORTIZATION...... -- -- 1,851 -- 1,170
ACQUISITION RELATED EXPENSES......... -- -- 575 -- --
--------- --------- ---------- ---------- ----------
Operating income........... 1,717 5,076 4,531 (12,894) 6,563
OTHER INCOME (EXPENSE):
Interest income................. 209 283 1,149 85 194
Interest expense................ (203) (244) (1,212) (67) (777)
Other........................... 73 (108) 132 (14) 52
--------- --------- ---------- ---------- ----------
Other income (expense)..... 79 (69) 69 4 (531)
--------- --------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES........... 1,796 5,007 4,600 (12,890) 6,032
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 503 1,417 7,430 (749) 2,654
--------- --------- ---------- ---------- ----------
NET INCOME (LOSS).................... $ 1,293 $ 3,590 $ (2,830) $ (12,141) $ 3,378
========= ========= ========== ========== ==========
NET INCOME (LOSS) PER SHARE:
Basic........................... $ .17 $ .42 $ (.16) $ (1.41) $ .12
========= ========= ========== ========== ==========
Diluted......................... $ .17 $ .42 $ (.16) $ (1.41) $ .12
========= ========= ========== ========== ==========
SHARES USED IN COMPUTING NET
INCOME (LOSS) PER SHARE:
Basic........................... 7,686 8,535 17,515 8,626 27,887
========= ========= ========== ========== ==========
Diluted......................... 7,686 8,535 17,708 8,626 28,318
========= ========= ========== ========== ==========

Reflects a 121.1387-for-one stock split effective on March 19, 1997

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

F-11

COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------------- PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------------ ------ ---------- --------- -------------

BALANCE AT DECEMBER 31, 1994............ 3,446,419 $ 34 $ 20 $ 4,251 $ 4,305
S Corporation distributions made by
certain Pooled Companies......... -- -- -- (137) (137)
Net income......................... -- -- -- 1,293 1,293
Pooled Companies not restated...... 847,808 8 60 2,135 2,203
Other.............................. -- -- -- 43 43
------------ ------ ---------- --------- -------------
BALANCE AT DECEMBER 31, 1995............ 4,294,227 42 80 7,585 7,707
S Corporation distributions made by
certain Pooled Companies......... -- -- -- (613) (613)
Adjustments to conform fiscal
year-ends of Pooled Companies.... -- -- -- 376 376
Initial Capitalization............. 121,139 1 -- -- 1
Net income......................... -- -- -- 3,590 3,590
Pooled Companies not restated...... 213,179 2 11 500 513
Other.............................. -- 1 5 (223) (217)
------------ ------ ---------- --------- -------------
BALANCE AT DECEMBER 31, 1996............ 4,628,545 46 96 11,215 11,357
Issuance of Common stock:
Proceeds of the Offering...... 7,015,000 70 79,805 -- 79,875
Acquisition of Founding
Companies.................. 9,720,927 98 100,999 -- 101,097
Issuance of management
shares..................... 4,118,708 41 11,556 -- 11,597
Acquisition of Purchased
Companies.................. 1,092,489 11 13,253 -- 13,264
S Corporation distributions
made by certain Pooled
Companies.................. -- -- -- (1,692) (1,692)
Net loss........................... -- -- -- (2,830) (2,830)
------------ ------ ---------- --------- -------------
BALANCE AT DECEMBER 31, 1997............ 26,575,669 266 205,709 6,693 212,668
Issuance of Common Stock:
Acquisition of Purchased
Companies (unaudited)...... 2,220,416 22 25,646 -- 25,668
Net Income (unaudited)............. -- -- -- 3,378 3,378
------------ ------ ---------- --------- -------------
BALANCE AT MARCH 31, 1998 (unaudited)... 28,796,085 $ 288 $ 231,355 $ 10,071 $ 241,714
============ ====== ========== ========= =============

Reflects a 121.1387-for-one stock split effective on March 19, 1997

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

F-12

COMFORT SYSTEMS USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

THREE MONTHS THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
------------------------------- MARCH 31, MARCH 31,
1995 1996 1997 1997 1998
--------- --------- --------- ------------ ------------
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 1,293 $ 3,590 $ (2,830) $ (12,141) $ 3,378
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization
expense.......................... 643 967 3,997 312 2,114
Bad debt expense................. 36 177 347 -- 111
Compensation expense related to
issuance of management
shares......................... -- -- 11,556 11,556 --
Deferred tax expense (benefit)... (24) 279 (663) (1,276) (787)
Loss (gain) on sale of property
and equipment.................. 11 4 (100) -- (21)
Pooled Companies not restated.... 780 104 -- -- --
Adjustment to conform year-end of
certain pooled companies....... -- 376 -- -- --
Changes in operating assets and
liabilities, net of effects of
acquisitions of Founding and
Purchased Companies --
(Increase) decrease in --
Receivables, net............. (1,839) (3,851) (10,890) 701 (1,564)
Inventories.................. (16) (422) 1,053 183 (95)
Prepaid expenses and other
current assets............. 183 (1,285) 160 (2,486) (435)
Cost and estimated earnings
in excess of billings...... (625) 1,312 (4,261) (1,619) (1,596)
Other noncurrent assets...... (162) 221 (63) 88 (352)
Increase (decrease) in --
Accounts payable and accrued
liabilities................ 888 545 (478) 5,051 (4,264)
Billings in excess of costs
and estimated earnings..... (195) 1,434 402 683 (377)
Other, net....................... 49 (184) 30 -- (82)
--------- --------- --------- ------------ ------------
Net cash provided by (used
in) operating activities... 1,022 3,267 (1,740) 1,052 (3,970)
--------- --------- --------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment.......................... (785) (1,865) (3,930) (443) (1,531)
Proceeds from sales of property and
equipment.......................... 79 43 474 -- 90
Cash paid for Founding Companies,
net of cash acquired............... -- -- (42,295) -- --
Cash paid for Purchased Companies,
net of cash acquired............. -- -- (11,781) -- (15,449)
--------- --------- --------- ------------ ------------
Net cash used in investing
activities................. (706) (1,822) (57,532) (443) (16,890)
--------- --------- --------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt......... (383) (1,699) (37,114) (62) (20,469)
Borrowings of long-term debt....... 1,684 1,455 26,453 520 32,483
S Corporation distributions paid
by certain Pooled Companies.. (137) (613) (1,591) -- --
Proceeds from issuance of common
stock, net of offering costs..... -- -- 79,916 41 --
Other.............................. (42) 52 -- -- --
--------- --------- --------- ------------ ------------
Net cash provided by (used
in) financing activities... 1,122 (805) 67,664 499 12,014
--------- --------- --------- ------------ ------------
NET INCREASE IN CASH................. 1,438 640 8,392 1,108 (8,846)
CASH AND CASH EQUIVALENTS, beginning
of year............................ 4,063 5,501 6,141 6,141 14,533
--------- --------- --------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of
year................................. $ 5,501 $ 6,141 $ 14,533 $ 7,249 $ 5,687
========= ========= ========= ============ ============

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

F-13

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997

1. BUSINESS AND ORGANIZATION:

Comfort Systems USA, Inc., a Delaware corporation, ("Comfort Systems" and
collectively with its subsidiaries, the "Company"), is a national provider of
comprehensive heating, ventilation and air conditioning ("HVAC") installation,
maintenance, repair and replacement services. Founded in December 1996, the
Company is consolidating the fragmented commercial and industrial HVAC markets,
executing most of its applications within office buildings, retail centers,
apartment complexes, hotels, manufacturing plants and government facilities. In
addition to standard HVAC services, the Company also provides specialized
applications such as process cooling, control systems, electronic monitoring and
process piping. Certain locations also perform related services such as
electrical and plumbing.

On June 27, 1997, Comfort Systems completed the initial public offering
(the "Offering") of its common stock (the "Common Stock") and simultaneously
acquired in separate concurrent transactions twelve companies (collectively
referred to as the "Founding Companies") engaged in providing HVAC services.
The Founding Companies had operations in ten states. Subsequent to June 30,
1997, and through December 31, 1997, the Company acquired 27 HVAC and related
businesses. These companies added operating locations in an additional 10 states
(which includes Puerto Rico). These acquisitions included six "tuck-in"
operations which were combined with existing Comfort Systems locations in 1997.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

For financial statement purposes, Comfort Systems has been identified as
the accounting acquirer. Accordingly, the historical financial statements
include those of Comfort Systems since December 1996. Of the 27 acquisitions
noted above, 14 were accounted for as poolings-of-interests (the "Pooled
Companies") and 13 were accounted for as purchases (the "Purchased
Companies"). These consolidated financial statements reflect the acquisitions
of the Founding Companies and Purchased Companies as of their respective
acquisition dates and reflects eight of the Pooled Companies (the "Restated
Companies") for all periods presented. Certain of the Pooled Companies are
considered immaterial poolings based upon the relative significance of their
individual operations and have not been restated for all periods presented. The
acquisitions of the Founding and Purchased Companies were accounted for using
the purchase method of accounting. The allocations of the purchase prices to the
assets acquired and liabilities assumed of these companies have been recorded
based on preliminary estimates of fair value and may be changed as additional
information becomes available.

Prior to their acquisition by Comfort Systems, three of the Pooled
Companies reported annual results based on fiscal year-ends other than December
31. An adjustment to conform the year-ends of these companies to December 31
year-ends was made in 1996 resulting in an increase of approximately $376,000 to
retained earnings and cash flows for 1996.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Comfort Systems and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

CASH FLOW INFORMATION

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

Cash paid for interest in 1995, 1996 and 1997 was approximately $242,000,
$246,000, and $492,000, respectively. Cash paid for income taxes in 1995, 1996
and 1997 was approximately $228,000, $697,000, and $985,000, respectively.

F-14

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company recorded capital leases in 1995, 1996 and 1997 of approximately
$ -- , $ -- , and $114,000, respectively.

INVENTORIES

Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
expected life of the lease or the estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated over the
remaining useful life of the equipment. Upon retirement or disposition of
property and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in the
statement of operations.

GOODWILL

Goodwill represents the excess of the aggregate purchase price paid by the
Company in acquisitions accounted for as purchases over the fair value of the
net tangible assets acquired. Goodwill is amortized on a straight-line basis
over 40 years.

The Company periodically evaluates the recoverability of the remaining
balance of goodwill recorded from business acquisitions. The Company uses an
estimate of future income from operations and cash flows, as well as other
economic and business factors as a measure of recoverability of these assets.

As of December 31, 1997, accumulated amortization of goodwill was
approximately $1.9 million.

REVENUE RECOGNITION

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and revenues, and their effects are recognized in the period
in which the revisions are determined.

Receivable balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.

WARRANTY COSTS

The Company typically warrants labor for the first year after installation
on new air conditioning and heating systems. The Company generally warrants
labor for 30 days after servicing of existing air conditioning and heating
systems. A reserve for warranty costs is recorded upon completion of
installation or service.

F-15

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

The Company will file a consolidated return for federal income tax
purposes. Income taxes are provided for under the liability method, which takes
into account differences between financial statement treatment and tax treatment
of certain transactions. Deferred tax assets represent the tax effect of
activity that has been reflected in the financial statements but which will not
be deductible for tax purposes until future periods. Deferred tax liabilities
represent the tax effect of activity that has been reflected in the financial
statements but which will not be taxable until future periods.

Certain of the Pooled Companies were S Corporations for income tax purposes
and, accordingly, any income tax liabilities for the periods prior to the
acquisition date are the responsibility of the respective stockholders. All
acquired entities are subject to corporate income taxes subsequent to their
acquisition.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of revenues, expenses, assets,
liabilities and contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.

CONCENTRATIONS OF CREDIT RISK

The Company provides services to a broad range of geographical regions. The
Company's credit risk primarily consists of receivables from a variety of
customers including, general contractors, property owners and developers, and
commercial and industrial companies. The Company reviews its accounts receivable
and provides allowances as deemed necessary.

IMPAIRMENT OF LONG-LIVED ASSETS

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to fair value is necessary. Adoption of this standard
did not have a material effect on the financial position or results of
operations of the Company.

3. BUSINESS COMBINATIONS:

POOLINGS

During 1997, the Company acquired all of the outstanding stock of the
Pooled Companies in exchange for 4,507,406 shares of Common Stock. These
acquisitions have been accounted for as poolings-of-interests as described in
Note 2. These companies provide HVAC and related services.

The historical financial statements for 1995 and 1996 represent the
operations of the Restated Companies prior to their acquisition by the Company.
The combined revenues and net income of the Pooled Companies for the
preacquisition period in 1997 were $94.6 million and $5.5 million, respectively.

PURCHASES

Subsequent to the Offering, Comfort Systems acquired the thirteen Purchased
Companies, which were accounted for as purchase transactions. These companies
provide HVAC and related services. The aggregate consideration paid in these
transactions was $14.5 million in cash, 1,092,489 shares of Common Stock with a
market value at the date of acquisition totaling $13.3 million and $5.0 million
in the form of convertible subordinated notes (the "Notes"). These notes are
convertible at various dates in 1998 or 1999

F-16

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and thereafter into 225,473 or 220,449 shares of Common Stock, respectively. The
accompanying balance sheet as of December 31, 1997 includes allocations of the
respective purchase prices to the assets acquired and liabilities assumed based
on preliminary estimates of fair value and is subject to final adjustment. The
allocations resulted in $25.4 million of goodwill, which represents the excess
of purchase price over the estimated fair value of the net assets acquired for
the Purchased Companies. In conjunction with the acquisitions, goodwill was
determined as follows (in thousands):

Fair value of assets acquired, net of
cash acquired...................... $ (21,677)
Liabilities assumed.................. 17,010
Cash paid, net of cash acquired...... 11,781
Estimated market value of stock
consideration...................... 13,264
Issuance of convertible notes........ 4,978
----------
Goodwill............................. $ 25,356
==========

The unaudited pro forma data presented below consists of the income
statement data presented in these consolidated financial statements plus (a)
income statement data for the Founding Companies for the year ended December 31,
1996, and the six months ended June 30, 1997, and (b) income statement data for
the Purchased Companies as if they were effective on January 1, 1996 through the
respective dates of acquisitions (in thousands, except per share data):

YEAR ENDED DECEMBER
31,
----------------------
1996 1997
---------- ----------
(UNAUDITED)
Revenues............................. $ 327,721 $ 381,528
Net income........................... 16,374 19,294
Net income per share................. 0.64 0.76

Pro forma adjustments included in the preceding tables regarding the
Founding Companies and the Purchased Companies primarily relate to (a) certain
reductions in salaries and benefits to the former owners (the "Compensation
Differential") of the Founding Companies, Pooled Companies and Purchased
Companies which they agreed would take effect as of the acquisition date, (b)
pro forma compensation expense of $430,000 for the six months ended June 30,
1997, to reflect the ongoing salaries received by corporate management as though
these salaries were being paid prior to the Offering, (c) elimination of merger
costs in connection with the acquisition of the Pooled Companies, (d)
amortization of goodwill related to the Purchased and Founding Companies, (e)
elimination of the non-recurring, non-cash compensation charge of $11.6 million
recorded by Comfort Systems in the first quarter of 1997 related to Common Stock
issued to management of and consultants to the Company, and (f) interest expense
on borrowings of $11.0 million that would have been necessary to fund certain S
Corporation distributions as if they had occurred at the beginning of each
period presented. In addition, an incremental tax provision has been recorded as
if all applicable Purchased and Founding Companies and Pooled Companies which
were C Corporations had been subject to federal and state income taxes.

The pro forma combined results presented above are not necessarily
indicative of actual results which might have occurred had the operations and
management teams of the Company, the Founding Companies, the Purchased Companies
and Pooled Companies been combined at the beginning of the periods presented.

ADDITIONAL ACQUISITIONS

Subsequent to December 31, 1997, and through February 25, 1998, the Company
completed five additional acquisitions (the "Additional Acquisitions") for
approximately $15.1 million in cash, 2,002,894 shares of Common Stock and
approximately $1.3 million in Notes. The Company filed a Current Report on Form
8-K related to one of these Additional Acquisitions. Annualized revenues from
the businesses

F-17

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired in the Additional Acquisitions were approximately $109 million. All of
these acquisitions will be accounted for as purchase transactions.

4. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (dollars in thousands):

ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1996 1997
------------ --------- ---------
Land................................. N/A $ -- $ 95
Transportation equipment............. 3-7 4,362 14,450
Machinery and equipment.............. 3-15 2,130 7,211
Computer and telephone equipment..... 3-7 1,232 4,118
Buildings and leasehold
improvements....................... 3-20 869 3,174
Furniture and fixtures............... 3-10 677 2,625
--------- ---------
9,270 31,673
Less -- Accumulated depreciation..... 5,907 19,627
--------- ---------
Property and equipment, net..... $ 3,363 $ 12,046
========= =========

5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):

DECEMBER 31,
--------------------
1996 1997
--------- ---------
Balance at beginning of year......... $ 196 $ 227
Additions for bad debt expense....... 177 347
Deductions for recoveries and for
uncollectible receivables written
off................................ (146) (149)
Allowance for doubtful accounts of
Founding and Purchased Companies at
acquisition dates.................. -- 609
--------- ---------
Balance at end of year.......... $ 227 $ 1,034
========= =========

Other current liabilities consist of the following (in thousands):

DECEMBER 31,
--------------------
1996 1997
--------- ---------
Accrued warranty costs.................. $ 192 $ 1,743
Accrued insurance expense............... 118 549
Deferred income taxes................... 59 1,430
Deferred revenue........................ -- 770
Other current liabilities............... 2,424 4,794
--------- ---------
$ 2,793 $ 9,286
========= =========

F-18

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Installation contracts in progress are as follows (in thousands):

DECEMBER 31,
---------------------
1996 1997
--------- ----------
Costs incurred on contracts in
progress................................ $ 25,829 $ 143,222
Estimated earnings, net of losses....... 5,947 38,966
--------- ----------
31,776 182,188
Less -- Billings to date................ 34,060 180,238
--------- ----------
$ (2,284) $ 1,950
========= ==========
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................. $ 1,476 $ 12,050
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. (3,760) (10,100)
--------- ----------
$ (2,284) $ 1,950
========= ==========

6. LONG-TERM DEBT OBLIGATIONS:

Long-term debt obligations consist of the following (in thousands):

DECEMBER 31,
--------------------
1996 1997
--------- ---------
Revolving credit facility............... $ -- $ 15,300
Notes................................... -- 4,978
Other................................... 3,087 917
--------- ---------
Total long-term......................... 3,087 21,195
Less: current maturities 1,770 869
--------- ---------
$ 1,317 $ 20,326
========= =========

At December 31, 1997, future principal payments of long-term debt are as
follows (in thousands):

Year Ending December 31 --
1998............................... $ 869
1999............................... 315
2000............................... 20,011
2001............................... --
2002............................... --
Thereafter......................... --
---------
$ 21,195
=========

REVOLVING CREDIT AGREEMENT

In July 1997, the Company entered into a credit agreement with Bank One,
Texas, N.A. (the "Credit Facility"). The Credit Facility was amended and
restated in September 1997 primarily to provide for additional banks to lend to
the Company under the Credit Facility. The Credit Facility provides the Company
with an unsecured revolving line of credit of $75 million. The Company has a
choice of two interest rate options when borrowing under the Credit Facility.
Under one option, the interest rate is determined based on the higher of the
Federal Funds Rate plus one-half percentage point or the bank's prime rate. An
additional margin of zero to one-quarter percentage point is then added to the
higher of these two rates. The additional margin depends on the ratio of the
Company's debt to earnings before interest, taxes, depreciation and amortization
for the preceding twelve months ("EBITDA"). For purposes of this

F-19

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ratio, EBITDA may include the preceding twelve months' results for any companies
acquired during the last year. Under the other interest rate option, borrowings
bear interest based on designated short-term Eurodollar rates (which generally
approximate the London Interbank Offered Rates or LIBOR, as published in major
financial media) plus one to two percentage points, again depending on the ratio
of debt to EBITDA. In addition, commitment fees of 0.125% to 0.375% per annum,
also depending on the ratio of debt to EBITDA, are payable on the unused portion
of the line of credit. The Credit Facility prohibits the payment of dividends by
the Company without lender's approval and requires the Company to comply with
certain financial covenants. The Credit Facility expires on July 2, 2000, at
which time all amounts outstanding under the facility are due.

As of December 31, 1997, the Company had borrowed $15.3 million under the
Credit Facility at an average interest rate of approximately 6.7% per annum for
the second half of 1997. As of March 24, 1998, $43.8 million (unaudited) was
outstanding under this facility.

The Notes in the amount of $5 million referred to above were issued to
former owners of certain Purchased Companies as partial consideration of the
acquisition purchase price. The Notes bear interest, payable quarterly, at a
weighted average interest rate of 6.0% and are convertible by the holder into
shares of the Company's Common Stock at a weighted average price of $22.08 per
share. The terms of the Notes require $0.3 million of principal payments in 1999
and $4.7 million of principal payments at maturity in 2000.

The Company estimates the fair value of long-term debt as of December 31,
1997, to be approximately the same as the recorded value.

7. INCOME TAXES:

The Company has implemented SFAS No. 109, "Accounting for Income Taxes,"
which provides for a liability approach to accounting for income taxes. The
provision for income taxes consists of the following (in thousands):

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Current --
Federal......................... $ 379 $ 893 $ 6,346
State and Puerto Rico........... 148 245 1,747
--------- --------- ---------
527 1,138 8,093
--------- --------- ---------
Deferred --
Federal......................... 9 243 (710)
State and Puerto Rico........... (33) 36 47
--------- --------- ---------
(24) 279 (663)
--------- --------- ---------
$ 503 $ 1,417 $ 7,430
========= ========= =========

F-20

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The difference in income taxes provided for and the amounts determined by
applying the federal statutory tax rate to income before income taxes result
from the following (in thousands):

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Income tax expense at the statutory
rate................................. $ 629 $ 1,752 $ 1,610
Increase (decrease) resulting from --
State income taxes, net of
related tax effect............ 47 142 1,217
Non-deductible expenses......... 26 30 401
Non-recurring, non-cash
compensation charge........... -- -- 4,045
Effect of S Corporation income
previously taxed to the former
owners........................ (200) (495) (880)
Non-deductible goodwill
amortization.................. -- -- 633
Non-deductible acquisition costs
related to Pooled Companies... -- -- 201
Provision recognized upon
termination of Subchapter S
election...................... -- -- 100
Other........................... 1 (12) 103
--------- --------- ---------
$ 503 $ 1,417 $ 7,430
========= ========= =========

Deferred income tax provisions result from current period activity that has
been reflected in the financial statements but which is not includable in
determining the Company's tax liabilities until future periods. Deferred tax
assets and liabilities reflect the tax effect in future periods of all such
activity to date that has been reflected in the financial statements but which
is not includable in determining the Company's tax liabilities until future
periods.

DECEMBER 31,
--------------------
1996 1997
--------- ---------
(IN THOUSANDS)
Deferred income tax assets --
Accounts receivable and
allowance for doubtful
accounts....................... $ (55) $ (340)
Accrued liabilities and
expenses........................ (579) (1,623)
Other........................... (177) (437)
--------- ---------
Total deferred income tax
assets.................... (811) (2,400)
--------- ---------
Deferred income tax liabilities --
Property and equipment.......... 47 309
Long-term installation
contracts....................... 1,490 1,883
Other........................... 56 123
--------- ---------
Total deferred income tax
liabilities............... 1,593 2,315
--------- ---------
Net deferred income tax
(assets) liabilities...... $ 782 $ (85)
========= =========

The deferred tax assets and liabilities reflected above are included in the
consolidated balance sheet at December 31, 1997, as $2.0 million of current
deferred income tax assets in prepaid expenses and other, $0.5 million of
non-current deferred income tax assets in other non-current assets, $1.4 million
of current deferred income tax liabilities in other current liabilities and $1.0
million of non-current deferred income tax liabilities in deferred income taxes.

8. EMPLOYEE BENEFIT PLANS:

Certain of the Company's subsidiaries sponsor various retirement plans for
most full-time and some part-time employees. These plans consist of defined
contribution plans and multi-employer pension plans and cover employees at
substantially all of the Company's operating locations. The defined contribution

F-21

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plans provide for contributions ranging from 1% to 5% of covered employees'
salaries or wages and totaled $1.4 million for 1995, $1.8 million for 1996 and
$1.4 million for 1997. Of these amounts, approximately $830,000 and $400,000 was
payable to the plans at December 31, 1996, and December 31, 1997, respectively.

Certain of the Company's subsidiaries also participate in several
multi-employer pension plans for the benefit of their employees who are union
members. Company contributions to these plans were approximately $0.7 million
for 1995, $0.6 million for 1996 and $0.8 million for 1997. The data available
from administrators of the multi-employer pension plans is not sufficient to
determine the accumulated benefit obligations, nor the net assets attributable
to the multi-employer plans in which Company employees participate.

9. COMMITMENTS AND CONTINGENCIES:

LEASES

The Company leases certain facilities and equipment under noncancelable
operating leases. Rent expense for the years ended December 31, 1995, 1996, and
1997 was $0.5 million, $0.5 million, and $1.8 million, respectively. Concurrent
with the acquisitions of certain Founding, Pooled and Purchased Companies, the
Company entered into various agreements with previous owners to lease land and
buildings used in the Company's operations. The terms of these leases range from
five years to twenty years and provide for certain escalations in the rental
expenses each year. Included in the 1997 rent expenses above is approximately
$1.0 million of rent paid to these related parties. The following represents
future minimum rental payments under noncancelable operating leases (in
thousands):

Year ending December 31 --
1998............................ $ 3,948
1999............................ 3,508
2000............................ 3,089
2001............................ 2,580
2002............................ 2,165
Thereafter...................... 9,204
---------
$ 24,494
=========

CLAIMS AND LAWSUITS

The Company is from time to time party to litigation in the ordinary course
of business. There are currently no pending legal proceedings that, in
management's opinion, would have a material adverse effect on the Company's
operating results or financial condition. The Company maintains various
insurance coverages in order to minimize financial risk associated with certain
claims. The Company has provided accruals for probable losses and legal fees
associated with certain of these actions in the accompanying consolidated
financial statements.

10. STOCKHOLDER'S EQUITY:

COMMON STOCK AND PREFERRED STOCK

Comfort Systems effected a 121.1387-for-one stock split on March 19, 1997
for each share of Common Stock of the Company then outstanding. In addition, the
Company increased the number of authorized shares of Common Stock to 52,969,912
and authorized 5,000,000 shares of $.01 par value preferred stock. The effects
of the Common Stock split and the increase in the number of shares of authorized
Common Stock have been retroactively reflected on the balance sheet and in the
accompanying notes as applicable.

F-22

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the organization and initial capitalization of Comfort
Systems, the Company issued 121,139 shares of Common Stock at $.01 per share to
Notre Captial Ventures II, L.L.C. ("Notre"). In January 1997, the Company
issued 2,848,773 additional shares to Notre for $.01 per share.

In January and February 1997, the Company issued a total of 1,269,935
shares of Common Stock to management of and consultants to the Company at a
price of $.01 per share. As a result, the Company recorded a non-recurring,
non-cash compensation charge of $11.6 million in the first quarter of 1997,
representing the difference between the amount paid for the shares and the
estimated fair value of the shares on the date of sale.

RESTRICTED COMMON STOCK

In March 1997, Notre exchanged its 2,742,912 shares of Common Stock for an
equal number of shares of restricted voting common stock ("Restricted Voting
Common Stock"). The holder of Restricted Voting Common Stock is entitled to
elect one member of the Company's Board of Directors and to 0.55 of one vote for
each share on all other matters on which they are entitled to vote. Holders of
Restricted Voting Common Stock are not entitled to vote on the election of any
other directors.

Each share of Restricted Voting Common Stock will automatically convert to
Common Stock on a share-for-share basis (i) in the event of a disposition of
such share of Restricted Voting Common Stock by the holder thereof (other than a
distribution which is a distribution by a holder to its partners or beneficial
owners, or a transfer to a related party of such holders (as defined in Sections
267, 707, 318 and/or 4946 of the Internal Revenue Code of 1986, as amended)),
(ii) in the event any person acquires beneficial ownership of 15% or more of the
total number of outstanding shares of Common Stock of the Company, or (iii) in
the event any person offers to acquire 15% or more of the total number of
outstanding shares of Common Stock of the Company. After July 1,1998, the Board
of Directors may elect to convert any remaining shares of Restricted Voting
Common Stock into shares of Common Stock in the event 80% or more of the
originally outstanding shares of Restricted Voting Common Stock have been
previously converted into shares of Common Stock.

EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share."SFAS No. 128 revises the methodology to be used in
computing earnings per share (EPS) such that the computations previously
required for primary and fully diluted EPS are to be replaced with "basic" and
"diluted" EPS. Basic EPS is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
EPS is computed in the same manner as fully diluted EPS, except that, among
other changes, the average share price for the period is used in all cases when
applying the treasury stock method to potentially dilutive outstanding options.
The Notes are not included in the weighted average shares outstanding because
they were not significant. The Company has adopted SFAS No. 128 and restated EPS
for all periods presented.

F-23

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands):

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Shares issued in connection with the
acquisitions of Founding
Companies.......................... -- -- 5,008
Shares sold pursuant to the
Offering........................... -- -- 3,142
Shares held by Notre, management and
consultants........................ 4,240 4,240 4,240
Shares issued in connection with the
acquisitions of Pooled Companies... 3,446 4,295 4,507
Shares issued in connection with the
underwriter's overallotment........ -- -- 434
Shares issued in connection with the
acquisitions of the Purchased
Companies.......................... -- -- 184
--------- --------- ---------
Weighted average shares
outstanding -- Basic............... 7,686 8,535 17,515
Weighted average portion of shares
related to stock options under the
treasury stock method.............. -- -- 193
--------- --------- ---------
Weighted average shares
outstanding -- Diluted............. 7,686 8,535 17,708
========= ========= =========

11. STOCK OPTION PLANS:

LONG-TERM INCENTIVE PLAN

In March 1997, the Company's stockholders approved the Company's 1997
Long-Term Incentive Plan which provides for the granting or awarding of
incentive or non-qualified stock options, stock appreciation rights, restricted
or deferred stock, dividend equivalents or other incentive awards to directors,
officers, key employees and consultants to the Company.

The Company's 1997 Long-Term Incentive Plan provides for the granting of
options to key employees to purchase an aggregate of not more than 13% of the
total number of shares of the Company's Common Stock outstanding at the time of
grant. Such options have been issued by the Company at fair market value on the
date of grant and become exercisable in five equal annual installments beginning
on the first anniversary of the date of grant. The options expire after seven
years from the date of grant if unexercised. Outstanding options may be canceled
and reissued under terms specified in the plan.

The following table summarizes activity under the Company's stock option
plan:

1997
----------
Options outstanding, beginning of
year............................... --
Granted (range of exercise
prices, $13.00 to $17.88)...... 2,537,203
Forfeited (range of exercise
prices, $13.00 to $17.88)...... --
----------
Options outstanding, end of year..... 2,537,203
==========

The Company accounts for its stock-based compensation under Accounting
Principles Board Statement No. 25, "Accounting for Stock Issued to Employees"
(APB 25). Under this accounting method, no expense in connection with a stock
option is recognized in the consolidated statements of operations if the
exercise price of the option is equal to the market price of the stock on the
date of grant. In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which requires that
if a company accounts for stock-based compensation in accordance with APB 25,
the company must also disclose the effects on its results of operations as if an
estimate of the value of stock-

F-24

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
based compensation at the date of grant was recorded as an expense in the
company's statement of operations. These effects for the Company are as follows
(in thousands, except per share data):

1997
---------
Net Loss As reported......................... $ (2,830)
Pro forma for SFAS No. 123.......... $ (3,229)
Loss Per Share As reported......................... $ (.16)
Pro forma for SFAS No. 123.......... $ (.18)

Pro forma basic loss per share and diluted loss per share are the same for
SFAS No. 123 purposes.

The effects of applying SFAS No. 123 in the pro forma disclosure may not be
indicative of future amounts as additional awards in future years are
anticipated. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions:

Expected dividend yield.............. 0.00%
Expected stock price volatility...... 39.41%
Risk free interest rate.............. 5.77%-6.15%
Expected life of options............. 7 years

Options outstanding at December 31, 1997, had exercise prices ranging from
$13.00 to $17.88, a weighted average remaining contractual life of 6.6 years, a
weighted average fair value of $4.24 per option and a weighted average exercise
price of $13.72 per option.

NON-EMPLOYEE DIRECTORS STOCK PLAN

In March 1997, the Company's stockholders approved the 1997 Non-Employee
Directors' Stock Plan (the "Directors' Plan"), which provides for the granting
or awarding of stock options and stock appreciation rights to non-employees. The
number of shares authorized and reserved for issuance under the Directors' Plan
is 250,000 shares. The Directors' Plan provides for the automatic grant of
options to purchase 10,000 shares to each non-employee director serving at the
commencement of the Offering.

Each non-employee director will be granted options to purchase 10,000
shares at the time of the initial election. In addition, each director will be
automatically granted options to purchase an additional 5,000 shares at each
annual meeting of the stockholders occurring more than two months after the date
of the director's initial election. All options will be granted with an exercise
price equal to the fair market value at the date of grant and are immediately
vested upon grant.

Options have been granted to three current members of the board of
directors to purchase 10,000 shares of Common Stock at the initial Offering
price. These options will expire at the earlier of 10 years from the date of
grant or one year after termination of service as a director.

The Directors' Plan allows non-employee directors to receive shares
("Deferred Shares") at future settlement dates in lieu of cash. The number of
Deferred Shares will have an aggregate fair market value equal to the fees
payable to the directors.

12. SIGNIFICANT VENDORS:

Significant vendors are defined as those that account for greater than 10%
of the Company's purchases. For the year ended December 31, 1997, one vendor
accounted for 10.9% of the Company's purchases. There were no significant
vendors in 1996 or 1995. The Company believes that an interruption in supply
from the significant vendor referred to above would not have a material adverse
impact on the financial position or results of operations of the Company.

F-25

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. SUBSEQUENT EVENT (UNAUDITED):

Subsequent to December 31, 1997 through March 31, 1998, the Company has
acquired 11 additional mechanical contracting companies engaged principally in
the HVAC business. The Company paid approximately $16.6 million in cash, issued
2,220,417 shares of Common Stock and issued $2.0 million in convertible
subordinated notes as consideration for those companies. The Company funded the
$16.6 million cash portion of the purchase price through borrowings on the
Credit Facility. The Company has accounted for these acquisitions as purchase
transactions.

From April 1, 1998, through May 12, 1998, the Company has acquired thirteen
additional mechanical contracting companies engaged principally in the HVAC
business. The Company paid approximately $29.6 million in cash, issued 1,495,648
shares of Common Stock and issued $15.4 million in convertible subordinated
notes as consideration for these companies. The Company funded the cash portion
of the purchase price through borrowing on the Credit Facility. The Company has
accounted for these acquisitions as purchase transactions.

In April 1998, the Credit Facility was further amended in order to increase
borrowing capacity and to provide for additional banks to lend to the Company
under the Credit Facility. The Credit Facility provides the Company with an
unsecured revolving line of credit of $175 million. The interest rate under the
second option available to the Company was revised to LIBOR plus .75 to 1.5
percentage points. In addition, commitment fees have decreased to .125% to .325%
per annum, depending on the ratio of debt to EBITDA, which are payable on the
unused portion of the line of credit. The amended Credit Facility expires on
April 14, 2001, at which time, all amounts outstanding under the facility is
due.

F-26

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Quality Air Heating & Cooling, Inc.:

We have audited the accompanying balance sheets of Quality Air Heating &
Cooling, Inc., as of March 31, 1995 and 1996, and December 31, 1996, and the
related statements of operations, shareholders' equity and cash flows for the
years ended March 31, 1995 and 1996, the nine months ended December 31, 1996,
the year ended December 31, 1996, and the six months ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Quality Air Heating &
Cooling, Inc., as of March 31, 1995 and 1996, and December 31, 1996, and the
results of their operations and their cash flows for the years ended March 31,
1995 and 1996, the nine months ended December 31, 1996, the year ended December
31, 1996, and the six months ended June 30, 1997, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 25, 1998

F-27

QUALITY AIR HEATING & COOLING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

MARCH 31,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,669 $ 4,191 $ 2,651
Accounts receivable --
Trade, net of allowance of
$87, $80, and $80,
respectively............ 4,510 4,188 5,260
Retainage.................. 457 464 453
Other receivables.......... 14 12 5
Inventories..................... 445 480 541
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 1,192 964 1,312
Prepaid expenses and other
current assets................ 92 63 17
Federal income tax deposit...... 506 654 691
--------- --------- ------------
Total current
assets............. 8,885 11,016 10,930
PROPERTY AND EQUIPMENT, net.......... 771 708 758
--------- --------- ------------
Total assets.......... $ 9,656 $ 11,724 $ 11,688
========= ========= ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ 470 $ 613 $ 675
Accounts payable and accrued
expenses...................... 2,786 2,734 2,178
Dividends payable to
shareholder................... 1,538 3,314 1,519
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 897 604 1,254
Unearned revenue................ 335 362 372
--------- --------- ------------
Total current
liabilities........ 6,026 7,627 5,998
LONG-TERM DEBT, net of current
maturities......................... 2,444 1,392 646
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value;
250,000 shares authorized and
issued, 183,993 shares
outstanding................... 22 22 22
Additional paid-in capital...... 6 6 6
Retained earnings............... 2,056 3,575 5,914
Treasury stock, 66,007 shares,
at cost....................... (898) (898) (898)
--------- --------- ------------
Total shareholders'
equity............. 1,186 2,705 5,044
--------- --------- ------------
Total liabilities and
shareholders'
equity............. $ 9,656 $ 11,724 $ 11,688
========= ========= ============

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

F-28

QUALITY AIR HEATING & COOLING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

YEARS ENDED NINE MONTHS YEAR SIX MONTHS
MARCH 31, ENDED ENDED ENDED
-------------------- DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1996 1996 1997
--------- --------- ------------ ------------ ----------

REVENUES............................. $ 24,434 $ 32,594 $ 23,282 $ 29,597 $ 16,747

COST OF SERVICES..................... 15,634 20,850 14,176 18,467 9,854
--------- --------- ------------ ------------ ----------

Gross profit.................... 8,800 11,744 9,106 11,130 6,893

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,646 6,791 5,032 6,640 3,879
--------- --------- ------------ ------------ ----------

Income from operations.......... 2,154 4,953 4,074 4,490 3,014

OTHER INCOME (EXPENSE):

Interest expense................ (36) (218) (101) (154) (72)

Other........................... 53 98 60 97 24
--------- --------- ------------ ------------ ----------

NET INCOME........................... $ 2,171 $ 4,833 $ 4,033 $ 4,433 $ 2,966
========= ========= ============ ============ ==========

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

F-29

QUALITY AIR HEATING & COOLING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------- ------ ---------- --------- -------- --------------

BALANCE, March 31, 1994................. 250,000 $ 22 $ 6 $ 3,636 $-- $ 3,664

Purchase of treasury stock......... -- -- -- -- (898) (898)

Distributions to shareholders...... -- -- -- (3,751) -- (3,751)

Net income......................... -- -- -- 2,171 -- 2,171
--
------- ------ --------- -------- --------------

BALANCE, March 31, 1995................. 250,000 22 6 2,056 (898) 1,186

Distributions to shareholders...... -- -- -- (3,314) -- (3,314)

Net income......................... -- -- -- 4,833 -- 4,833
--
------- ------ --------- -------- --------------

BALANCE, March 31, 1996................. 250,000 22 6 3,575 (898) 2,705

Distributions to shareholders...... -- -- -- (1,694) -- (1,694)

Net income......................... -- -- -- 4,033 -- 4,033
--
------- ------ --------- -------- --------------

BALANCE, December 31, 1996.............. 250,000 22 6 5,914 (898) 5,044

Distribution to shareholders....... -- -- -- (8,538) -- (8,538)

Net income......................... -- -- -- 2,966 -- 2,966
--
------- ------ --------- -------- --------------

BALANCE, June 30, 1997.................. 250,000 $ 22 $ 6 $ 342 $ (898) $ (528)
======= ====== == ========= ======== ==============

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

F-30

QUALITY AIR HEATING & COOLING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

SIX
YEARS ENDED NINE MONTHS YEAR MONTHS
MARCH 31 ENDED ENDED ENDED
-------------------- DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1996 1996 1997
--------- --------- ------------ ------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,171 $ 4,833 $ 4,033 $ 4,433 $ 2,966
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --.....
Depreciation and amortization... 359 371 242 370 200
Loss (gain) on sale of property
and equipment................. 7 -- 25 25 --
Changes in operating assets and
liabilities --................
(Increase) decrease in --.....
Accounts receivable........ (1,334) 317 (1,054) 335 (338)
Inventories................ (6) (35) (61) (76) (76)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... (804) 228 (348) (253) 504
Prepaid expenses and other
current assets.......... (15) 29 46 (3) (53)
Federal income tax
deposit................. 50 (148) (37) (185) (709)
Increase (decrease) in --.....
Accounts payable and
accrued expenses........ 470 (52) (556) (481) (132)
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 477 (293) 650 269 (522)
Unearned revenue........... (15) 27 10 26 33
--------- --------- ------------ ------------ ---------
Net cash provided by
operating
activities......... 1,360 5,277 2,950 4,460 1,873
--------- --------- ------------ ------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of property and
equipment, net.................. (446) (308) (317) (441) (197)
--------- --------- ------------ ------------ ---------
Net cash used in
investing
activities......... (446) (308) (317) (441) (197)
--------- --------- ------------ ------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... 3,000 -- -- -- 6,068
Payments of long-term debt......... (226) (909) (684) (903) --
Distributions to shareholders...... (3,088) (1,538) (3,489) (3,488) (9,845)
Purchase of treasury stock......... (898) -- -- -- --
--------- --------- ------------ ------------ ---------
Net cash used in
financing
activities......... (1,212) (2,447) (4,173) (4,391) (3,777)
--------- --------- ------------ ------------ ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (298) 2,522 (1,540) (372) (2,101)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 1,967 1,669 4,191 3,023 2,651
--------- --------- ------------ ------------ ---------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 1,669 $ 4,191 $ 2,651 $ 2,651 $ 550
========= ========= ============ ============ =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for --
Interest........................ $ 44 $ 201 $ 107 $ 152 $ 55

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

F-31

QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Quality Air Heating & Cooling, Inc., a Michigan corporation, (the
"Company") focuses on providing "design and build" installation services and
maintenance, repair and replacement of HVAC systems primarily for mid-sized to
large commercial facilities. Quality primarily operates throughout western
Michigan.

The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems"), pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.

REVENUE RECOGNITION

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.

The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance will be billed and
collected in the upcoming fiscal year.

WARRANTY COSTS

The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating systems. A reserve
for warranty costs is recorded upon completion of installation or service.

F-32

QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
this Offering. Included in current assets are deposits to prepay certain of the
shareholders' federal income taxes.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENT

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value is necessary. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (dollars in thousands):

ESTIMATED MARCH 31,
USEFUL LIVES -------------------- DECEMBER 31,
IN YEARS 1995 1996 1996
------------ --------- --------- ------------

Transportation equipment............. 5 $ 1,449 $ 1,554 $1,725
Machinery and equipment.............. 7 480 453 465
Computer and telephone equipment..... 5-7 80 87 90
Leasehold improvements............... 5 838 834 859
Furniture and fixtures............... 7 435 414 459
--------- --------- ------------
Less -- Accumulated depreciation and
amortization....................... (2,511) (2,634) (2,840)
--------- --------- ------------
Property and equipment, net..... $ 771 $ 708 $ 758
========= ========= ============

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS):

Activity in the Company's allowance for doubtful accounts consists of the
following:

MARCH 31,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Balance at beginning of year......... $ 70 $ 87 $ 80
Additions to costs and expenses...... 142 35 2
Deductions for uncollectible
receivables written off and
recoveries......................... (125) (42) (2)
--------- --------- ------------
$ 87 $ 80 $ 80
========= ========= ============

F-33

QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Accounts payable and accrued expenses consist of the following:

MARCH 31,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Accounts payable, trade.............. $ 1,353 $ 1,145 $ 921
Accrued compensation and benefits.... 540 693 426
Other accrued expenses............... 893 896 831
--------- --------- ------------
$ 2,786 $ 2,734 $2,178
========= ========= ============

Installation contracts in progress are as follows:

MARCH 31,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Costs incurred on contracts in
progress........................... $ 5,240 $ 7,697 $ 7,231
Estimated earnings, net of losses.... 1,556 2,588 2,433
--------- --------- ------------
6,796 10,285 9,664
Less -- Billings to date............. 6,501 9,925 9,606
--------- --------- ------------
$ 295 $ 360 $ 58
========= ========= ============
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 1,192 $ 964 $ 1,312
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (897) (604) (1,254)
--------- --------- ------------
$ 295 $ 360 $ 58
========= ========= ============

5. LONG-TERM DEBT:

Long-term debt consists of a note payable to a bank. The debt is secured by
certain equipment, accounts receivable, inventory, a $1,000,000 life insurance
policy on the president and the personal guaranty of the president limited to 50
percent of the outstanding balance of the loan. The note is payable in monthly
installments of $63,000 including interest at the prime lending rate less .25
percent (8 percent at December 31, 1996). The Company has restrictive and
various financial covenants with which the Company was in compliance at December
31, 1996.

The maturities of long-term debt as of December 31, 1996, are as follows
(in thousands):

Year ending December 31,
1997............................ $ 675
1998............................ 646
---------
$ 1,321
=========

The Company has a $2,000,000 line of credit with a bank. The line of credit
expires August 1, 1997, and bears interest at one-half percent below the prime
lending rate. The line of credit is secured by accounts receivable, inventory, a
$1,000,000 life insurance policy, and machinery and equipment. There was no
balance outstanding under this line of credit at March 31, 1995 and 1996, and
December 31, 1996.

6. LEASES:

The Company leases a facility from a company which is owned by one of the
Company's shareholders. The lease expires on April 30, 2005. Quality has an
option to renew the lease for one additional three-year

F-34

QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
term on the same terms. The rent paid under this related-party lease was
approximately $221,000 for each of the years ended March 31, 1995 and 1996, and
December 31, 1996, and $110,400 for the six months ended June 30, 1997. The
Company also leases a facility from a third party, which expires on June 30,
1998. The rent paid under this lease was approximately $20,000 for each of the
years ended March 31, 1995 and 1996, and December 31, 1996. The Company has
guaranteed the payment of two series of public bonds issued in 1985 and 1990,
respectively, by the Michigan Strategic Fund on behalf of two real property
development entities owned by a shareholder, the proceeds of which were used to
fund the construction of the Company's leased warehouse facility and a second
adjacent warehouse. As of March 1997, approximately $1.6 million of the bond
debt remained outstanding.

Future minimum lease payments under these non-cancellable operating leases
are as follows (in thousands):

Year ending December 31,
1997............................ $ 241
1998............................ 231
1999............................ 221
2000............................ 221
2001............................ 221
Thereafter...................... 718
---------
$ 1,853
=========

7. RELATED-PARTY TRANSACTIONS:

The Company paid management fees to an entity owned by its majority
shareholder through December 31, 1995. Total management fees paid amounted to
$260,000 and $190,000 for the years ended March 31, 1995 and 1996, respectively.

8. EMPLOYEE BENEFIT PLAN:

The Company has a defined contribution profit sharing plan. The plan
provides for the Company to match one-half of the first 4 percent contributed by
each employee. Total contributions by the Company under the plan were
approximately $104,000, $110,000 and $125,000 for the years ending March 31,
1995 and 1996, and December 31, 1996, respectively. The Company may also make
discretionary contributions. The Company made discretionary contributions of
$200,000 and $300,000 for the years ended March 31, 1995 and 1996, and had
accrued approximately $169,000 at December 31, 1996, for contributions to be
funded in 1997, along with approximately $116,000 for the six months ended June
30, 1997.

9. FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash and cash equivalents, a
line of credit, notes payable and debt. The Company believes that the carrying
value of these instruments on the accompanying balance sheet approximates their
fair value.

10. COMMITMENTS AND CONTINGENCIES:

LITIGATION

The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.

F-35

QUALITY AIR HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INSURANCE

The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant claims or losses on any of these insurance policies.

The Company is self-insured for medical claims up to $30,000 per year per
covered individual. Additionally, the Company is part of the state's workers'
compensation plan and is responsible for claims up to $275,000 per accident with
a maximum aggregate exposure for twenty-four months of $648,000. Claims in
excess of these amounts are covered by a stop-loss policy. Under the state's
policy, the Company has a $300,000 letter of credit which expires December 31,
1997. The Company has recorded reserves for its portion of self-insured claims
based on estimated claims incurred through March 31, 1995 and 1996 and December
31, 1996.

ROYALTY AGREEMENT

The Company is obligated to pay royalties ranging from 1 percent to 4.5
percent based on the level of service revenues through December 1, 2001, for
management systems support. Royalties paid under this agreement were
approximately $157,000, $159,000 and $165,000 for the years ended March 31, 1995
and 1996 and December 31, 1996, and approximately $76,000 for the six months
ended June 30, 1997.

11. SHAREHOLDERS' EQUITY:

On February 15, 1995, the Company acquired 66,007 shares of common stock
from its majority shareholder for approximately $898,000.

As of June 30, 1997, the Company distributed $8,326,000 in cash and $85,000
in property to its shareholders. The Company distributed approximately $127,000
subsequent to the merger which has been reflected in the accompanying financial
statements.

12. SUBSEQUENT EVENTS:

In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems. On July 2, 1997,
Comfort Systems completed its initial public offering and the merger with the
Company.

In connection with the merger, Comfort Systems assumed all debt of the
Company. Subsequent to the IPO, substantially all of the debt has been repaid.

F-36

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Atlas Comfort Services USA, Inc.:

We have audited the accompanying consolidated balance sheets of Atlas
Comfort Services USA, Inc. (a Texas corporation) and its subsidiary (the
Company) as of June 30, 1995 and 1996 and December 31, 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended June 30, 1994, 1995 and 1996, the six months ended December 31,
1996, and the six months ended June 30, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Atlas Comfort Services USA, Inc., and its subsidiary as of June 30, 1995 and
1996, and December 31, 1996, and the consolidated results of their operations
and their cash flows for the three years ended June 30, 1994, 1995 and 1996 for
the six months ended December 31, 1996, and for the six months ended June 30,
1997, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 25, 1998

F-37

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 427 $ 391 $ 101
Accounts receivable --
Trade, net of allowance of
$60, $60, and $100,
respectively............ 2,920 3,953 2,604
Retainage.................. 904 1,327 1,208
Officers, employees and
other receivables....... 114 172 159
Inventories..................... 1,685 2,000 1,770
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 1,050 681 676
Current deferred income taxes... 155 164 145
Prepaid expenses and other
current assets................ 40 27 82
--------- --------- ------------
Total current
assets............. 7,295 8,715 6,745
PROPERTY AND EQUIPMENT, net.......... 231 484 499
OTHER ASSETS:
Goodwill, net................... 24 23 22
Deferred income tax............. 167 105 88
--------- --------- ------------
Total assets.......... $ 7,717 $ 9,327 $7,354
========= ========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit.................. $ 500 $ 600 $--
Current maturities of notes
payable to affiliates......... 200 102 107
Current obligations under
capital leases................ 32 92 101
Current maturities of long-term
debt.......................... 9 348 356
Accounts payable and accrued
expenses...................... 3,522 3,295 2,246
Income tax payable.............. 363 390 752
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 1,115 1,947 523
--------- --------- ------------
Total current
liabilities........ 5,741 6,774 4,085
NOTES PAYABLE TO AFFILIATES, net of
current portion.................... 1,271 149 98
OBLIGATIONS UNDER CAPITAL LEASES, net
of current portion................. 44 133 121
LONG-TERM DEBT, net of current
portion............................ 21 1,225 1,058
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value;
5,000 shares authorized,
1,000 issued and
outstanding................... 1 1 1
Retained earnings............... 639 1,045 1,991
--------- --------- ------------
Total shareholders'
equity............. 640 1,046 1,992
--------- --------- ------------
Total liabilities and
shareholders'
equity............. $ 7,717 $ 9,327 $7,354
========= ========= ============

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

F-38

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

SIX MONTHS SIX MONTHS
YEAR ENDED JUNE 30, ENDED ENDED
------------------------------- DECEMBER 31, JUNE 30,
1994 1995 1996 1996 1997
--------- --------- --------- ------------ ----------

REVENUES............................. $ 21,848 $ 22,444 $ 29,174 $ 15,545 $ 13,962

COST OF SERVICES..................... 19,657 19,635 25,449 12,508 11,166
--------- --------- --------- ------------ ----------

Gross profit..................... 2,191 2,809 3,725 3,037 2,796

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,086 2,166 2,843 1,432 1,740
--------- --------- --------- ------------ ----------

Income from operations........... 105 643 882 1,605 1,056

OTHER INCOME (EXPENSE):

Interest expense................. (156) (168) (185) (107) (105)

Other............................ 2 28 (11) 78 67
--------- --------- --------- ------------ ----------

Income (loss) before income taxes,
extraordinary item, and cumulative
effect of a change in accounting
principle.......................... (49) 503 686 1,576 1,018

Provision for income taxes
(benefit).......................... (2) 199 280 630 402
--------- --------- --------- ------------ ----------

Income (loss) before extraordinary
item and cumulative effect of a
change in accounting principle..... (47) 304 406 946 616

Extraordinary item -- gain on
extinguishment of debt, net of
deferred taxes of $167,000 (Note
5)................................. 273 -- -- -- --
--------- --------- --------- ------------ ----------

Income before cumulative effect of a
change in accounting principle..... 226 304 406 946 616

Cumulative effect on prior years of a
change in accounting for income
taxes (Note 7)..................... 141 -- -- -- --
--------- --------- --------- ------------ ----------

NET INCOME........................... $ 367 $ 304 $ 406 $ 946 $ 616
========= ========= ========= ============ ==========

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

F-39

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)

COMMON STOCK TOTAL
------------------ RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- ------- --------- -------------

BALANCE, December 31, 1993........... 1,000 $ 1 $ (32) $ (31)

Net income...................... -- -- 367 367
------- ------- --------- -------------

BALANCE, June 30, 1994............... 1,000 1 335 336

Net income...................... -- -- 304 304
------- ------- --------- -------------

BALANCE, June 30, 1995............... 1,000 1 639 640

Net income...................... -- -- 406 406
------- ------- --------- -------------

BALANCE, June 30, 1996............... 1,000 1 1,045 1,046

Net income...................... -- -- 946 946
------- ------- --------- -------------

BALANCE, December 31, 1996........... 1,000 1 1,991 1,992

Net income...................... -- -- 616 616
------- ------- --------- -------------

BALANCE, June 30, 1997............... 1,000 $ 1 $ 2,607 $ 2,608
======= ======= ========= =============

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

F-40

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

SIX MONTHS SIX MONTHS
YEAR ENDED JUNE 30, ENDED ENDED
------------------------------- DECEMBER 31, JUNE 30,
1994 1995 1996 1996 1997
--------- --------- --------- ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income....................... $ 367 $ 304 $ 406 $ 946 $ 616
Adjustments to reconcile net
income to net cash
provided by (used in) operating
activities --
Depreciation and
amortization.............. 104 124 92 84 71
Cumulative effect of a
change in accounting
principle................. (141) -- -- -- --
Extraordinary gain on
extinguishment of debt.... (440) -- -- -- --
Deferred income tax
provision................. 167 (196) 54 36 --
Changes in operating assets
and liabilities --
(Increase) decrease in --
Accounts receivable......... (1,672) 148 (1,514) 1,481 (550)
Inventories................. (264) (554) (315) 230 (275)
Costs and estimated earnings
in excess of billings on
uncompleted contracts..... (145) (266) 369 5 (276)
Prepaid expenses and other
current assets............ 121 (14) 13 (55) (111)
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 1,320 (417) (227) (1,049) 710
Income tax payable.......... -- 363 27 362 391
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... 585 437 834 (1,424) (242)
--------- --------- --------- ------------ ----------
Net cash provided by (used
in) operating
activities................ 2 (71) (261) 616 334
--------- --------- --------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of property and
equipment, net................. (139) (67) (121) (50) (226)
--------- --------- --------- ------------ ----------
Net cash used in investing
activities................ (139) (67) (121) (50) (226)
--------- --------- --------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of
credit......................... 400 100 100 (600) --
Principal payments on notes
payable to affiliates.......... (38) (261) (1,219) (50) (205)
Borrowings on notes payable to
affiliates..................... 1,202 100 -- 3 --
Principal payments on long-term
debt........................... (1,067) (14) (150) (176) --
Borrowings on long-term debt..... 41 -- 1,689 15 126
Additions to (principal payments
on) capital lease
obligations.................... (29) (37) (74) (48) 14
Cash paid for dividends.......... -- -- -- -- --
--------- --------- --------- ------------ ----------
Net cash provided by (used
in) financing
activities................ 509 (112) 346 (856) (65)
--------- --------- --------- ------------ ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 372 (250) (36) (290) 43
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 305 677 427 391 101
--------- --------- --------- ------------ ----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 677 $ 427 $ 391 $ 101 $ 144
========= ========= ========= ============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ -- $ -- $ -- $ -- $ 105
Income Taxes..................... $ -- $ 30 $ 200 $ 224 $--

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

F-41

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Atlas Comfort Services USA, Inc., a Texas corporation, and its subsidiary
(the "Company") is a leading provider of HVAC installation services for
apartment complexes, condominiums and hotels in the United States and also
provides maintenance, repair and replacement of HVAC systems. Atlas primarily
operates in the southwest, northeast, and the mid-Atlantic regions of the United
States.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

The consolidated financial statements include the accounts and results of
operations of the Company and its subsidiary which are under common control and
management of two individuals. All significant intercompany transactions and
balances have been eliminated in combination.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.

REVENUE RECOGNITION

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined.

The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the

F-42

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's experience with similar contracts in recent years, the retention
balance will be billed and collected in the upcoming fiscal year.

WARRANTY COSTS

The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.

INCOME TAXES

The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon the differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

GOODWILL

Goodwill, in the amount of $33,000, represents the excess of cost over the
fair value of net assets acquired and is amortized using the straight-line
method over 40 years. The Company assesses the recoverability of its goodwill
whenever adverse events occur and believes that no material impairment exists.

NEW ACCOUNTING PRONOUNCEMENTS

Effective July 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.

F-43

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (dollars in thousands):

ESTIMATED JUNE 30,
USEFUL LIVES -------------------- DECEMBER 31,
IN YEARS 1995 1996 1996
------------ --------- --------- ------------

Transportation equipment............. 5 $ 741 $ 987 $1,043
Machinery and equipment.............. 5 116 140 137
Leasehold improvements............... 3 28 28 28
Furniture and fixtures............... 5 266 286 212
--------- --------- ------------
Less -- Accumulated depreciation and
amortization....................... (920) (957) (921)
--------- --------- ------------
Property and equipment,
net..................... $ 231 $ 484 $ 499
========= ========= ============

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS):

Activity in the Company's allowance for doubtful accounts consists of the
following:

JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Balance at beginning of year......... $ 60 $ 60 $ 60
Additions to costs and expenses...... 75 77 42
Deductions for uncollectible
receivables written off and
recoveries......................... (75) (77) (2)
--------- --------- ------------
$ 60 $ 60 $ 100
========= ========= ============

Accounts payable and accrued expenses consist of the following:

JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Accounts payable, trade.............. $ 2,935 $ 2,409 $1,582
Accrued compensation and benefits.... 197 231 163
Accrued warranty expense............. 250 300 310
Other accrued expenses............... 140 355 191
--------- --------- ------------
$ 3,522 $ 3,295 $2,246
========= ========= ============

F-44

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Installation contracts in progress are as follows:

JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Costs incurred on contracts in
progress........................... $ 11,884 $ 12,526 $ 12,643
Estimated earnings, net of losses.... 2,666 2,589 2,582
--------- --------- ------------
14,550 15,115 15,225
Less -- Billings to date............. 14,615 16,381 15,072
--------- --------- ------------
$ (65) $ (1,266) $ 153
========= ========= ============
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... 1,050 681 676
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (1,115) (1,947) (523)
--------- --------- ------------
$ (65) $ (1,266) $ 153
========= ========= ============

5. DEBT:

LINE OF CREDIT

The Company has a $700,000 revolving line-of-credit facility with a bank at
the prime lending rate plus 1 percent with interest payable monthly. This credit
facility is secured by the Company's cash, accounts receivable, inventory, and
unpledged property and equipment. The credit facility is guaranteed by two of
the Company's officers and is also secured by investment accounts of certain
affiliates. The credit facility had an outstanding balance of $500,000,
$600,000, and $0 at June 30, 1995 and 1996 and December 31, 1996, respectively,
and matures in January 1998. The Company paid approximately $8,000, $33,000 and
$35,000 of interest relating to the revolving credit line for the years ended
June 30, 1994, 1995 and 1996 and $18,500 for the six months ended December 31,
1996.

NOTES PAYABLE TO FINANCIAL INSTITUTIONS

Long-term debt is summarized as follows:

JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
(IN THOUSANDS)
Note payable to a financial
institution with interest at prime
plus 1%, payable in monthly
installments of $26,667 plus
interest through January 1999, when
the entire balance of unpaid
principal and accrued interest
shall be due and payable........... $ -- $ 1,467 $1,306
Vehicle notes with interest at rates
ranging from 7.9% to 9.4%, payable
in monthly installments through
March 2001......................... 30 106 108
--------- --------- ------------
30 1,573 1,414
Less -- Current maturities........... 9 348 356
--------- --------- ------------
$ 21 $ 1,225 $1,058
========= ========= ============

The note payable to a financial institution is secured by cash, accounts
receivable, inventory, property and equipment, and the personal guarantee of the
two shareholders. In addition, investment accounts of the shareholders and of
certain affiliates of the shareholders are pledged as collateral for the note.
The Company paid interest of $3,000, $3,000 and $73,500 for the years ended June
30, 1994, 1995 and 1996, respectively, and $73,000 for the six months ended
December 31, 1996.

F-45

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In September 1993, the Company and a bank reached a settlement agreement in
which the bank released the Company from its total obligation of approximately
$1,500,000 related to a revolving line of credit, installment notes, equipment
notes and related accrued interest, for a lump sum payment of $1,100,000. The
payment was funded by the proceeds from the notes payable to affiliates
mentioned below. This early extinguishment of debt generated a gain aggregating
$440,000. The Company paid approximately $77,000 in interest during the year
ended June 30, 1994 related to these extinguished notes.

NOTES PAYABLE TO AFFILIATES

Notes payable to affiliates are summarized as follows:

JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
(IN THOUSANDS)
Note payable to a related party in
monthly installments of $5,500
including interest at 10% through
March 1998, collateralized by stock
of the Company..................... $ 159 $ 105 $ 78
Unsecured note payable to an
affiliate in monthly installments
of $2,500 including interest at 6%
through September 1996............. 326 -- --
Notes payable to Company officers in
monthly installments of $4,812
including interest at 10% through
June 1999.......................... 186 146 127
Notes payable to Company officers
with interest due monthly at the
prime rate through September 1996,
secured by accounts receivable,
certain property and equipment, and
intangible assets.................. 700 -- --
Unsecured note payable to Company
officers with interest and any
unpaid principal balance due August
8, 1995, at the rate of 9%......... 100 -- --
--------- --------- ------------
1,471 251 205
Less -- Current maturities........... 200 102 107
--------- --------- ------------
$ 1,271 $ 149 $ 98
========= ========= ============

The Company paid interest of $116,400, $112,600 and $68,000 related to
notes payable to affiliates for the years ended June 30, 1994, 1995 and 1996,
respectively, and $12,600 for the six months ended December 31, 1996.

The aggregate maturities of notes payable to financial institutions and
affiliates are as follows (in thousands):

Year ending December 31,
1997............................ $ 463
1998............................ 424
1999............................ 718
2000............................ 13
2001 and thereafter............. 1
---------
$ 1,619
=========

F-46

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. LEASES:

The Company leases vehicles and warehouse facilities under capital and
operating leases expiring through October, 2000. Total rent expense related to
operating leases amounted to $95,000, $143,000 and $180,000 for the years ended
June 30, 1994, 1995 and 1996, respectively, and $60,000 for the six months ended
December 31, 1996, and $245,000 for the six months ended June 30, 1997.

Future minimum lease payments for capital and noncancelable operating
leases are as follows (in thousands):

NONCANCELABLE
CAPITAL OPERATING
LEASES LEASES
------- -------------
Year ended December 31,
1997............................ $ 117 $ 142
1998............................ 98 23
1999............................ 44 --
2000............................ 6 --
------- -------------
Total minimum lease payments.... 265 165
Amounts representing interest... 43
-------
Present value of net minimum
lease payments................ 222
Less -- Current portion......... 101
-------
Long-term obligation............ $ 121
=======

7. INCOME TAXES (IN THOUSANDS):

Federal and state income taxes are as follows:

SIX MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------- DECEMBER 31,
1994 1995 1996 1996
--------- --------- --------- ------------
Federal --

Current......................... $ (2) $ 331 $ 193 $ 504
Deferred........................ 141 (164) 43 28
State --
Current......................... -- 64 34 90
Deferred........................ 26 (32) 10 8
--------- --------- --------- ------------
$ 165 $ 199 $ 280 $ 630
========= ========= ========= ============

F-47

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34 percent to income
(loss) before income taxes as follows:

SIX MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------------- DECEMBER 31,
1994 1995 1996 1996
--------- --------- --------- ------------
Provision at the statutory rate...... $ (16) $ 171 $ 233 $ 536
Increase resulting from --
Permanent differences, mainly
meals and entertainment....... 164 7 19 29
State income tax, net of benefit
for federal deduction......... 17 21 28 65
--------- --------- --------- ------------
$ 165 $ 199 $ 280 $ 630
========= ========= ========= ============

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:

JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Accounting for long-term contracts... $ 159 $ 74 $ (11)
Warranty reserves.................... 100 123 127
Inventory............................ 32 38 40
Allowance for doubtful accounts...... 36 30 51
Other accrued expenses not deducted
for tax purposes................... 25 62 90
Bases differences on property and
equipment and capital lease
accounting......................... (30) (58) (64)
--------- --------- ------------
Net deferred tax assets.............. $ 322 $ 269 $ 233
========= ========= ============

The net deferred tax assets and liabilities are comprised of the following:

JUNE 30,
-------------------- DECEMBER 31,
1995 1996 1996
--------- --------- ------------
Deferred tax assets --
Current......................... $ 209 $ 240 $ 293
Long-term....................... 221 171 149
--------- --------- ------------
Total...................... 430 411 442
--------- --------- ------------
Deferred tax liabilities --
Current......................... (54) (76) (148)
Long-term....................... (54) (66) (61)
--------- --------- ------------
Total...................... (108) (142) (209)
--------- --------- ------------
Net deferred income tax
assets.................. $ 322 $ 269 $ 233
========= ========= ============

The Company adopted the provisions of SFAS No. 109 in fiscal year 1994
resulting in a cumulative effect of a change in accounting principle of
$141,000.

8. RELATED-PARTY TRANSACTIONS:

Two shareholders lease to the Company the main office facility. Total
payments made under this lease agreement amounted to $90,000 for each of the
years ended June 30, 1994, 1995 and 1996, respectively, and $45,000 for the six
months ended December 31, 1996. The Company is in the process of entering into

F-48

ATLAS COMFORT SERVICES USA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an agreement with these shareholders to lease land on which a new facility will
be built. This lease agreement is anticipated to have a twenty year term.

9. COMMITMENTS AND CONTINGENCIES:

LITIGATION

The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal action will have
a material adverse effect on the Company's financial position or consolidated
results of operations.

INSURANCE

The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.

10. EMPLOYEE BENEFIT PLAN

The Company sponsors a Profit Sharing and Savings Plan (the "Plan") which
covers substantially all employees. The employees who participate in the Plan
may contribute 1 percent to 20 percent of their base compensation, and the
Company may make discretionary matching contributions. The Company did not make
any contributions for the years ended December 31, 1994 and 1995. The Company
made $18,248 in contributions for the year ended June 30, 1996 and $12,667 for
the six months ended December 31, 1996.

11. FINANCIAL INSTRUMENTS:

The Company's financial instruments consist of cash and cash equivalents,
notes receivable, notes payable, a line of credit and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheet approximates their fair value.

12. SIGNIFICANT CUSTOMERS AND VENDORS:

Significant customers are those that account for greater than ten percent
of the Company's revenues. For the year ended June 30, 1996 and the six months
ended December 31, 1996, one customer, a publicly traded Real Estate Investment
Trust, accounted for 14% and 20% of the Company's revenues, respectively.
Receivables outstanding from this customer represented 13% and 12% of the
Company's trade and retainage receivables as of June 30, 1996 and December 31,
1996, respectively. In addition, one of the Company's shareholders has less than
1% ownership in this customer.

During the years ended June 30, 1994, 1995 and 1996 and the six months
ended December 31, 1996, two vendors accounted for 12% and 11%; 29% and 17%; 20%
and 17%; and 15% and 12% of the Company's purchases, respectively.

13. SUBSEQUENT EVENTS:

In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems providing for the
merger of the Company with the subsidiary of Comfort Systems. On July 2, 1997,
Comfort Systems completed its initial public offering and the merger with the
Company.

Concurrently with the merger, the Company entered into agreements with the
shareholders to lease land and buildings used in the Company's operations for
$204,000 a year for three five-year renewable terms.

In connection with the merger, Comfort Systems assumed all debt of the
Company. Subsequent to the IPO, substantially all of the debt has been repaid.

F-49

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Tri-City Mechanical, Inc.:

We have audited the accompanying balance sheets of Tri-City Mechanical,
Inc. as of December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996, and the six months ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Tri-City Mechanical, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, and the
six months ended June 30, 1997, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 25, 1998

F-50

TRI-CITY MECHANICAL, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

DECEMBER 31,
----------------------------
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,551 $1,958
Restricted cash................. 383 325
Investments..................... -- 493
Accounts Receivable --
Trade, net of allowance of
$130, and $30,
respectively............ 4,495 3,734
Retainage.................. 831 756
Other receivables.......... 2 11
Inventories..................... 1,183 762
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 306 288
Prepaid expenses and other
current assets................. 1 12
------------ ------------
Total current assets....... 9,752 8,339
PROPERTY AND EQUIPMENT, net.......... 508 656
------------ ------------
Total assets............... $ 10,260 $8,995
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses....................... $ 2,683 $2,179
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 2,207 667
------------ ------------
Total current
liabilities............. 4,890 2,846
PAYABLE TO SHAREHOLDER............... -- --
LONG-TERM DEBT, net of current
maturities......................... -- --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par 2,500
shares authorized, 2,500 issued
and outstanding................ 25 25
Additional paid-in capital...... 105 105
Retained earnings............... 5,240 6,019
------------ ------------
Total shareholders'
equity.................. 5,370 6,149
------------ ------------
Total liabilities and
shareholders' equity.... $ 10,260 $8,995
============ ============

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

F-51

TRI-CITY MECHANICAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------- JUNE 30,
1994 1995 1996 1997
------------ ------------ ------------ -----------

REVENUES............................. $ 16,883 $ 25,030 $ 24,237 $17,016

COST OF SERVICES..................... 14,271 19,298 18,561 14,528
------------ ------------ ------------ -----------

Gross profit.................... 2,612 5,732 5,676 2,488

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,219 3,193 3,903 1,346
------------ ------------ ------------ -----------

Income from operations.......... 393 2,539 1,773 1,142

OTHER INCOME (EXPENSE):

Interest expense................ (2) (1) -- --

Interest income................. 50 132 152 70

Other........................... 24 81 89 3
------------ ------------ ------------ -----------

NET INCOME........................... $ 465 $ 2,751 $ 2,014 $ 1,215
============ ============ ============ ===========

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

F-52

TRI-CITY MECHANICAL, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- --------------

BALANCE, December 31, 1993........... 2,500 $ 25 $ 105 $ 2,577 $ 2,707
Distributions to shareholders... -- -- -- (338) (338)
Net income...................... -- -- -- 465 465
------ ------ ---------- -------- --------------
BALANCE, December 31, 1994........... 2,500 25 105 2,704 2,834
Distributions to shareholders... -- -- -- (215) (215)
Net income...................... -- -- -- 2,751 2,751
------ ------ ---------- -------- --------------
BALANCE, December 31, 1995........... 2,500 25 105 5,240 5,370
Distributions to shareholders... -- -- -- (1,235) (1,235)
Net income...................... -- -- -- 2,014 2,014
------ ------ ---------- -------- --------------
BALANCE, December 31, 1996........... 2,500 25 105 6,019 6,149
Distributions to shareholders... -- -- -- (7,437) (7,437)
Net income...................... -- -- -- 1,215 1,215
------ ------ ---------- -------- --------------
BALANCE, June 30, 1997............... 2,500 $ 25 $ 105 $ (203) $ (73)
====== ====== ========== ======== ==============

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

F-53

TRI-CITY MECHANICAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- JUNE 30,
1994 1995 1996 1997
--------- --------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income......................... $ 465 $ 2,751 $ 2,014 $ 1,215
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation.................... 131 134 102 52
Deferred income taxes........... (218) -- -- --
Loss (gain) on sale of property
and equipment................. -- 1 (10) --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Restricted cash............ (73) (75) 58 325
Accounts receivable........ (231) (1,306) 827 (1,697)
Inventories................ (329) (801) 421 489
Costs in excess of billings
and estimated earnings
on uncompleted
contracts............... 17 (90) 18 (809)
Prepaid expenses and other
current assets.......... (14) 28 (11) (78)
Increase (decrease) in --
Accounts payable and
accrued expenses........ 864 519 (504) 2,143
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 1,360 508 (1,540) 163
--------- --------- --------- ----------
Net cash provided by
operating
activities......... 1,972 1,669 1,375 1,803
--------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchase) of property and
equipment, net.................. (311) 139 (240) (23)
Purchase (sale) of investment,
net............................. -- -- (493) 493
--------- --------- --------- ----------
Net cash (used in)
provided by
investing
activities......... (311) (139) (733) 470
--------- --------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in payable to
shareholders.................... (210) -- -- 591
Borrowings on line of credit....... 19 1 -- 3,112
Payments on line of credit......... (17) (15) -- --
Distributions to shareholders...... (338) (215) (1,235) (7,437)
--------- --------- --------- ----------
Net cash used in
financing
activities......... (546) (229) (1,235) (3,734)
--------- --------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 1,115 1,301 (593) (1,461)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 135 1,250 2,551 1,958
--------- --------- --------- ----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 1,250 $ 2,551 $ 1,958 $ 497
========= ========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 2 $ 1 $ -- $ --

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

F-54

TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Tri-City Mechanical, Inc., an Arizona corporation, (the "Company")
focuses on providing "design and build" installation services and maintenance,
repair and replacement of HVAC systems primarily for large commercial and
industrial facilities, as well as process piping for industrial facilities.
Tri-City primarily operates in Arizona, California and Nevada.

The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems") pursuant to which
all outstanding shares of the Company's common stock will be exchanged for cash
and shares of Comfort Systems common stock concurrently with the consummation of
the initial public offering (the "Offering") of the common stock of Comfort
Systems.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

RESTRICTED CASH

The Company also maintains restricted cash which consists of certificates
of deposit. These certificates of deposit are held in a joint checking account
between the contractors and Tri-City for the retainage balance due from
contractors at the completion of the job.

INVENTORIES

INVESTMENTS

The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
which requires that investments in debt securities and marketable equity
securities be designated as trading, held-to-maturity or available-for-sale. At
December 31, 1996, investments have been categorized as held-to-maturity, are
stated at cost, and are classified in the balance sheet as current assets.
Investments at December 31, 1996 consist of U.S. Treasury Bills.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.

REVENUE RECOGNITION

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-

F-55

TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
completion method measured by the percentage of costs incurred to total
estimated costs for each contract. Provisions for the total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
their effects are recognized in the period in which the revisions are
determined.

WARRANTY COSTS

INCOME TAXES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENT

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset is compared to the asset's carrying amount to determine if a
write-down to market value is necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.

F-56

TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (dollars in thousands):

ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment............. 5 $ 521 $ 623
Machinery and equipment.............. 10 639 680
Computer and telephone equipment..... 5 121 157
Leasehold improvements............... 5 48 48
Furniture and fixtures............... 6 54 54
--------- ---------
1,383 1,562
Less -- Accumulated depreciation..... (875) (906)
--------- ---------
Property and equipment, net..... $ 508 $ 656
========= =========

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):

DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
Balance at beginning of year......... $ 100 $ 130 $ 130
Additions to costs and expenses...... 184 1 48
Deductions for uncollectible
receivables written off and
recoveries......................... (154) (1) (148)
--------- --------- ---------
$ 130 $ 130 $ 30
========= ========= =========

Accounts payable and accrued expenses consist of the following (in
thousands):

DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade................. $ 2,178 $ 1,749
Accrued compensation and benefits....... 181 97
Warranty reserve........................ 301 278
Other accrued expenses.................. 23 55
--------- ---------
$ 2,683 $ 2,179
========= =========

F-57

TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Installation contracts in progress are as follows (in thousands):

DECEMBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress........................... $ 14,659 $ 8,615
Estimated earnings, net of losses.... 3,865 2,471
--------- ---------
18,524 11,086
Less -- Billings to date............. 20,425 11,465
--------- ---------
$ (1,901) $ (379)
========= =========
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 306 $ 288
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (2,207) (667)
--------- ---------
$ (1,901) $ (379)
========= =========

5. LONG-TERM DEBT:

The Company has a $1.0 million line of credit with a financial services
company. The line of credit expires October 31, 1997, and bears interest at 9
percent per annum. The line of credit is secured by a lien on accounts
receivable. There was no balance outstanding under this line of credit at
December 31, 1995 or 1996.

6. LEASES:

The Company leases facilities from a company which is wholly owned by one
of the shareholders. The lease expires June 30, 1998. The rent paid under this
related-party lease was approximately $109,000 for the year ended 1996. The
lease requires the Company to pay taxes, maintenance, insurance and certain
other operating costs of the leased property. The lease contains renewal and
termination provisions.

The Company leases vehicles for certain key members of management. The
leases expire October 1, 1999. The lease payments under these vehicle leases
were approximately $6,000, $15,000 and $16,000 for the years ended December 31,
1994, 1995 and 1996, respectively.

Future minimum lease payments for operating leases are as follows (in
thousands):

Year ending December 31 --
1997............................ $ 142
1998............................ 65
1999............................ 3
---------
$ 210
=========

7. EMPLOYEE BENEFIT PLANS:

The Company has adopted a 401(k) plan. The plan provides for the Company to
match 20 percent of the first 6 percent contributed by each employee. Total
contributions by the Company under this plan were approximately $13,000, $22,000
and $24,000 during 1994, 1995 and 1996, respectively. Amounts due to this plan
were approximately $ --, $ -- and $4,000 for the years ended December 31, 1994,
1995 and 1996, respectively.

F-58

TRI-CITY MECHANICAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

8. RELATED-PARTY TRANSACTIONS:

The Company provides accounting services and building maintenance at no
cost to Nothum Properties & SMAC companies which are wholly owned by the
shareholders. The estimated value of the services provided during the years
ended December 31, 1994, 1995 and 1996 was $25,000, $28,000 and $30,000,
respectively.

9. COMMITMENTS AND CONTINGENCIES:

LITIGATION

INSURANCE

10. FINANCIAL INSTRUMENTS:

The Company's financial instruments consist of cash and cash equivalents,
investments, and a line of credit. The Company believes that the carrying value
of these instruments on the accompanying balance sheet approximates their fair
value.

11. SALES TO SIGNIFICANT CUSTOMER:

For the years ended December 31, 1994, 1995 and 1996, a customer accounted
for approximately 17, 11 and 11 percent, respectively, of the Company's sales.

12. SHAREHOLDERS' EQUITY:

As of June 30, 1997, the Company distributed $6,846,000 from the Company's
S Corporation accumulated adjustment account. The Company distributed
approximately $388,000 subsequent to the merger which has been reflected in the
accompanying financial statements.

13. SUBSEQUENT EVENTS:

Concurrently with the merger, the Company entered into agreements with the
shareholders to lease land and buildings used in the Company's operations for a
negotiated amount and term.

Tri-City has a commitment with a limited liability corporation owned by Mr.
Nothum, Jr. and his father to construct new office, operations and warehouse
facilities. The Company believes that the rent for its current and future
property does not and will not exceed fair market value.

In connection with the merger, Comfort Systems assumed all debt of the
Company. Subsequent to the IPO, substantially all of the debt has been repaid.

F-59

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To S. M. Lawrence Inc.:

We have audited the accompanying combined balance sheets of S. M. Lawrence
Inc. and related company as of October 31, 1995 and 1996, and the related
combined statements of operations, shareholders' equity and cash flows for the
three years ended October 31, 1996, and the eight months ended June 30, 1997.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of S. M. Lawrence Inc.
and related company as of October 31, 1995 and 1996, and the results of their
operations and their cash flows for the three years ended October 31, 1996, and
the eight months ended June 30, 1997, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 25, 1998

F-60

S. M. LAWRENCE INC. AND RELATED COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

OCTOBER 31,
--------------------
1995 1996
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 680 $ 327
Accounts receivable --
Trade......................... 1,457 2,493
Retainage..................... 454 896
Other receivables............. 1 1
Note receivable from shareholder... 50 75
Inventories........................ 215 253
Costs and estimated earnings in
excess of billings on
uncompleted contracts............ 66 358
Prepaid expenses and other current
assets............................ 39 61
--------- ---------
Total current assets..... 2,962 4,464
PROPERTY AND EQUIPMENT, net............. 459 644
OTHER NONCURRENT ASSETS................. 138 132
--------- ---------
Total assets............. $ 3,559 $ 5,240
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Line of credit..................... $ 10 $ --
Note payable to affiliate.......... -- --
Accounts payable and accrued
expenses.......................... 1,153 2,737
Income tax payable................. -- --
Billings in excess of costs and
estimated earnings on
uncompleted contracts............ 299 344
--------- ---------
Total current
liabilities............ 1,462 3,081
LONG-TERM DEBT, net of current
maturities............................ -- --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 3,000
shares authorized, 1,480 shares
issued and outstanding............ 161 161
Treasury stock, at cost............ (15) (15)
Retained earnings.................. 1,951 2,013
--------- ---------
Total shareholders'
equity................. 2,097 2,159
--------- ---------
Total liabilities and
shareholders' equity... $ 3,559 $ 5,240
========= =========

The accompanying notes are an integral part of these combined financial
statements.

F-61

S.M. LAWRENCE INC. AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

EIGHT MONTHS
ENDED
YEARS ENDED OCTOBER 31, JUNE 30,
------------------------------- ------------
1994 1995 1996 1997
--------- --------- --------- ------------

REVENUES................................ $ 12,758 $ 12,568 $ 17,163 $ 11,575
COST OF SERVICES........................ 9,797 9,142 12,211 8,156
--------- --------- --------- ------------
Gross profit....................... 2,961 3,426 4,952 3,419
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,849 3,477 4,885 3,460
--------- --------- --------- ------------
Income (loss) from operations......... 112 (51) 67 (41)
OTHER INCOME (EXPENSE):
Interest income, net.................. 32 55 47 3
Other................................. (41) 34 8 39
--------- --------- --------- ------------
INCOME (LOSS) BEFORE INCOME TAXES....... 103 38 122 1
PROVISION (BENEFIT) FOR INCOME TAXES.... 50 30 60 --
--------- --------- --------- ------------
NET INCOME (LOSS)....................... $ 53 $ 8 $ 62 $ 1
========= ========= ========= ============

The accompanying notes are an integral part of these combined financial
statements.

F-62

S.M. LAWRENCE INC. AND RELATED COMPANY
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

COMMON STOCK TOTAL
------------------ RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT EARNINGS STOCK EQUITY
--------- ------ --------- --------- -------------

BALANCE, October 31, 1993............ 1,480 $ 161 $ 1,890 $ (15) $ 2,036

Net income...................... -- -- 53 -- 53
--------- ------ --------- --------- -------------

BALANCE, October 31, 1994............ 1,480 161 1,943 (15) 2,089

Net income...................... -- -- 8 -- 8
--------- ------ --------- --------- -------------

BALANCE, October 31, 1995............ 1,480 161 1,951 (15) 2,097

Net income...................... -- -- 62 -- 62
--------- ------ --------- --------- -------------

BALANCE, October 31, 1996............ 1,480 161 2,013 (15) 2,159

Net income...................... -- -- 1 -- 1
--------- ------ --------- --------- -------------

BALANCE, June 30, 1997............... 1,480 $ 161 $ 2,014 $ (15) $ 2,160
========= ====== ========= ========= =============

The accompanying notes are an integral part of these combined financial
statements.

F-63

S.M. LAWRENCE INC. AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEARS ENDED OCTOBER 31, EIGHT MONTHS
------------------------------- ENDED
1994 1995 1996 JUNE 30, 1997
--------- --------- --------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss).................. $ 53 $ 8 $ 62 $ 1
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating
activities --
Depreciation and amortization... 263 121 200 152
Gain on sale of property and
equipment..................... -- -- -- (128)
Changes in operating assets and
liabilities
(Increase) decrease in --
Accounts receivable........ 262 203 (1,502) 115
Inventories................ (18) (26) (38) 42
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... 42 26 (292) 80
Prepaid expenses and other
assets.................. 46 (13) 3 (206)
Increase (decrease) in --.....
Accounts payable and
accrued expenses........ (156) 143 1,584 (778)
Billings in excess of costs
on uncompleted
contracts............... 33 (171) 45 380
--------- --------- --------- ---------------
Net cash provided by
(used in) operating
activities......... 525 291 62 (342)
--------- --------- --------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments of (additions to) cash
surrender value of insurance.... (38) (45) (19) --
Sales (purchases) of property and
equipment, net.................. (74) (380) (386) (123)
--------- --------- --------- ---------------
Net cash used in
investing
activities......... (112) (425) (405) (123)
--------- --------- --------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note receivable from
shareholder..................... -- (2) (10) --
Proceeds received on note from
shareholder..................... -- 12 -- --
Payments on note payable to
shareholder..................... (181) -- -- --
Borrowings on long-term debt....... -- -- -- 300
--------- --------- --------- ---------------
Net cash provided by
(used in)
financing
activities......... (181) 10 (10) 300
--------- --------- --------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 232 (124) (353) (165)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 572 804 680 327
--------- --------- --------- ---------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 804 $ 680 $ 327 $ 162
========= ========= ========= ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 14 $ -- $ 5 $--
Income taxes.................... -- 16 14 --

The accompanying notes are an integral part of these combined financial
statements.

F-64

S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

S.M. Lawrence Inc., a Tennessee corporation (the "Company") focuses on
providing "design and build" installation services and process piping
primarily for industrial facilities and maintenance, repair and replacement of
commercial and industrial HVAC systems. S.M. Lawrence primarily operates in
Tennessee and the immediately surrounding states.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

The financial statements include the accounts and results of operations of
S.M. Lawrence Inc. and Lawrence Services, Inc. which are under common control
and management of two individuals. All significant intercompany transactions and
balances have been eliminated in combination.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using an accelerated method of depreciation. Leasehold improvements are
capitalized and amortized over the lesser of the life of the lease or the
estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.

REVENUE RECOGNITION

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.

F-65

S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

WARRANTY COSTS

The Company warrants labor and parts for one year after installation of new
air conditioning and heating systems. A reserve for warranty costs is recorded
upon completion of installation or service.

INCOME TAXES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENT

Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (dollars in thousands):

ESTIMATED OCTOBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment............. 5 $ 774 $ 907
Machinery and equipment.............. 7 648 677
Furniture and fixtures............... 5 145 210
Leasehold improvements............... 32 122 231
Construction in process.............. 81 --
--------- ---------
1,770 2,025
Less -- Accumulated depreciation and
amortization....................... (1,311) (1,381)
--------- ---------
Property and equipment,
net..................... $ 459 $ 644
========= =========

F-66

S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Accounts payable and accrued expenses consist of the following (in
thousands):

OCTOBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade.............. $ 620 $ 1,560
Accrued compensation and benefits.... 466 1,091
Other accrued expenses............... 67 86
--------- ---------
$ 1,153 $ 2,737
========= =========

Installation contracts in progress are as follows (in thousands):

OCTOBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress........................... $ 13,475 $ 15,503
Estimated earnings, net of losses.... 4,193 5,641
--------- ---------
17,668 21,144
Less -- Billings to date............. 17,901 21,130
--------- ---------
$ (233) $ 14
========= =========
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 66 $ 358
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (299) (344)
--------- ---------
$ (233) $ 14
========= =========

5. LINE OF CREDIT:

The Company had an unsecured bank line of credit at October 31, 1995 and
1996, with an outstanding balance of $0 for all years. The available balance was
$800,000 for 1995 and $850,000 for 1996. The line of credit is secured by
guarantees and is payable upon demand. Interest is payable on the line of credit
at prime plus 1 percent.

6. LEASES:

The Company leases facilities from a company which is owned by one of the
shareholders. The lease is for a one-year period and is renewed annually. For
each year ended October 31, 1994, 1995 and 1996, the rent expense under this
related-party lease was $110,400, and $74,000 for the eight months ended June
30, 1997.

F-67

S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES:

Federal and state income taxes are as follows (in thousands):

OCTOBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Federal --
Current............................ $ 25 $ 24 $ 54
Deferred........................... 17 1 (3)
State --
Current............................ 5 4 10
Deferred........................... 3 1 (1)
--- --- ---
$ 50 $ 30 $ 60
=== === ===

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes for 1994 and 1995 and 35 percent for 1996 as follows (in
thousands):

OCTOBER 31,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Provision at the statutory rate......... $ 35 $ 13 $ 39
Increase resulting from --
State income tax, net of benefits
for federal deduction............ 5 3 6
Other.............................. 10 14 15
--- --- ---
$ 50 $ 30 $ 60
=== === ===

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following (in thousands):

OCTOBER 31,
------------------------
1995 1996
----------- -----------
Accruals and reserves not deductible
until paid............................ $ (1) $ 2
--- ---
Net deferred income tax assets
(liabilities)......................... $ (1) $ 2
=== ===

The net deferred tax assets and liabilities are comprised of the following
(in thousands):

OCTOBER 31,
------------------------
1995 1996
----------- -----------
Deferred tax assets --
Current............................ $ -- $ 2
--- ---
Total......................... -- 2
--- ---
Deferred tax liabilities --
Current............................ (1) --
--- ---
Total......................... (1) --
--- ---
Net deferred income tax assets
(liabilities).............. $ (1) $ 2
=== ===

F-68

S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

8. RELATED-PARTY TRANSACTIONS:

The Company loans one of the shareholders money annually. In 1994, the
shareholder signed a promissory note for $44,695 to be paid on demand, accruing
interest at eight percent. The entire balance remained outstanding at year-end
1994. The entire note was repaid during fiscal year 1995. In fiscal year 1995,
the shareholder signed a promissory note for $50,435 to be paid on demand,
accruing interest at eight percent. The entire amount remained outstanding at
year-end 1995. The entire note was repaid during fiscal year 1996. In 1996, the
shareholder signed a promissory note for $75,435 to be paid on demand, accruing
interest at eight percent. The entire balance remained outstanding at year-end
1996.

The Company entered into a non-compete agreement with a former major
shareholder on November 1, 1991 for $542,562. Under this agreement, the former
shareholder agreed not to compete with the Company for a period of 36 months
beginning with November 1, 1991. The principal to be paid was recorded as an
asset and was fully amortized over 36 months. The last payment of $180,854 was
made during fiscal 1994.

In September 1995, the Company entered into an agreement to purchase
equipment from a related party. The terms of the agreement included a $2,776
cash down payment and a note payable due in one year for $11,852. Payments on
the note were $1,975 and $9,877 during 1995 and 1996, respectively.

9. COMMITMENTS AND CONTINGENCIES:

LITIGATION

INSURANCE

The Company has adopted a partially self-funded medical plan. Under this
plan, the Company pays up to $20,000 per year per employee. The Company's
insurance copay pays the remaining amount. For the years ended December 31,
1994, 1995, and 1996 the Company contributed $102,647, $82,866 and $143,788,
respectively. For the eight months ended June 30, 1997, the Company contributed
$114,000. For claims incurred but not yet reported the Company accrued $25,000
for the years ended December 31, 1995 and 1996.

10. EMPLOYEE BENEFIT PLANS:

The Company has adopted a 401(k) retirement plan which provides for 100
percent matching contribution by the Company, up to a maximum liability of 5
percent of each participating employee's annual compensation. The Company has
the right to make additional discretionary contributions. Total contributions by
the Company under this plan to provide contributions and pay expenses were
$57,434, $141,105 and $368,377 during 1994, 1995, and 1996, respectively, and
approximately $111,000 for the eight months ended June 30, 1997. Amounts due to
this plan were approximately $117,508 and $397,000 for the years ended December
31, 1995 and 1996, respectively, and approximately $98,000 for the eight months
ended June 30, 1997.

F-69

S.M. LAWRENCE INC. AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

11. FINANCIAL INSTRUMENTS:

The Company's financial instruments consist of cash and cash equivalents,
notes receivable, investments, notes payable and a line of credit. The Company
believes that the carrying value of these instruments on the accompanying
balance sheet approximates their fair value.

12. SALES TO SIGNIFICANT CUSTOMER:

During 1996, one customer accounted for approximately 19 percent of the
Company's sales.

13. INVESTMENT IN AIRCRAFT

In December 1996, the Company entered into an agreement to purchase a
one-third interest in an investment. The investment is a partnership and will
own an aircraft, available for use by any of the partners. The Company's cost
for this investment was $100,000. In connection with the agreement, the Company
signed a note payable to the partnership on December 31, 1996 for $100,000 with
interest of 7 percent. This note was fully paid in 1997.

14. SUBSEQUENT EVENTS:

Concurrently with the merger, the Company entered into agreements with the
shareholders to lease land and buildings used in the Company's operations for
$125,000 for a one-year period beginning January 1, 1998.

In connection with the merger, Comfort Systems assumed all debt of the
Company. Subsequent to the IPO, substantially all of the debt has been repaid.

F-70

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Accurate Air Systems, Inc.:

We have audited the accompanying balance sheets of Accurate Air Systems,
Inc. as of June 30, 1995, December 31, 1995 and 1996, and the related statements
of operations, shareholder's equity and cash flows for each of the years ended
June 30, 1994 and 1995, for the six months ended December 31, 1995, for the year
ended December 31, 1996, and for the six months ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Accurate Air Systems, Inc.,
as of June 30, 1995, December 31, 1995 and 1996, and the results of their
operations and their cash flows for the years ended June 30, 1994 and 1995, for
the six months ended December 31, 1995, for the year ended December 31, 1996,
and for the six months ended June 30, 1997 in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 25, 1998

F-71

ACCURATE AIR SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

JUNE 30, DECEMBER 31, DECEMBER 31,
1995 1995 1996
-------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $ 50 $ 33 $ 79
Accounts receivable --
Trade, net of allowance of $70,
$70, and $33, respectively.... 1,385 1,671 1,778
Retainage........................ 550 321 725
Other receivables................ 8 16 18
Inventories........................... 122 129 104
Costs and estimated earnings in excess
of billings on uncompleted
contracts.......................... 275 212 231
Prepaid expenses and other current
assets............................. 181 81 --
-------- ------------ ------------
Total current assets............. 2,571 2,463 2,935
PROPERTY AND EQUIPMENT, net............. 804 1,014 925
DEFERRED TAX ASSET...................... 14 -- --
-------- ------------ ------------
Total assets..................... $3,389 $3,477 $3,860
======== ============ ============

LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................... $ 88 $ 109 $ 42
Accounts payable and accrued
expenses........................... 1,707 1,355 1,236
Line of credit........................ 374 600 500
Note payable -- shareholder........... -- -- 630
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... 229 206 312
-------- ------------ ------------
Total current liabilities........ 2,398 2,270 2,720
LONG-TERM DEBT, net of current
maturities............................ 56 175 133
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock $1 par, 250,000 shares
authorized, 1,000 shares issued and
outstanding........................ 1 1 1
Retained earnings..................... 934 1,031 1,006
-------- ------------ ------------
Total shareholder's equity....... 935 1,032 1,007
-------- ------------ ------------
Total liabilities and
shareholder's equity.......... $3,389 $3,477 $3,860
======== ============ ============

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

F-72

ACCURATE AIR SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

YEARS ENDED JUNE 30, SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED
-------------------- DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1995 1996 1997
-------- -------- ------------ ------------ ----------

REVENUES............................. $9,763 $ 12,171 $5,585 $ 16,806 $6,204

COSTS OF SERVICES.................... 7,204 8,998 4,312 13,270 4,776
-------- -------- ------------ ------------ ----------

Gross profit.................... 2,559 3,173 1,273 3,536 1,428

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 2,681 2,960 1,131 3,037 1,200
-------- -------- ------------ ------------ ----------

Income (Loss) from
operations.................... (122) 213 142 499 228

OTHER INCOME/(EXPENSE):

Interest expense................ (21) (48) (41) (80) (65)

Other........................... (9) (9) (4) 14 7
-------- -------- ------------ ------------ ----------

INCOME (LOSS) BEFORE INCOME TAXES.... (152) 156 97 433 170
-------- -------- ------------ ------------ ----------

PROVISION (BENEFIT) FOR INCOME
TAXES................................ (54) 60 -- -- --
-------- -------- ------------ ------------ ----------

NET INCOME (LOSS).................... $ (98) $ 96 $ 97 $ 433 $ 170
======== ======== ============ ============ ==========

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

F-73

ACCURATE AIR SYSTEMS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

COMMON STOCK TOTAL
----------------- RETAINED SHAREHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------

BALANCE, June 30, 1993............... 1,000 $ 1 $ 941 $ 942

Net loss........................ -- -- (98) (98)
------ ------ -------- -------------

BALANCE, June 30, 1994............... 1,000 1 843 844

Distribution to shareholder..... -- -- (5) (5)

Net income...................... -- -- 96 96
------ ------ -------- -------------

BALANCE, June 30, 1995............... 1,000 1 934 935

Net income...................... -- -- 97 97
------ ------ -------- -------------

BALANCE, December 31, 1995........... 1,000 1 1,031 1,032

Distributions to shareholder.... -- -- (458) (458)

Net income...................... -- -- 433 433
------ ------ -------- -------------

BALANCE, December 31, 1996........... 1,000 $ 1 $1,006 $ 1,007

Distributions to shareholders... -- -- (101) (101)

Net income...................... -- -- 170 170
------ ------ -------- -------------

BALANCE, June 30, 1997............... 1,000 $ 1 $1,075 $ 1,076
====== ====== ======== =============

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

F-74

ACCURATE AIR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED JUNE 30, SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED
-------------------- DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1995 1996 1997
--------- --------- ------------ ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss).................. $ (98) $ 96 $ 97 $ 433 $ 170
Adjustments to reconcile net income
(loss) to net cash
provided by (used in) operating
activities --
Depreciation and amortization... 128 124 85 186 110
Deferred income tax provision... (150) (70) 81 -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ 127 (395) (66) (513) (16)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts................. (90) (58) 63 (19) (99)
Prepaid expenses and other
current assets............ (1) (44) 31 81 (12)
Inventories................ (22) (16) (7) 25 (37)
Increase (decrease) in --
Accounts payable and
accrued expenses.......... 365 419 (350) (119) 278
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 64 119 (22) 106 (162)
--------- --------- ------------ ------------ ----------
Net cash provided by (used in)
operating activities........ 323 175 (88) 180 232
--------- --------- ------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchase) of property and
equipment......................... (100) (347) (295) (97) (52)
--------- --------- ------------ ------------ ----------
Net cash provided by (used in)
investing activities........ (100) (347) (295) (97) (52)
--------- --------- ------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... -- 183 192 -- 239
Payments of long-term debt......... (186) (39) (52) (109) --
Borrowings of short-term debt...... -- -- -- 630 --
Borrowings on line of credit....... 50 -- 226 -- --
Payments on line of credit......... -- (76) -- (100) --
Distributions to shareholder....... -- (5) -- (458) (290)
--------- --------- ------------ ------------ ----------
Net cash provided by (used in)
financing activities........ (136) 63 366 (37) (51)
--------- --------- ------------ ------------ ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 87 (109) (17) 46 129
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 72 159 50 33 79
--------- --------- ------------ ------------ ----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 159 $ 50 $ 33 $ 79 $ 208
========= ========= ============ ============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 21 $ 48 $ 41 $ 79 $ 66
Income taxes.................... 53 34 -- -- --

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

F-75

ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Accurate Air Systems, Inc., a Texas corporation, (the "Company") focuses
on providing "design and build" installation services and maintenance, repair
and replacement of HVAC systems for commercial facilities. Accurate primarily
operates in Texas and Oklahoma.

The Company and its shareholder intend to enter into a definitive agreement
with Comfort Systems USA, Inc. ("Comfort Systems") pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of Comfort Systems common stock concurrently with the consummation of the
initial public offering (the "Offering") of the common stock of Comfort
Systems.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CHANGE IN FISCAL YEAR END

Effective July 1, 1995, the Company changed its fiscal year end from June
30 to December 31. The statements of operations, shareholder's equity and cash
flows for the six months ended December 31, 1995 are presented in the
accompanying financial statements. The results of operations for the six month
period are not necessarily indicative of the results for a full year period.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.

REVENUE RECOGNITION

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.

F-76

ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

WARRANTY COSTS

The Company warrants labor for the first year after installation on new air
conditioning and heating systems. The Company generally warrants labor for 90
days after the servicing of existing air conditioning and heating systems. A
reserve for warranty costs is recorded upon completion of installation or
service.

INCOME TAXES

Effective July 1, 1995, the Company elected S Corporation status as defined
by the Internal Revenue Code whereby the Company is not subject to taxation for
federal purposes. Under S Corporation status, each shareholder reports his share
of the Company's taxable earnings or losses in his personal federal and state
tax returns. The balance in the deferred tax liability account at July 1, 1995
was credited to income during the six month period ended December 31, 1995.

Prior to July 1, 1995, the Company followed the liability method of
accounting for income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109. Under this method, deferred income taxes were recorded
based upon differences between the financial reporting and tax bases of assets
and liabilities and were measured using the enacted tax rates and laws that
would have been in effect when the underlying assets or liabilities were
recovered or settled.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENT

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (dollars in thousands):

ESTIMATED DECEMBER 31,
USEFUL LIVES JUNE 30, --------------------
IN YEARS 1995 1995 1996
------------ -------- --------- ---------

Land................................. -- $ 200 $ 200 $ 200
Buildings............................ 31.5 205 213 213
Transportation equipment............. 5 414 336 241
Machinery and equipment.............. 5 - 7 262 477 510
Leasehold improvements............... 15 - 18 57 60 61
Furniture and fixtures............... 5 - 7 74 122 133
-------- --------- ---------
Less -- Accumulated depreciation and
amortization....................... (408) (394) (433)
-------- --------- ---------
Property and equipment, net..... $ 804 $ 1,014 $ 925
======== ========= =========

F-77

ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (IN THOUSANDS):

Activity in the Company's allowance for doubtful accounts consist of the
following:

DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --- ---------
Balance at beginning of year......... $ 57 $ 70 $ 70
Additions to costs and expenses...... 19 -- --
Deductions for uncollectible
receivables written off and
recoveries......................... (6) -- (37)
--- --- ---------
$ 70 $ 70 $ 33
=== === =========

Accounts payable and accrued expenses consist of the following:

DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --------- ---------
Accounts payable, trade.............. $ 537 $ 871 $ 685
Accrued compensation and benefits.... 509 179 288
Other accrued expenses............... 575 243 190
Warranty reserve..................... 86 62 73
-------- --------- ---------
$1,707 $ 1,355 $ 1,236
======== ========= =========

Installation contracts in progress are as follows:

DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --------- ---------
Costs incurred on contracts in
progress............................. $4,113 $ 2,468 $ 5,514
Estimated earnings, net of losses.... 1,428 726 1,760
Less -- Billings to date............. 5,495 3,188 7,355
-------- --------- ---------
$ 46 $ 6 $ (81)
======== ========= =========
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 275 $ 212 $ 231
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (229) (206) (312)
-------- --------- ---------
$ 46 $ 6 $ (81)
======== ========= =========

5. SHORT-TERM DEBT:

On October 15, 1996, the Company executed a renewal and extension of its
revolving line of credit with its bank. The new agreement provides for maximum
borrowings of up to $900,000 with interest payable monthly on the amount
outstanding at the rate of prime plus one percent, not to exceed 18 percent. The
agreement provides that the Company may borrow up to 70 percent of its accounts
receivable that are less than sixty days past due. The revolving line of credit
is secured by accounts receivable and the personal guaranty of the sole
shareholder, and requires the Company to maintain certain minimum tangible net
worth and cash flow ratios. Balances outstanding relating to the line are
approximately $374,000, $600,000, and $500,000 as of June 30, 1995, and December
31, 1995 and 1996, respectively. The Company was in compliance with all
covenants at each applicable year end.

On December 27, 1996, the Company borrowed $630,000 from the Company's
shareholder. Interest is payable monthly at a rate of 9 percent on the
outstanding balance. The note matures on June 30, 1997. The entire balance was
outstanding as of December 31, 1996.

F-78

ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. LONG-TERM DEBT:

DECEMBER 31,
JUNE 30, --------------------
1995 1995 1996
-------- --------- ---------
(IN THOUSANDS)
Note payable, secured by real estate,
payable in twenty-four installments
of $2,540 including interest at
9.50% per annum with the final
payment due January 28, 1997....... $ 44 $ 31 $ --
Notes payable, secured by
transportation and operating
equipment, monthly installments of
various amounts, including interest
at rates ranging from 9.00% to
9.75% per annum until 1997......... 100 69 21
Note payable, secured by operating
equipment, payable in thirty-five
installments of $3,177 including
interest at a rate of prime plus
one percent. A final payment of
$128,696 due on August 1, 1998..... -- 184 154
-------- --------- ---------
144 284 175
Less -- Current maturities........... 88 109 42
-------- --------- ---------
$ 56 $ 175 $ 133
======== ========= =========

The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):

1997................................. $ 42
1998................................. 133
---------
$ 175
=========

7. LEASES:

The Company leases facilities from a company which is partially owned by
the shareholder. The lease expires in April 1999. The rent paid under this
related-party lease was approximately $15,000, $60,000, $30,000 and $60,000 for
the years ended June 30, 1994 and 1995, the six months ended December 31, 1995
and the year ended December 31, 1996 respectively. The Company also leased a
facility from a third party, which expired on December 31, 1996. The rent paid
under this lease was approximately $12,000, $12,000, $6,000 and $13,200 for the
years ended June 30, 1994 and 1995, the six months ended December 31, 1995, and
the year ended December 31, 1996, respectively. The leases require the Company
to pay taxes, maintenance, insurance and certain other operating costs of the
leased properties.

The Company also leases vehicles for operations which expire in 1998. The
payments under these vehicle leases were approximately $--, $1,400, $26,000,
$94,000, and $103,000, for the years ended June 30, 1994 and 1995, the six
months ended December 31, 1995, the year ended December 31, 1996, and the six
months ended June 30, 1997, respectively.

Concurrently with the merger, the Company entered into new agreements with
a company partially owned by the shareholder to lease land and buildings owned
by such party used in the Company's operations for $84,700 per year for five
years commencing on June 27, 1997.

F-79

ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum lease payments for operating leases are as follows (in
thousands):

DECEMBER 31,
1996
------------
Year Ended
1997............................... $ 197
1998............................... 60
1999............................... 15
------------
$ 272
============

8. INCOME TAXES (IN THOUSANDS):

Federal and state income taxes are as follows:

YEAR ENDED JUNE 30,
--------------------
1994 1995
--------- ---------
Federal --
Current............................ $ (37) $ 111
Deferred........................... (9) (60)
State --
Current............................ (7) 20
Deferred........................... (1) (11)
--------- ---------
$ (54) $ 60
========= =========

Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:

YEAR ENDED JUNE 30,
--------------------
1994 1995
--------- ---------
Provision at the statutory rate......... $ (52) $ 53
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction............. (2) 6
Other.............................. -- 1
--------- ---------
$ (54) $ 60
========= =========

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:

JUNE 30,
1995
--------
Depreciation and amortization........ $ 14
Accruals and reserves not deductible
until paid......................... 121
State taxes.......................... (4)
Cash to accrual adjustments.......... (50)
--------
Net deferred income tax assets....... $ 81
========

F-80

ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The net deferred tax assets and liabilities are comprised of the following:

JUNE 30,
1995
--------
Deferred tax assets --
Current......................... $ 114
Long-term....................... 14
--------
Total...................... 128
--------
Deferred tax liabilities --
Current......................... 47
Long-term....................... --
--------
Total...................... 47
--------
Net deferred income tax
assets................. $ 81
========

9. COMMITMENTS AND CONTINGENCIES:

LITIGATION

INSURANCE

Effective January 1, 1995, the Company became self-insured for medical
claims up to $30,000 per year per covered individual per event. Claims in excess
of these amounts are covered by a stop-loss policy. The Company has recorded
reserves for self-insured claims based on estimated claims incurred through June
30, 1995, six months ended December 31, 1995 and the year ended December 31,
1996.

10. EMPLOYEE BENEFIT PLANS:

The Company has adopted a 401(k) plan which provides for 10 percent
matching contributions by the Company, up to a maximum of 6 percent of each
participating employee's annual compensation. The Company has the right to make
additional discretionary contributions. Employees become 100 percent vested in
the employer's contribution after 7 years of service. Total contributions by the
Company under this plan to provide contributions and pay expenses were
approximately $118,000, $131,000, $12,000 and $199,000 during the years ended
June 30, 1994 and 1995, the six months ended December 31, 1995 and the year
ended December 31, 1996, respectively. Amounts due to this plan were
approximately $109,000, $-- and $173,000 for the year ended June 30, 1995, the
six months ended December 31, 1995 and the year ended December 31, 1996,
respectively.

The Company also adopted a discretionary profit-sharing plan under which
the Company may contribute up to 25 percent of a participant's compensation, up
to a maximum contribution of $30,000. Employees become 100 percent vested in the
employer's contributions after 7 years of service. The Company's contributions
and administrative expenses were approximately $5,000, $8,000, $-- and $--, for
the years ended June 30, 1994 and 1995, and six months ended December 31, 1995
and the year ended December 31, 1996, respectively.

F-81

ACCURATE AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

11. FINANCIAL INSTRUMENTS:

The Company's financial instruments consist of cash and cash equivalents,
notes payable, a line of credit, and debt. The Company believes that the
carrying value of these instruments on the accompanying balance sheet
approximates their fair value.

12. CAPITAL STOCK:

In addition to the 250,000 authorized shares of $1 par value voting common
stock, the Company has the following classes of authorized capital stock. None
of these three classes have been issued.

SHARES PAR
AUTHORIZED VALUE
----------- ------
Nonvoting Common..................... 250,000 $ 1
Voting Preferred..................... 250,000 $ 1
Nonvoting Preferred.................. 250,000 $ 1

In connection with the merger, the Company transferred certain assets to
the shareholder, consisting of land, buildings, and automobiles, with a total
carrying value of approximately $370,000 as of June 30, 1997. The Company also
distributed approximately $101,000 to its shareholder as of June 30, 1997.

13. SALES TO SIGNIFICANT CUSTOMERS:

For the years ended June 30, 1994 and 1995, the six months ended December
31, 1995, and year ended December 31, 1996 one customer accounted for
approximately 12, 25, 13, and 0 percent, respectively, of the Company's revenue.

14. SUBSEQUENT EVENTS:

In March 1997, the Company and its shareholder entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
merger of the Company with the subsidiary of Comfort Systems. On July 2, 1997,
Comfort Systems completed its initial public offering and the merger with the
Company.

In connection with the merger, Comfort Systems assumed all debt of the
Company. Subsequent to the IPO, substantially all of the debt has been repaid.

F-82

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Eastern Heating and Cooling, Inc.:

We have audited the accompanying balance sheet of Eastern Heating and
Cooling, Inc., as of December 31, 1996, and the related statements of
operations, shareholder's equity and cash flows for the year then ended, and the
six months ended June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Eastern Heating and Cooling,
Inc., as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended, and the six months ended June 30, 1997 in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 25, 1998

F-83

EASTERN HEATING AND COOLING, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

DECEMBER 31,
1996
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 83
Accounts receivable --
Trade, net of allowance of
$25....................... 1,214
Retainage.................. 43
Other receivables.......... 13
Inventories..................... 100
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 66
Prepaid expenses and other
current assets................. --
------------
Total current
assets............... 1,519
PROPERTY AND EQUIPMENT, net.......... 604
OTHER NONCURRENT ASSETS.............. 144
------------
Total assets.......... $2,267
============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 302
Accounts payable and accrued
expenses....................... 826
Line of credit.................. 140
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 102
------------
Total current
liabilities.......... 1,370
PAYABLE TO SHAREHOLDER............... --
LONG-TERM DEBT, net of current
maturities......................... 431
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value, 200
shares authorized, 100 shares
issued and outstanding......... 50
Retained earnings............... 416
------------
Total shareholder's
equity............... 466
------------
Total liabilities and
shareholder's
equity............... $2,267
============

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

F-84

EASTERN HEATING AND COOLING, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------

REVENUES............................. $ 7,944 $3,465

COST OF SERVICES..................... 5,276 2,112
------------ ----------

Gross profit.................... 2,668 1,353

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 2,237 1,144
------------ ----------

Income from operations.......... 431 209

OTHER INCOME (EXPENSE):

Interest expense................ (87) (43)

Other........................... 40 34
------------ ----------

NET INCOME........................... $ 384 $ 200
============ ==========

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

F-85

EASTERN HEATING AND COOLING, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------

BALANCE, December 31, 1995........... 100 $ 50 $ 356 $ 406

Distributions to shareholder.... -- -- (324) (324)

Net income...................... -- -- 384 384
------ ------ -------- -------------

BALANCE, December 31, 1996........... 100 $ 50 $ 416 $ 466

Distributions to shareholder.... -- -- (616) (616)

Net income...................... -- -- 200 200
------ ------ -------- -------------

BALANCE, June 30, 1997............... 100 $ 50 $-- $ 50
====== ====== ======== =============

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

F-86

EASTERN HEATING AND COOLING, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 384 $ 200
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization.... 144 79
Gain on sale of property and
equipment....................... (31) 13
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... (434) 3
Inventories................. 4 (13)
Costs and estimated earnings
in excess of billings on
uncompleted contracts..... 123 (384)
Other noncurrent assets..... 80 (181)
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 246 701
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... 10 (4)
------------ ----------
Net cash provided by
operating
activities............ 526 414
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of property and
equipment, net................... (224) (126)
------------ ----------
Net cash used in
investing
activities............ (224) (126)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... 208 265
Borrowings from shareholder........ -- 465
Payments of long-term debt......... (280) --
Borrowings on line of credit....... 140 --
Distributions to shareholder....... (325) (616)
------------ ----------
Net cash provided by
(used in) financing
activities............ (257) 114
------------ ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 45 402
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 38 83
------------ ----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 83 $ 485
============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 52 $ 43

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

F-87

EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Eastern Heating and Cooling, Inc., a New York corporation, (the
"Company") focuses on providing "design and build" installation and
maintenance, repair and replacement of HVAC systems for commercial and
industrial facilities. Eastern also offers continuous monitoring and control
systems for commercial facilities. Eastern primarily operates in the area within
a 75 mile radius of Albany, New York.

The Company and its shareholder intends to enter into a definitive
agreement with Comfort Systems USA, Inc. ("Comfort Systems") pursuant to which
all outstanding shares of the Company's common stock will be exchanged for cash
and shares of Comfort Systems common stock concurrently with the consummation of
the initial public offering (the "Offering") of the common stock of Comfort
Systems.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.

REVENUE RECOGNITION

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.

The balances billed but not paid by customers pursuant to retainage
provision in construction contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance will be billed and collected in
the upcoming fiscal year.

WARRANTY COSTS

F-88

EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholder reports his share of the
Company's taxable earnings or losses in his personal tax returns. The Company
will terminate its S Corporation status concurrently with the effective date of
this Offering.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENT

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (dollars in thousands):

ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1996
------------ ------------
Transportation equipment............. 7 $ 957
Machinery and equipment.............. 10 54
Computer and telephone equipment..... 3-5 6
Leasehold improvements............... 20 36
Furniture and fixtures............... 7-10 126
------------
1,179
Less -- Accumulated depreciation and
amortization....................... (575)
------------
Property and equipment, net..... $ 604
============

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):

DECEMBER 31,
1996
------------
Balance at beginning of year......... $ 16
Additions to costs and expenses...... 25
Deductions for uncollectible
receivables written off and
recoveries......................... (16)
------------
$ 25
============

F-89

EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Accounts payable and accrued expenses consist of the following (in
thousands):

DECEMBER 31,
1996
------------
Accounts payable, trade.............. $ 611
Accrued compensation and benefits.... 120
Other accrued expenses............... 95
------------
$ 826
============

Installation contracts in progress are as follows (in thousands):

DECEMBER 31,
1996
------------
Costs incurred on contracts in
progress........................... $ 749
Estimated earnings, net of losses.... 235
------------
984
Less -- Billings to date............. 1,020
------------
$ (36)
============

Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 66
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (102)
------------
$ (36)
============

5. LONG-TERM DEBT:

Long-term debt consists of the following:

The Company has a term note payable to a financial institution with an
outstanding balance of approximately $133,000 at December 31, 1996. The term
note matures in April 1999, and bears interest at prime plus 2 percent (10.25
percent at December 31, 1996) which is payable along with principal of $4,583
monthly. The note is secured by substantially all assets of the Company and is
guaranteed by the Company's shareholder.

The Company has various installment notes with several financial
institutions which are secured by transportation equipment. The terms of the
notes range from 48 months to 60 months with monthly payments of principal and
interest of approximately $12,300. The notes bear interest at rates ranging from
6.5 percent to 10.5 percent and mature from 1997 to 2001.

The Company has a note payable to its former owner with an outstanding
balance of $288,444 at December 31, 1996. The note payable was calculated using
an implied interest rate of 9 percent. The note payable is due in installments
of $159,385 on January 1, 1997 and $168,948 on January 1, 1998, including
interest.

F-90

EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):

Year ending December 31 --
1997............................ $ 302
1998............................ 296
1999............................ 85
2000............................ 42
2001............................ 8
---------
$ 733
=========

6. LINE OF CREDIT:

The Company has a $500,000 line of credit with a financial services
company. The line of credit is due on demand and bears interest at prime plus 1
percent per annum (9.25 percent at December 31, 1996). The line of credit is
secured by substantially all assets of the Company. The balance outstanding
under this line of credit at December 31, 1996 was $140,000.

7. LEASES:

The Company leases a facility from a company which is 50 percent owned by
the Company's shareholder. The lease expires in December 1999. The rent paid
under this related-party lease was approximately $50,000 and $39,000 for the
year ended December 31, 1996, and six months ended June 30, 1997, respectively.

Additionally, the Company rents other facilities from non-related parties.
Future minimum lease payments under non-cancellable operating leases are as
follows (in thousands):

Year Ended December 31 --
1997............................... $ 55
1998............................... 55
1999............................... 50
------------
$ 160
============

8. COMMITMENTS AND CONTINGENCIES:

LITIGATION

INSURANCE

9. FINANCIAL INSTRUMENTS:

The Company's financial instruments consist of cash and cash equivalents,
investments, notes payable, a line of credit, and debt. The Company believes
that the carrying value of these instruments on the Investment in RECC, Inc.
accompanying balance sheet approximates their fair value.

F-91

EASTERN HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

10. SALES TO SIGNIFICANT CUSTOMER:

During 1996, one customer accounted for approximately 12 percent of the
Company's sales.

11. INTEREST IN RECC, INC.:

Effective January 2, 1997, an affiliate of the Company acquired the
business and certain operating assets of RECC, Inc., a New York corporation.
This affiliate agreed to pay $10,000 over a period of one year.

12. SHAREHOLDERS' EQUITY

As of June 30, 1997, the Company distributed $454,000 from the accumulated
adjustment account. The Company distributed approximately $162,000 subsequent to
the merger which has been reflected in the accompanying financial statements.

13. SUBSEQUENT EVENTS:

Concurrently with the merger, the Company entered into agreements with the
shareholders to lease land and buildings used in the Company's operations for a
negotiated amount and term.

Eastern intends to enter into a 10-year lease with 60 Loudonville Road
Associates for a new building and terminate the existing lease. Eastern has
agreed to install the HVAC systems in the new building at a price which the
Company believes to be at a fair market value. The Company's annual rental in
the new building will be at fair market value, as determined by appraisal.

In connection with the merger, Comfort Systems assumed all debt of the
Company. Subsequent to the IPO, substantially all of the debt has been repaid.

F-92

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Contract Service, Inc.:

We have audited the accompanying balance sheets of Contract Service, Inc.,
as of December 31, 1995 and 1996, and the related statements of operations,
shareholders' equity and cash flows for the three years ended December 31, 1996,
and the six months ended June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Contract Service, Inc., as
of December 31, 1995 and 1996, and the results of their operations and their
cash flows for the three years ended December 31, 1996, and the six months ended
June 30, 1997 in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 25, 1998

F-93

CONTRACT SERVICE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

DECEMBER 31,
--------------------
1995 1996
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 116 $ 207
Accounts receivable --
Trade, net of allowance of
$11, $22, respectively...... 651 680
Retainage..................... 10 26
Other......................... -- --
Inventories........................ 306 362
Costs and estimated earnings in
excess of billings on uncompleted
contracts......................... 104 110
Prepaid expenses and other current
assets............................ 11 4
--------- ---------
Total current assets.......... 1,198 1,389
PROPERTY AND EQUIPMENT, net............. 549 642
OTHER NONCURRENT ASSETS................. 14 16
--------- ---------
Total assets.................. $ 1,761 $ 2,047
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term
debt.............................. $ 100 $ 100
Accounts payable and accrued
expenses.......................... 576 691
Billings in excess of costs and
estimated earnings on uncompleted
contracts......................... 149 136
--------- ---------
Total current liabilities..... 825 927
PAYABLE TO SHAREHOLDERS................. -- --
LONG-TERM DEBT, net of current
maturities............................ 263 429
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 20,000
shares authorized, 8,946 shares
issued and outstanding............ 9 9
Retained earnings.................. 664 682
--------- ---------
Total shareholders' equity.... 673 691
--------- ---------
Total liabilities and
shareholders' equity........ $ 1,761 $ 2,047
========= =========

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

F-94

CONTRACT SERVICE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- JUNE 30,
1994 1995 1996 1997
--------- --------- --------- ----------
(UNAUDITED)

REVENUES................................ $ 6,502 $ 6,361 $ 7,842 $3,828

COST OF SERVICES........................ 4,393 4,413 5,201 2,535
--------- --------- --------- ----------

Gross profit............. 2,109 1,948 2,641 1,293

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,228 1,500 1,660 865
--------- --------- --------- ----------

Income from operations... 881 448 981 428

OTHER INCOME (EXPENSE):

Interest expense................... (5) (9) (29) (43)

Other.............................. 29 38 51 16
--------- --------- --------- ----------

NET INCOME.............................. $ 905 $ 477 $ 1,003 $ 401
========= ========= ========= ==========

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

F-95

CONTRACT SERVICE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

COMMON STOCK TOTAL
------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- ------ -------- --------------

BALANCE, December 31, 1993........... 8,946 $ 9 $ 660 $ 669

Distributions to shareholders... -- -- (911) (911)

Net income...................... -- -- 905 905
--------- ------ -------- --------------

BALANCE, December 31, 1994........... 8,946 9 654 663

Distributions to shareholders... -- -- (467) (467)

Net income...................... -- -- 477 477
--------- ------ -------- --------------

BALANCE, December 31, 1995........... 8,946 9 664 673

Distributions to shareholders... -- -- (985) (985)

Net income...................... -- -- 1,003 1,003
--------- ------ -------- --------------

BALANCE, December 31, 1996........... 8,946 9 682 691

Distributions to shareholders... -- -- (1,083) (1,083)

Net income...................... -- -- 401 401
--------- ------ -------- --------------

BALANCE, June 30, 1997............... 8,946 $ 9 $-- $ 9
========= ====== ======== ==============

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

F-96

CONTRACT SERVICE, INC.
STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- JUNE 30,
1994 1995 1996 1997
--------- --------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income......................... $ 905 $ 477 $ 1,003 $ 401
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation..................... 97 120 138 66
Gain (loss) on sale of property
and equipment................... 8 (5) -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... (219) (96) (45) (50)
Inventories................. 20 (49) (57) (124)
Costs and estimated earnings
in excess of billings on
uncompleted contracts........ (44) 35 (6) (48)
Prepaid expenses and other
current assets............... (9) (2) 7 (7)
Other noncurrent assets..... (8) 5 (2) (11)
Increase (decrease) in --
Accounts payable and accrued
expenses..................... (27) (3) 115 58
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... 12 17 (13) 99
--------- --------- --------- -----------
Net cash provided by operating
activities..................... 735 499 1,140 384
--------- --------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of property and
equipment......................... (138) (193) (230) (100)
--------- --------- --------- -----------
Net cash used in investing
activities..................... (138) (193) (230) (100)
--------- --------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from shareholders....... -- -- -- 529
Borrowings of long-term debt....... 102 201 166 327
Distributions to shareholders...... (911) (467) (985) (1,083)
Collections of advances to officers
and shareholders.................. 86 -- -- --
--------- --------- --------- -----------
Net cash (used in) financing
activities..................... (723) (266) (819) (227)
--------- --------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (126) 40 91 57
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 202 76 116 207
--------- --------- --------- -----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 76 $ 116 $ 207 $ 264
========= ========= ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 6 $ 30 $ 41 $ 41

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

F-97

CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Contract Service, Inc., a Utah corporation, (the "Company") focuses on
providing comprehensive maintenance, repair and replacement of HVAC systems for
commercial and residential facilities primarily in Utah.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.

REVENUE RECOGNITION

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined.

WARRANTY COSTS

The Company warrants labor for the first year after installation of new air
conditioning and heating units. The Company generally warrants labor for 30 days
after the servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.

F-98

CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENT

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (dollars in thousands):

ESTIMATED
USEFUL LIVES DECEMBER 31, DECEMBER 31,
IN YEARS 1995 1996
------------ ------------ ------------

Transportation equipment............. 5-10 $ 690 $ 907
Machinery and equipment.............. 5-30 126 127
Furniture and fixtures............... 5-20 178 189
------------ ------------
Less -- Accumulated depreciation..... (445) (581)
------------ ------------
Property and equipment, net..... $ 549 $ 642
============ ============

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):

DECEMBER 31,
--------------------
1995 1996
--------- ---------
Balance at beginning of year......... $ 11 $ 11
Additions to costs and expenses...... 18 26
Deductions for uncollectible
receivables written off and
recoveries......................... (18) (15)
--------- ---------
$ 11 $ 22
========= =========

F-99

CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Accounts payable and accrued expenses consist of the following (in
thousands):

DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade.............. $ 242 $ 256
Accrued compensation................. 219 312
Other accrued expenses............... 115 123
--------- ---------
$ 576 $ 691
========= =========

Installation contracts in progress are as follows (in thousands):

DECEMBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress............................. $ 1,998 $ 2,534
Estimated earnings, net of losses.... 741 978
--------- ---------
2,739 3,512
Less -- Billings to date............. 2,784 3,538
--------- ---------
$ (45) $ (26)
========= =========

Costs and estimated earnings in
excess
of billings on uncompleted
contracts.......................... $ 104 $ 110
Billings in excess of costs and
estimated
earnings on uncompleted
contracts.......................... (149) (136)
--------- ---------
$ (45) $ (26)
========= =========

5. LONG-TERM DEBT:

Long-term debt consists of ten unsecured promissory notes to the Company's
shareholders of which two are demand notes. All notes, except the demand notes,
are due 10 years from the date of the note. The notes bear an interest rate of
10 percent. Monthly interest payments are made to the shareholders with the
principal due at the date of maturity.

The aggregate maturities of long-term debt are as follows (in thousands):

Year ending December 31,

1997................................. $ 100
1998................................. --
1999................................. --
2000................................. --
2001................................. --
Thereafter........................... 429
---------
$ 529
=========

6. LEASES:

The Company leases its facilities from a company owned by its two
shareholders. The lease is currently on a month-to-month basis. The rent paid
under this related-party lease was approximately $66,000, $106,000 and $120,000
for the years ended December 31, 1994, 1995 and 1996, respectively, and
approximately $65,000 for the six months ended June 30, 1997.

F-100

CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum lease payments for operating leases are as follows (in
thousands):

Year ending December 31,
1997............................ $ 120
1998............................ 120
1999............................ 120
2000............................ 120
2001............................ 120
---------
$ 600
=========

7. RELATED-PARTY TRANSACTIONS:

At December 31, 1994, 1995 and 1996, the Company held notes payable to the
shareholders in the amount of $162,000, $363,000 and $529,000, respectively.
(See Note 5.) The notes bear interest at 10 percent. Interest paid during the
years ended December 31, 1994, 1995 and 1996 related to these loans was $6,000,
$29,000 and $41,000, respectively, and approximately $30,000 for the six months
ended June 30, 1997.

8. COMMITMENTS AND CONTINGENCIES:

LITIGATION

INSURANCE

9. EMPLOYEE BENEFIT PLAN:

Beginning January 1, 1994, the Company adopted a 401(k) plan. The plan
allows employees to contribute a portion of their gross wages into the plan as a
salary deferral and requires the Company to match 25 percent of the employee
contribution up to 5 percent of employee's gross wages. The Company's matching
contributions for the years ended December 31, 1995 and 1996 were $17,000 and
$19,000 respectively.

The Company has also adopted a cafeteria plan pursuant to Section 125 of
the Internal Revenue Code that covers all employees from 90 days after the
commencement of employment. Under this plan, the employees may reduce their
compensation to fund medical, dental and dependent care/day care benefits. The
funds withheld are used to pay actual claims or medical insurance, based on the
employees' elections.

10. FINANCIAL INSTRUMENTS:

The Company's financial instruments consist of cash and cash equivalents,
and debt. The Company believes that the carrying value of these instruments on
the accompanying balance sheet approximates their fair value.

F-101

CONTRACT SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

11. SHAREHOLDERS' EQUITY:

As of June 30, 1997, the Company distributed approximately $1,083,000 which
represents the Company's S Corporation accumulated adjustment account.

12. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):

In connection with the merger, Comfort Systems assumed all debt of the
Company. Subsequent to the IPO, substantially all of the debt has been repaid.

F-102

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Tech Heating and Air Conditioning, Inc.:

We have audited the accompanying combined balance sheets of Tech Heating
and Air Conditioning, Inc., and related company as of December 31, 1995 and
1996, and the related combined statements of operations, shareholders' equity
and cash flows for the years then ended, and the six months ended June 30, 1997.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Tech
Heating and Air Conditioning, Inc., and related company as of December 31, 1995
and 1996, and the combined results of their operations and their cash flows for
the years then ended, and the six months ended June 30, 1997, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 25, 1998

F-103

TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

DECEMBER 31,
--------------------
1995 1996
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 313 $ 611
Accounts receivable --
Trade, net of allowance of
$45, $40, respectively...... 1,244 1,723
Retainage..................... 92 48
Other receivables............. -- 7
Inventories........................ 67 208
Prepaid expenses and other current
assets............................ 7 33
Costs and estimated earnings in
excess of billings on uncompleted
contracts......................... -- --
--------- ---------
Total current assets..... 1,723 2,630
PROPERTY AND EQUIPMENT, net............. 368 500
--------- ---------
Total assets............. $ 2,091 $ 3,130
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................... $ -- $ 62
Accounts payable and accrued
expenses........................... 1,048 757
Line of credit..................... 88 190
--------- ---------
Total current
liabilities............... 1,136 1,009
LONG-TERM DEBT, net of current
maturities.............................. 48 60
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 1,000
shares authorized, 500 shares
issued............................ 1 1
Treasury stock..................... (3) (3)
Retained earnings.................. 909 2,063
--------- ---------
Total shareholders'
equity.................... 907 2,061
--------- ---------
Total liabilities and
shareholders' equity...... $ 2,091 $ 3,130
========= =========

The accompanying notes are an integral part of these combined financial
statements.

F-104

TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

SIX MONTHS
YEAR ENDED DECEMBER ENDED
31, JUNE 30,
-------------------- ----------
1995 1996 1997
--------- --------- ----------
REVENUES................................ $ 6,960 $ 7,537 $3,904
COST OF SERVICES........................ 4,212 3,996 2,229
--------- --------- ----------
Gross profit....................... 2,748 3,541 1,675
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,800 1,861 1,059
--------- --------- ----------
Income from operations............. 948 1,680 616
OTHER INCOME (EXPENSE):
Interest expense................... (12) (18) (29)
Other.............................. 20 31 (19)
--------- --------- ----------
NET INCOME.............................. $ 956 $ 1,693 $ 568
========= ========= ==========

The accompanying notes are an integral part of these combined financial
statements.

F-105

TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

COMMON STOCK TOTAL
---------------- TREASURY RETAINED SHAREHOLDERS'
SHARES AMOUNT STOCK EARNINGS EQUITY
------ ------ -------- -------- -------------

BALANCE, December 31, 1994.............. 500 $ 1 $ (3) $ 575 $ 573
Distributions to shareholders...... -- -- -- (622) (622)
Net income......................... -- -- -- 956 956
------ ------ --- -------- -------------
BALANCE, December 31, 1995.............. 500 1 (3) 909 907
Distributions to shareholders...... -- -- -- (539) (539)
Net income......................... -- -- -- 1,693 1,693
------ ------ --- -------- -------------
BALANCE, December 31, 1996.............. 500 1 (3) 2,063 2,061
Distributions to shareholders...... -- -- -- (2,581) (2,581)
Net income......................... -- -- -- 568 568
------ ------ --- -------- -------------
BALANCE, June 30, 1997.................. 500 $ 1 $ (3) $ 50 $ 48
====== ====== === ======== =============

The accompanying notes are an integral part of these combined financial
statements.

F-106

TECH HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 956 $ 1,693 $ 568
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation.................... 89 142 71
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ 581 (442) 2
Inventories................ (42) (141) (20)
Prepaid expenses and other
current assets.......... 7 (26) (20)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... -- -- (50)
Increase (decrease) in --
Accounts payable and
accrued expenses........ (513) (291) 182
--------- --------- -----------
Net cash provided by
(used in) operating
activities......... 1,078 935 733
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of property and
equipment....................... (127) (274) 106
--------- --------- -----------
Net cash provided by
(used in) investing
activities......... (127) (274) 106
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit....... 76 102 --
Borrowings on long-term debt....... -- 205 1,594
Payments on long-term debt......... (100) (131) --
Distributions to shareholders...... (622) (539) (2,639)
--------- --------- -----------
Net cash provided by
(used in) financing
activities......... (646) (363) (1,045)
--------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 305 298 (206)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 8 313 611
--------- --------- -----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 313 $ 611 $ 405
========= ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 12 $ 18 $ 37

The accompanying notes are an integral part of these combined financial
statements.

F-107

TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Tech Heating and Air Conditioning, Inc., an Ohio corporation, and related
company (collectively, the "Company") focuses on providing "design and
build" installation and services, maintenance, repair and replacement of HVAC
systems for commercial and industrial facilities. Tech also offers continuous
monitoring and control services for commercial facilities. The Company's
customers are primarily in the greater Cleveland, Ohio area.

The Company and its shareholders intend to enter into a definitive
agreement with Comfort Systems, USA, Inc. ("Comfort Systems") pursuant to
which all outstanding shares of the Company's common stock will be exchanged for
cash and shares of Comfort Systems common stock concurrently with the
consummation of the initial public offering (the "Offering") of the common
stock of Comfort Systems.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

The combined financial statements include the accounts and results of
operations of Tech Heating and Air Conditioning, Inc., and its related company,
Tech Mechanical which are under common control and management of two
individuals. All significant intercompany transactions and balances have been
eliminated in combination.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the combined statements of operations.

REVENUE RECOGNITION

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and their effects are recognized in the period in
which the revisions are determined.

F-108

TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

WARRANTY COSTS

The Company warrants labor for the first year after installation of new air
conditioning and heating systems. The Company generally warrants labor for 30
days after the servicing of existing air conditioning and heating systems. A
reserve for warranty costs is recorded upon completion of installation or
service.

INCOME TAXES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENT

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset are compared to the asset's carrying amount to determine if a
write-down to market value is necessary. Adoption of this standard did not have
a material effect on the financial position or combined results of operations of
the Company.

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (dollars in thousands):

ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment................ 5 $ 462 $ 553
Machinery and equipment................. 7 61 159
Computer and telephone equipment........ 5 107 190
Furniture and fixtures.................. 5-7 145 128
--------- ---------
Less -- Accumulated depreciation........ (407) (530)
--------- ---------
Property and equipment, net........ $ 368 $ 500
========= =========

F-109

TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):

DECEMBER 31,
--------------------
1995 1996
--- ---
Balance at beginning of year............ $ 25 $ 45
Additions to costs and expenses......... 20 --
Deductions for uncollectible receivables
written off and recoveries............ -- (5)
--- ---
$ 45 $ 40
=== ===

Accounts payable and accrued expenses consist of the following (in
thousands):

DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade................. $ 428 $ 388
Accrued compensation and benefits....... 337 226
Other accrued expenses.................. 283 143
--------- ---------
$ 1,048 $ 757
========= =========

At December 31, 1995 and 1996 billings to customers generally equalled work
performed which resulted in no costs and estimated earnings in excess of
billings or billings in excess of costs and estimated earnings on uncompleted
contracts.

5. LONG-TERM DEBT AND NOTES PAYABLE:

Long-term debt consists of installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes range from 24 months to 36 months with monthly payments of
principal and interest of approximately $8,000. The notes bear interest at rates
ranging from 7.5 percent to 9.95 percent.

The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):

Year ending December 31 --
1997............................... $ 252
1998............................... 55
1999............................... 5
---------
$ 312
=========

The Company has a $1,500,000 line of credit with a financial services
company. The line of credit expires in July 1997 and bears interest at prime
plus .25 percent per annum (8.5 percent at December 31, 1996). The line of
credit is secured by a lien on accounts receivable and inventory and is
guaranteed by the shareholders. There was $190,000 outstanding under this line
of credit at December 31, 1996.

6. LEASES:

The Company leases facilities from a company which is partially owned by
one of the shareholders. The lease expires in April of 2000. The rent paid under
this related-party lease was approximately $84,000, and $42,000 for the year
ended December 31, 1996, and the six months ended June 30, 1997, respectively.

F-110

TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The lease requires the Company to pay taxes, maintenance, insurance and certain
other operating costs of the leased property. The lease contains renewal
provisions.

The Company leases a vehicle for a key member of management. The lease
payments under this vehicle lease totaled approximately $6,700 for the year
ended December 31, 1996.

Future minimum lease payments for operating leases are as follows (in
thousands):

Year ending December 31
1997............................ $ 100
1998............................ 91
1999............................ 86
2000............................ 28
---------
$ 305
=========

7. EMPLOYEE BENEFIT PLANS:

The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code. The Company has the right to make
discretionary contributions. Total contributions by the Company under this plan
were approximately $18,000 and $12,000 for 1995 and 1996, respectively.

8. FINANCIAL INSTRUMENTS:

The Company's financial instruments consist of cash and cash equivalents
and debt. The Company believes that the carrying value of these instruments on
the accompanying balance sheet approximates their fair value.

9. COMMITMENTS AND CONTINGENCIES:

LITIGATION

INSURANCE

10. SHAREHOLDERS' EQUITY:

As of June 30, 1997, the Company distributed $2,639,000 from the
accumulated adjustment account through increased borrowings on the line of
credit of $900,000 with the remainder paid from cash on hand.

F-111

TECH HEATING AND AIR CONDITIONING, INC.
AND RELATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

11. SUBSEQUENT EVENTS:

In connection with the merger, Comfort Systems assumed all debt of the
Company. Subsequent to the IPO, substantially all of the debt has been repaid.

Concurrently with the merger, the Company cancelled its sole vehicle lease.

F-112

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Seasonair, Inc.:

We have audited the accompanying balance sheet of Seasonair, Inc. as of
December 31, 1996, and the related statements of operations, shareholders'
equity and cash flows for the year then ended, and the six months ended June 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Seasonair, Inc., as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, and the six months ended June 30, 1997, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 25, 1998

F-113

SEASONAIR, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

DECEMBER 31,
1996
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 69
Accounts receivable --
Trade, net of allowance of $
--........................... 961
Retainage..................... 17
Other receivables............. --
Inventories........................ 190
Costs on uncompleted contracts in
excess of billings................ 75
Deferred tax asset................. 104
Prepaid expenses and other current
assets............................ 96
------------
Total current assets..... 1,512
PROPERTY AND EQUIPMENT, net............. 63
OTHER NONCURRENT ASSETS................. 83
------------
Total assets............. $1,658
============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.............................. 34
Accounts payable and accrued
expenses.......................... 810
Billings in excess of costs and
estimated earnings on uncompleted
contracts......................... 156
------------
Total current
liabilities............. 1,000
LONG-TERM DEBT, net of current
maturities............................ 76
DEFERRED TAX LIABILITY.................. 17
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value,
2,000,000 shares authorized,
1,244,000 shares issued and
outstanding....................... 78
Additional paid-in capital......... 1
Retained earnings.................. 721
Treasury stock..................... (235)
------------
Total shareholders'
equity.................. 565
------------
Total liabilities and
shareholders' equity.... $1,658
============

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

F-114

SEASONAIR, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
REVENUES................................ $6,737 $3,767
COST OF SERVICES........................ 4,006 2,339
------------ ----------
Gross profit.................. 2,731 1,428
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 2,597 1,244
------------ ----------
Income from operations........ 134 184
OTHER INCOME (EXPENSE):
Interest expense................... (21) (6)
Other.............................. 82 30
------------ ----------
INCOME BEFORE INCOME TAXES.............. 195 208
PROVISION FOR INCOME TAXES.............. 69 83
------------ ----------
NET INCOME.............................. $ 126 $ 125
============ ==========

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

F-115

SEASONAIR, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------------ ------ ---------- --------- --------- -------------

BALANCE, December 31, 1995........... 1,214,724 $ 78 $ 1 $ 632 $ (269) $ 442

Sales of treasury stock......... 29,503 -- -- -- 34 34

Distributions to shareholders... -- -- -- (37) -- (37)

Net income...................... -- -- -- 126 -- 126
--
------------ ------ --------- --------- -------------

BALANCE, December 31, 1996........... 1,244,227 78 1 721 (235) 565

Purchase of treasury stock...... (266) -- -- -- -- --

Net income...................... -- -- -- 125 -- 125
--
------------ ------ --------- --------- -------------

BALANCE, June 30, 1997............... 1,243,961 $ 78 $ 1 $ 846 $ (235) $ 690
============ ====== == ========= ========= =============

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

F-116

SEASONAIR, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 126 $ 125
Adjustments to reconcile net income
(loss) to net cash provided by
(used in)
operating activities
Depreciation.................... 28 11
Gain on sale of property and
equipment...................... (4) --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ 49 (62)
Inventories................ (35) 4
Prepaid expenses and other
current assets.......... (171) (13)
Costs of uncompleted
contracts in excess of
billings................ 58 (24)
Other noncurrent assets.... (71) (32)
Increase (decrease) in --
Accounts payable and
accrued expenses........ (74) 47
Billings in excess of costs
on uncompleted
contracts............... (23) (34)
Deferred tax liability..... 30 (6)
------------ ----------
Net cash provided by
(used in) operating
activities......... (87) 16
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of property and
equipment, net................. (11) (4)
------------ ----------
Net cash provided by
(used in) investing
activities......... (11) (4)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit.... -- --
Borrowings of long-term debt.... -- 44
Payments of long-term debt...... (105) --
Distributions to shareholders... (37) --
Cash received for sale of
treasury shares................ 34 --
------------ ----------
Net cash provided by
(used in) financing
activities......... (108) 44
------------ ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (206) 56
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 275 69
------------ ----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 69 $ 125
============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................... $ 22 $ 43
Income taxes............... 163 --

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

F-117

SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Seasonair, Inc., a Maryland corporation, (the "Company") focuses on
providing installation services and maintenance, repair and replacement of HVAC
systems for light commercial facilities. Seasonair primarily operates in
Maryland, the District of Columbia and Virginia.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using an accelerated method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.

REVENUE RECOGNITION

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenue from construction
contracts is recognized on the completed-contract method. This method is used
because the typical contract is completed within a twelve-month period, and the
Company's current financial position and results of operations do not vary
significantly from those which would result from use of the
percentage-of-completion method. A contract is considered complete when all
costs except insignificant items have been incurred, and the installation is
operating according to specifications or has been accepted by the customer.

Contract costs include all direct equipment, material, labor, and
subcontract costs. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined.

F-118

SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

WARRANTY COSTS

INCOME TAXES

The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes". Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the underlying assets or liabilities are recovered
or settled.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENT

Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset are
compared to the asset's carrying amount to determine if a write-down to market
value is necessary. Adoption of this standard did not have a material effect on
the financial position or results of operations of the Company.

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (dollars in thousands):

ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1996
------------ ------------
Transportation equipment............. 5 $ 17
Machinery and equipment.............. 5 208
Leasehold improvements............... 39 15
Furniture and fixtures............... 7 16
------------
256
Less -- Accumulated depreciation and
amortization....................... (193)
------------
Property and equipment, net..... $ 63
============

F-119

SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Activity in the Company's allowance for doubtful accounts consist of the
following (in thousands):

DECEMBER 31,
1996
------------
Balance at beginning of year............ $ --
Additions to costs and expenses......... 5
Deductions for uncollectible receivables
written off and recoveries............ (5)
---
$ --
===

Accounts payable and accrued expenses consist of the following (in
thousands):

DECEMBER 31,
1996
------------
Accounts payable, trade.............. $ 353
Accrued compensation and benefits.... 321
Warranty reserve..................... 37
Other................................ 99
------------
$ 810
============

5. LONG-TERM DEBT:

Long-term debt consists of two notes payable to officers and an installment
note payable for transportation equipment, which is secured by the related
transportation equipment. The terms of the notes range from 51 months to 80
months with monthly payments of principal and interest of approximately $3,598.
The notes bear interest at rates ranging from 10 percent to 12.7 percent.

The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):

Year ending December 31 --
1997............................... $ 34
1998............................... 37
1999............................... 38
2000............................... 1
---------
$ 110
=========

The Company has a $150,000 line of credit with a financial services
company. The line of credit expires August 5, 1997, and bears interest at prime
plus one percent per annum. There was no balance outstanding under this line of
credit at December 31, 1996.

6. LEASES:

The Company leases facilities from a partnership which is partially owned
by one of the shareholders. The lease expires in October, 2006. The rent paid
under this lease was approximately $62,640 for the year ended December 31, 1996,
and $31,320 for the six months ended June 30, 1997. The lease requires the
Company to pay taxes, maintenance, insurance and certain other operating costs
of the leased property.

The Company leases vehicles for operations. The payments under these
vehicle leases were approximately $189,000 for the year ended December 31, 1996,
and $92,500 for the six months ended June 30, 1997.

F-120

SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Future minimum lease payments for operating leases are as follows (in
thousands):

Year ending December 31 --
1997............................... $ 241
1998............................... 202
1999............................... 158
2000............................... 105
2001............................... 65
---------
$ 771
=========

7. INCOME TAXES:

Federal and state income taxes for the year ended December 31, 1996, are as
follows (in thousands):

Federal --
Current............................ $ 50
Deferred........................... 7
State --
Current............................ 11
Deferred........................... 1
---
$ 69
===

Actual income tax expense for the year ended December 31, 1996, differs
from income tax expense computed by applying the U.S. federal statutory
corporate tax rate of 35% to income before income taxes as follows (in
thousands):

Provision at the statutory rate......... $ 68
Increase (decrease) resulting from --
State income tax, net of benefits
for federal deduction............. 8
Other.............................. (7)
---
$ 69
===

Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities as of December 31, 1996, result principally from the
following (in thousands):

Depreciation and amortization........... $ (18)
Accruals and reserves not deductible
until paid............................ 110
State taxes............................. (5)
---------
Net deferred income tax asset........... $ 87
=========

F-121

SEASONAIR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The net deferred tax assets and liabilities at December 31, 1996, are comprised
of the following (in thousands):

Deferred tax assets --
Current............................ $ 104
Long-term.......................... --
---------
Total......................... 104
---------
Deferred tax liabilities --
Current............................ --
Long-term.......................... 17
---------
Total......................... 17
---------
Net deferred income tax
asset...................... $ 87
=========

8. COMMITMENTS AND CONTINGENCIES:

LITIGATION

INSURANCE

9. EMPLOYEE BENEFIT PLAN:

The Company has a 401(k) profit-sharing plan which provides for the Company
to match employee contributions up to a maximum of $260 per person per year as
well as an employee stock ownership plan. Total contributions for both plans by
the Company under the plan were approximately $80,000 for purchase of treasury
stock for the employee stock ownership plan, and $5,000 for the 401(k) plan for
the year ended December 31, 1996.

10. FINANCIAL INSTRUMENTS:

The Company's financial instruments consist of cash and cash equivalents,
notes receivable, investments, notes payable, and debt. The Company believes
that the carrying value of these instruments on the accompanying balance sheet
approximates their fair value.

11. SUBSEQUENT EVENTS:

In March 1997, the Company and its shareholders entered into a definitive
agreement with a wholly-owned subsidiary of Comfort Systems, providing for the
exchange of shares by the Company with the subsidiary of Comfort Systems. On
July 2, 1997, Comfort Systems completed its initial public offering and the
merger with the Company.

In connection with the merger, Comfort Systems assumed all debt of the
Company. Subsequent to the IPO, substantially all of the debt has been repaid.

F-122

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Western Building Services, Inc.:

We have audited the accompanying balance sheets of Western Building
Services, Inc. as of December 31, 1995 and 1996, and the related statements of
operations, shareholders' equity and cash flows for the years then ended, and
the six months ended June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Western Building Services,
Inc. as of December 31, 1995 and 1996, and the results of their operations and
cash flows for the years then ended, and the six months ended June 30, 1997, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 25, 1998

F-123

WESTERN BUILDING SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)

DECEMBER 31,
--------------------
1995 1996
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ -- $ 177
Accounts receivable --
Trade......................... 726 661
Retainage on uncompleted
contracts................... 78 183
Other receivables............. 133 3
Inventories........................ 71 86
Costs and estimated earnings in
excess of billings on
uncompleted contracts............ 65 26
Prepaid expenses and other current
assets............................ 31 30
--------- ---------
Total current assets..... 1,104 1,166
PROPERTY AND EQUIPMENT, net............. 150 191
OTHER NONCURRENT ASSETS................. 22 129
--------- ---------
Total assets............. $ 1,276 $ 1,486
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Line of credit..................... $ 231 $ --
Notes payable...................... -- 6
Current maturities of long-term
debt.............................. 86 73
Current portion of capital
leases............................ 17 21
Accounts payable and accrued
expenses.......................... 732 556
Billings in excess of costs and
estimated earnings on
uncompleted contracts............ 76 151
--------- ---------
Total current
liabilities............ 1,142 807
PAYABLE TO SHAREHOLDERS................. -- --
LONG-TERM DEBT, net of current
maturities............................ 179 261
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common Stock, $.10 par value,
4,000,000 shares authorized, 2,600
and 2,700 shares issued and
outstanding....................... 1 1
Additional paid-in capital......... 61 62
Retained earnings (deficit)........ (107) 355
--------- ---------
Total shareholders'
equity (deficit)....... (45) 418
--------- ---------
Total liabilities and
shareholders' equity... $ 1,276 $ 1,486
========= =========

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

F-124

WESTERN BUILDING SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)

YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------------- JUNE 30,
1995 1996 1997
--------- --------- ----------

REVENUES............................. $ 4,112 $ 6,494 $ 2,174

COST OF SERVICES..................... 3,408 4,662 1,641
--------- --------- ----------

Gross profit.................... 704 1,832 533

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 855 1,088 457
--------- --------- ----------

Income (loss) from operations... (151) 744 76

OTHER INCOME (EXPENSE):

Interest expense................ (35) (51) (22)

Other........................... 6 (21) (13)
--------- --------- ----------

NET INCOME (LOSS).................... $ (180) $ 672 $ 41
========= ========= ==========

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

F-125

WESTERN BUILDING SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

TOTAL
COMMON STOCK ADDITIONAL RETAINED SHAREHOLDERS'
---------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
------ ------ ---------- --------- -------------

BALANCE, December 31, 1994........... 2,600 $ 1 $ 61 $ 73 $ 135

Net loss........................ -- -- -- (180) (180)
------ ------ --- --------- -------------

BALANCE, December 31, 1995........... 2,600 1 61 (107) (45)

Distributions to shareholders... -- -- -- (210) (210)

Net income...................... -- -- -- 672 672

Common stock issuance........... 100 -- 1 -- 1
------ ------ --- --------- -------------

BALANCE, December 31, 1996........... 2,700 1 62 355 418

Distributions to shareholders -- -- -- (385) (385)

Net income...................... -- -- -- 41 41
------ ------ --- --------- -------------

BALANCE, June 30, 1997............... 2,700 $ 1 $ 62 $ 11 $ 74
====== ====== === ========= =============

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

F-126

WESTERN BUILDING SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------------- JUNE 30,
1995 1996 1997
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (180) $ 672 $ 41
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --.....
Depreciation and amortization... 51 51 50
Gain on sale of assets.......... -- -- (1)
Changes in operating assets and
liabilities --................
(Increase) decrease in --.....
Accounts receivable........ (179) 91 59
Inventories................ (35) (15) 4
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... (5) 39 (111)
Prepaid expenses and other
current assets.......... 5 1 8
Other noncurrent assets.... (15) (106) 7
Increase (decrease) in --.....
Accounts payable and
accrued expenses........ 186 (177) (42)
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 17 74 (130)
--------- --------- ----------
Net cash provided by
(used in) operating
activities......... (155) 630 (115)
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchases) of property and
equipment, net.................. -- 20 --
Additions of property and
equipment....................... (40) (113) (41)
--------- --------- ----------
Net cash used in
investing
activities......... (40) (93) (41)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common
stock........................... -- 1 --
Borrowings of long-term debt....... 206 175 99
Payments of long-term debt......... (259) (96) --
Net borrowings in line of credit... 230 (230) --
Distributions to shareholders...... -- (210) (68)
--------- --------- ----------
Net cash provided by
(used in) financing
activities......... 177 (360) 31
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (18) 177 (125)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 18 -- 177
--------- --------- ----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ -- $ 177 $ 52
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 35 $ 51 $ 19

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

F-127

WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Western Building Services, Inc., a Colorado corporation, (the "Company")
focuses on providing "design and build" installation services and maintenance,
repair and replacement of HVAC systems for commercial facilities. Western also
offers continuous monitoring and control services for commercial facilities. The
Company primarily operates in Colorado.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statement of operations.

REVENUE RECOGNITION

The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to total estimated costs for each contract.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined.

Revenues of approximately $783,000 and $2,291,000 with gross profits of
$339,000 and $874,000 were recognized by the Company in 1995 and 1996,
respectively, for energy conversions and new installations related to an
incentive program developed by the Public Service Company of Colorado (PSC).

F-128

WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Demand Side Management program provided incentives for PSC customers to
convert from electric heat to gas/steam heat in order to reduce peak demand for
electricity. This program ended November 1996.

WARRANTY COSTS

INCOME TAXES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENT

Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.

3. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following (dollars in thousands):

ESTIMATED DECEMBER 31,
USEFUL LIVES --------------------
IN YEARS 1995 1996
------------ --------- ---------
Transportation equipment............. 5 $ 47 $ 47
Machinery and equipment.............. 6-7 133 68
Computer and telephone equipment..... 5 120 145
Leasehold improvements............... 3 21 71
Furniture and fixtures............... 7 28 20
--------- ---------
349 351
Less -- Accumulated depreciation and
amortization....................... (199) (160)
--------- ---------
Property and equipment, net..... $ 150 $ 191
========= =========

F-129

WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

Other noncurrent assets consist of the following (in thousands):

DECEMBER 31,
--------------------
1995 1996
--------- ---------
Covenant not to compete.............. $ -- $ 75
Life insurance surrender value....... 14 27
Other noncurrent assets.............. 8 27
--------- ---------
$ 22 $ 129
========= =========

At December 31, 1996, the Company acquired the contract rights of a
competitor for $75,000 through a covenant not to compete agreement. This
agreement will be amortized over its three year term which expires at
December 31, 1999.

Accounts payable and accrued expenses consist of the following (in
thousands):

DECEMBER 31,
--------------------
1995 1996
--------- ---------
Accounts payable, trade.............. $ 403 $ 249
Accrued compensation and benefits.... 108 86
Accrued warranty expense............. 82 82
Other accrued expenses............... 139 139
--------- ---------
$ 732 $ 556
========= =========

Installation contracts in progress are as follows (in thousands):

DECEMBER 31,
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress........................... $ 335 $ 530
Estimated earnings, net of losses.... 206 160
--------- ---------
541 690
Less -- Billings to date............. 552 815
--------- ---------
$ (11) $ (125)
========= =========
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 65 $ 26
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (76) (151)
--------- ---------
$ (11) $ (125)
========= =========

5. LONG-TERM DEBT:

Long-term debt consists of installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes range from 36 months to 48 months with monthly payments of
principal and interest of approximately $8,600. The notes bear interest at rates
ranging from 9 percent to 13 percent.

Long-term debt also consists of term loans and capital leases. The term
loans were issued in the amounts of $175,000 and $200,000 in 1996 and 1995,
respectively. The $175,000 term loan is secured by equipment, inventory,
accounts receivable and all contract rights. The $200,000 term loan is secured
by all

F-130

WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
inventory and equipment and bears interest at prime plus 2 percent per annum.
These term loans are also guaranteed by the Company president.

The capital leases relate to computer equipment and printers. The terms of
the leases range from 12 to 36 months. The interest rates on these leases range
from 10 to 12 percent.

The aggregate maturities of long-term debt as of December 31, 1996, are as
follows (in thousands):

Year ending December 31
1997............................ $ 85
1998............................ 89
1999............................ 98
2000............................ 89
---------
$ 361
=========

The Company has a $300,000 line of credit with a financial institution. The
line of credit expires September 28, 1997, and bears interest at prime plus 2
percent per annum. The line of credit is secured by accounts receivable and
inventory and is guaranteed by the Company president. There was no balance
outstanding under this line of credit at December 31, 1996.

6. LEASES:

The Company leases its facility from a third party, which expires in 1999.
The rent paid under this lease was approximately $43,000 and $66,500 for the
years ended December 31, 1995 and 1996, and approximately $39,000 for the six
months ended June 30, 1997. The lease requires the Company to pay taxes,
maintenance, insurance and certain other operating costs of the leased property.
The lease contains renewal provisions.

The Company leases vehicles for operating purposes. The lease payments
under these vehicle leases totaled approximately $47,000 and $71,000 for the
years ended December 31, 1995 and 1996, respectively, and approximately $37,000
for the six months ended June 30, 1997.

Future minimum lease payments for operating leases are as follows (in
thousands):

Year ending December 31
1997............................ $ 144
1998............................ 132
1999............................ 19
---------
$ 295
=========

7. EMPLOYEE BENEFIT PLANS:

The Company has adopted a 401(k) plan which allows the Company to make
discretionary contributions and discretionary profit sharing contributions. No
contributions were made by the Company under this plan in 1995 and 1996.
However, expenses of $2,733 and $3,903 were incurred by the Company during 1995
and 1996, respectively.

8. FINANCIAL INSTRUMENTS:

The Company's financial instruments consist of cash and cash equivalents,
investments, notes payable, a line of credit, and debt. The Company believes
that the carrying value of these instruments on the accompanying balance sheet
approximates their fair value.

F-131

WESTERN BUILDING SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. RELATED-PARTY TRANSACTIONS:

At December 31, 1995, the Company had a receivable of $109,500 due from the
president and vice president. At December 31, 1996, this balance was $173,500.
The Company offset this balance with the dividends payable of $210,315 at
December 31, 1996, resulting in a remaining dividend payable of $36,875 to two
shareholders and one director.

10. COMMITMENTS AND CONTINGENCIES:

LITIGATION

INSURANCE

11. SHAREHOLDER'S EQUITY:

As of June 30, 1997, the Company distributed $68,000 to its shareholders.
The Company distributed approximately $317,000 subsequent to the merger which
has been reflected in the financial statements.

12. SUBSEQUENT EVENTS:

In connection with the merger, Comfort Systems assumed all debt of the
Company. Subsequent to the IPO, substantially all of the debt has been repaid.

F-132

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
F & G Mechanical Corp. and Affiliate
348 New County Road
Secaucus, New Jersey 07094

We have audited the accompanying combined balance sheet of F & G Mechanical
Corp. and affiliate as of December 31, 1997, and the related combined statements
of income, retained earnings, and cash flows for the year then ended. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of F & G Mechanical
Corp. and affiliate at December 31, 1997, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.

As discussed in Note 1, the combined financial statements include the
accounts of F &G Mechanical ("F&G") and Meadowlands Fire Protection Corp.
("Meadowlands") which are related by common stockholder interests. In prior
years separate financial statements were issued for F&G and Meadowlands. On
February 12, 1998, both companies were purchased by Comfort Systems USA, Inc.
("Comfort Systems"). Accordingly, the current combined financial statements
are presented to reflect the activity of these companies as a single economic
unit.

MARDEN, HARRISON & KREUTER
Certified Public Accountants, P.C.
Port Chester, New York
March 24, 1998

F-133

F & G MECHANICAL CORP. AND AFFILIATE
COMBINED BALANCE SHEET
DECEMBER 31, 1997

ASSETS
Current assets:
Cash and cash equivalents....... $ 1,400,941
Marketable securities........... 1,780,888
Accounts receivable, net of
allowance for
doubtful accounts of
$200,000....................... 12,833,931
Retainage receivable............ 3,631,046
Costs and estimated earnings in
excess of
billings on uncompleted
contracts...................... 952,827
Loans receivable -- officers.... 1,554,123
Notes and loans
receivable -- related
parties........................ 1,065,963
Deferred contract costs......... 176,776
Prepaid expenses and other
receivables.................... 199,548
--------------
Total current
assets............... 23,596,043
--------------
Property and equipment:
Machinery and equipment......... 503,499
Transportation equipment........ 1,489,008
Furniture and fixtures.......... 489,469
Leasehold improvements.......... 26,665
--------------
2,508,641
Less accumulated depreciation
and amortization............... 1,657,075
--------------
Net property and
equipment............ 851,566
--------------
Other assets:
Notes and loans
receivable -- related parties,
net of current portion........ 5,778,005
--------------
Total other assets.... 5,778,005
--------------
Total assets.......... $ 30,225,614
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable -- bank........... $ 1,945,510
Accounts payable................ 7,788,790
Billings in excess of costs and
estimated
earnings on uncompleted
contracts...................... 2,455,659
Accrued expenses and payroll
taxes payable.................. 4,790,407
Deferred contract revenue....... 206,140
Loans payable -- affiliates..... 133,595
Income taxes payable............ 75,363
--------------
Total liabilities..... 17,395,464
--------------
Commitments and contingencies
Stockholders' equity:
Common stock.................... 11,000
Retained earnings............... 12,721,653
Net unrealized holding gain on
available-for-sale
securities..................... 97,497
--------------
Total stockholders'
equity............... 12,830,150
--------------
Total liabilities and
stockholders'
equity............... $ 30,225,614
==============

See notes to combined financial statements.

F-134

F & G MECHANICAL CORP. AND AFFILIATE
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1997

Contract revenue..................... $ 69,592,885
Direct costs......................... 61,792,317
--------------
Gross profit......................... 7,800,568
General and administrative
expenses........................... 5,280,332
--------------
Income from operations............... 2,520,236
--------------
Other income (expense):
Interest income................. 417,891
Other income.................... 29,351
Gain on sale of marketable
securities..................... 20,786
Interest expense................ (139,498)
--------------
328,530
--------------
Income before income taxes........... 2,848,766
Income taxes......................... 89,982
--------------
Net income........................... 2,758,784
Retained earnings, beginning of
year............................... 10,145,289
Distributions........................ (182,420)
--------------
Retained earnings, end of year....... $ 12,721,653
==============

See notes to combined financial statements.

F-135

F & G MECHANICAL CORP. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997

Reconciliation of net income to net
cash
provided by operating activities:
Net income...................... $ 2,758,784
Adjustments to reconcile net income
to
net cash provided by operating
activities:
Depreciation and amortization... 233,003
Provision for losses on accounts
receivable..................... 126,380
Gain on sale of marketable
securities..................... (20,786)
Changes in assets (increase)
decrease:
Accounts receivable........ (2,641,044)
Retainage receivable....... (1,320,282)
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts.............. 115,323
Deferred contract costs.... (8,607)
Prepaid expenses and other
receivables............ (85,631)
Changes in liabilities increase
(decrease):
Accounts payable........... 1,781,309
Billings in excess of costs
and estimated
earnings on uncompleted
contracts.............. (306,261)
Accrued expenses and
payroll taxes
payable................ 2,851,818
Deferred contract
revenue................ 177,740
Income taxes payable....... 75,363
--------------
Net cash provided by
operating
activities........ $ 3,737,109
Investing activities:
Proceeds from sales of
marketable securities.......... 116,786
Purchase of marketable
securities..................... (302,055)
Capital expenditures............ (436,780)
Net loans to related parties.... (3,265,154)
Net loans to officers........... (943,359)
--------------
Net cash used in
investing
activities........ (4,830,562)
Financing activities:
Net loans from affiliates....... 133,595
Principal payments on long-term
debt........................... (79,481)
Proceeds from borrowings under
line of credit................. 1,800,000
Distributions to stockholders... (182,420)
--------------
Net cash provided by
financing
activities... 1,671,694
--------------
Net increase in cash and cash
equivalents........................ 578,241
Cash and cash equivalents, beginning
of year............................ 822,700
--------------
Cash and cash equivalents, end of
year............................... $ 1,400,941
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for income
taxes.............................. $ 16,494
Cash paid during the year for
interest........................... $ 139,498

See notes to combined financial statements.

F-136

F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997

(1) PRINCIPLES OF COMBINATION AND NATURE OF OPERATIONS:

The combined financial statements include the accounts of F&G Mechanical
Corp. and Meadowlands Fire Protection Corp. (collectively the "Company"),
which are affiliated by majority stockholder interests. All intercompany
accounts and transactions have been eliminated in combination.

In prior years, separate financial statements were presented for F & G
Mechanical Corp. and Meadowlands Fire Protection Corp. The current combined
financial statement presentation reflects the companies as a single economic
unit.

F&G Mechanical Corp. is engaged in plumbing and HVAC construction
activities primarily in New Jersey and the New York Metropolitan area.
Meadowlands Fire Protection Corp., is engaged in the installation of fire
protection systems for customers located in New Jersey and in the New York
metropolitan area.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

(A) REVENUE AND COST RECOGNITION:

Revenue is recognized on the "percentage of completion" method for
reporting revenue on contracts not yet completed, measured by the
percentage of total costs incurred to date to estimated total costs
for each contract. This method is utilized because management
considers the cost-to-cost method the best method available to measure
progress on these contracts. Because of the inherent uncertainties in
estimating revenue and costs, it is at least reasonably possible that
the estimates used will change within the near term.

Contract costs include all direct material and labor costs and those
other direct and indirect costs related to contract performance
including, but not limited to, indirect labor, subcontract costs and
supplies. General and administrative costs are charged to expense as
incurred.

The Company has contracts that may extend over more than one year,
therefore, revisions in cost and profit estimates during the course of
the work are reflected in the accounting period in which the facts,
which require the revisions, become known.

Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Claims on contracts
are not recorded until it is probable that the claim will result in
additional contract revenue and the amounts can be reliably estimated.

Revenues recognized in excess of amounts billed are recorded as a
current asset under the caption "Costs and estimated earnings in
excess of billings on uncompleted contracts." Billings in excess of
revenues recognized are recorded as a current liability under the
caption "Billings in excess of costs and estimated earnings on
uncompleted contracts."

In accordance with construction industry practice, the Company reports
in current assets and liabilities those amounts relating to
construction contracts realizable and payable over a period in excess
of one year.

(B) CASH EQUIVALENTS:

The Company considers all highly liquid instruments with original
maturities of less than three months to be cash equivalents. At
December 31, 1997, cash equivalents consist of investments in money
market funds.

F-137

F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Investments, consisting of U.S. Treasury Notes, corporate bonds and
notes, mutual funds and common stock are classified as
"available-for-sale" securities and are stated at fair value.
Realized gains and losses, determined using the specific
identification cost method, are included in earnings. Unrealized
holding gains and losses are reported as a separate component of
stockholders' equity.

(D) DEFERRED CONTRACT REVENUE AND COSTS:

The Company's policy is to defer all revenue and costs associated with
individual contracts prior to the mobilization of the project.

(E) PROPERTY AND EQUIPMENT:

Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the assets using principally the
straight-line method. Leasehold improvements are amortized over the
lesser of the term of the related lease or the estimated useful life
of the asset. Expenditures for maintenance and repairs are charged to
operations in the period incurred.

(F) WARRANTY COSTS:

The Company typically warrants labor for the first year after
installation on new air conditioning and heating systems. The Company
generally warrants labor for 30 days after servicing of existing air
conditioning and heating systems. A reserve for warranty costs is
recorded upon completion of installation or service.

(G) USE OF ESTIMATES:

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

(3) MARKETABLE SECURITIES:

Cost and fair value of marketable securities at December 31, 1997 are as
follows:

GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
Available-for-sale:

U.S. Treasury Notes............. $ 321,232 $ 16,527 $-- $ 337,759
Corporate bonds and notes....... 1,009,668 27,589 6,317 1,030,940
Mutual Funds.................... 228,438 86,160 1,469 313,129
Common Stocks................... 124,053 2,649 27,642 99,060
------------ ----------- ----------- ------------
$ 1,683,391 $ 132,925 $35,428 $ 1,780,888
============ =========== =========== ============

At December 31, 1997, U.S. Treasury notes and corporate bonds and notes (at
fair value) mature as follows:

YEAR ENDING DECEMBER 31,
----------------------------------------
1998 1999 TO 2002 THEREAFTER TOTAL
---------- ------------- ---------- ------------
U.S. Treasury Notes.................. $ 180,000 $ -- $ 157,759 $ 337,759
Corporate bonds and notes............ 39,767 341,478 649,695 1,030,940
---------- ------------- ---------- ------------
$ 219,767 $ 341,478 $ 807,454 $ 1,368,699
========== ============= ========== ============

F-138

F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The net unrealized holding gain increased by $24,510 for the year ended
December 31, 1997. For the year ended December 31, 1997, gross realized gains
pertaining to marketable securities totaled $20,786.

(4) RETAINAGE RECEIVABLE:

The retained contract receivables include approximately $1,416,000 at
December 31, 1997, that are not collectible within one year.

(5) CONTRACTS IN PROGRESS:

Information with respect to contracts in progress at December 31, 1997 is
as follows:

Expenditures on uncompleted
contracts.......................... $ 27,953,123
Estimated earnings thereon........... 4,139,313
--------------
32,092,436
Less billings applicable thereto..... 33,595,268
--------------
$ (1,502,832)
==============
Included in the accompanying balance
sheet under the following captions:
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 952,827
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (2,455,659)
--------------
$ (1,502,832)
==============

(6) NOTES PAYABLE -- BANK:

The Company had a discretionary line of credit with a bank, which provided
for aggregate borrowings of up to $4,750,000, with interest at the bank's prime
rate plus 1%. Borrowings were guaranteed by the Company's stockholders. The
Company had outstanding borrowings under the line of credit totaling $1,800,000
at December 31, 1997.

The Company also had term notes payable which were collateralized by
equipment. The notes were payable in aggregate monthly installments of $7,998
with interest at 8%. The outstanding balance of the notes payable was $145,510
at December 31, 1997.

The outstanding balances were repaid in February 1998 concurrent with the
subsequent merger of the Company, and the facility was terminated (see Note 18).

(7) ACCRUED EXPENSES AND PAYROLL TAXES PAYABLE:

At December 31, 1997, accrued expenses and payroll taxes payable consists
of the following:

Payroll taxes........................ $ 1,627,663
Union benefits....................... 1,003,526
Insurance............................ 806,370
Other................................ 1,352,848
------------
$ 4,790,407
============

F-139

F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(8) STOCKHOLDERS' EQUITY:

The combined financial statements reflect the following capital structures
at December 31, 1997:

F&G MECHANICAL CORP.
Common stock, no par value; 1000
shares authorized;
200 shares issued and
outstanding........................ $ 1,000
Retained earnings.................... 9,364,045
Net unrealized holding gain on
available-for-sale securities...... 47,190
--------------
Total stockholders' equity...... 9,412,235
--------------
MEADOWLANDS FIRE PROTECTION CORP.
Common stock, no par value; 1000
shares authorized;
400 shares issued and
outstanding........................ 10,000
Retained earnings.................... 3,357,608
Net unrealized gain on
available-for-sale securities...... 50,307
--------------
Total stockholders' equity...... 3,417,915
--------------
Total combined stockholders'
equity......................... $ 12,830,150
==============

(9) CONCENTRATION RISKS:

(A) CREDIT RISK:

Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of cash and cash
equivalents and trade accounts and retainage receivables.

The Company maintains its cash and cash equivalents in accounts which
exceed Federally insured limits. The Company limits its credit risk by
selecting financial institutions considered to be highly creditworthy.

Trade accounts and retainage receivables are due from customers
located primarily in New Jersey and the New York metropolitan area.
The Company does not require collateral in most cases, but may file
statutory liens against the construction projects if a default in
payment occurs.

(B) DIRECT LABOR:

The Company's direct labor is supplied primarily by two unions which
have collective bargaining agreements expiring in April 1999. Although
the Company's past experience was favorable with respect to resolving
conflicting demands with these unions, it is always possible that a
protracted conflict may occur which could impact the renewal of the
collective bargaining agreements.

(10) RELATED PARTY TRANSACTIONS:

(A) LOANS RECEIVABLE -- OFFICERS:

The Company has loans receivable from officers totaling $1,554,123 at
December 31, 1997. The loans are noninterest bearing. In January 1998,
$950,000 was repaid.

(B) NOTES AND LOANS RECEIVABLE -- RELATED PARTIES:

The Company has loans receivable from an entity related through common
management control totalling $1,009,518 at December 31, 1997. The
loans are noninterest bearing. Subsequent to December 31, 1997 this
entity was purchased by Meadowlands Fire Protection Corp. (see Note
10D).

F-140

F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

In addition, the Company has notes receivable totaling $5,834,450,
from an entity in which the stockholders of the Company have an
ownership interest. At December 31, 1997, $56,445 of the loans were
classified as current assets. One note amounting to $3,960,000 bears
interest at 8.5% per annum. The balance of $1,818,005 is noninterest
bearing. In conjunction with the terms of the subsequent merger of the
Company, the notes, plus accrued interest, are due February 2001.

The Company has loans payable to entities related through common ownership
totalling $133,595. The loans are noninterest bearing.

(D) PAYROLL:

The Company used an entity affiliated through common management control as
a common paymaster to process certain payrolls. The Company reimbursed the
affiliate at cost with no mark-up. Reimbursements amounted to $3,373,308 for the
year ended December 31, 1997.

In February 1998, the Company acquired the affiliate for a purchase price
of $25,000.

(E) OPERATING FACILITIES:

The Company leases administrative, warehouse and yard space from an entity
affiliated by common ownership through a noncancelable net operating lease
expiring May 2004. Rent expense including utilities, maintenance and real estate
taxes for this lease totaled $485,375 for the year ended December 31, 1997. At
December 31, 1997, the future minimum rental payments to be made under the
noncancellable operating lease are as follows:

YEAR ENDING
DECEMBER 31, AMOUNT
- ------------------------------------- ------------
1998................................. $ 338,616
1999................................. 355,890
2000................................. 355,890
2001................................. 355,890
2002................................. 355,890
Thereafter........................... 504,178
------------
$ 2,266,354
============

On March 16, 1998 the Company increased the amount of space occupied. The
monthly rent increased by approximately $7,000 per month, plus real estate
taxes.

The Company also leases warehouse space from a related entity on a month to
month basis. Rent expense for this lease was $18,000 for the year ended December
31, 1997.

(11) COMMITMENTS AND CONTINGENCIES:

(A) PERFORMANCE BONDS:

The Company is contingently liable to a surety under a general indemnity
agreement. The Company agrees to indemnify the surety for any payments made on
contracts of suretyship, guaranty or indemnity. The Company believes that all
contingent liabilities will be satisfied by its performance on the specific
bonded contracts involved.

(B) CLAIMS AND LAWSUITS:

F-141

F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
on the Company's operating results or financial condition. The Company maintains
various insurance coverages in order to minimize financial risk associated with
certain claims.

(12) INCOME TAXES:

Both F&G Mechanical Corp. and Meadowlands Fire Protection Corp. have
elected and the stockholders have consented, under the applicable provisions of
the Internal Revenue Code, New Jersey, and New York State Franchise Tax Codes to
have the Company report its income for Federal Corporation, New Jersey
Corporation, and New York State Franchise tax purposes as an "S" corporation.
The stockholders report the net taxable income or loss of the Company in their
personal income tax returns. Therefore, no provision is made in the accompanying
combined financial statements for Federal Corporation, New Jersey Corporation,
and New York State Franchise taxes except for the New Jersey and New York State
tax on "S" corporations, when applicable.

In accordance with the subsequent merger of the Company, the "S"
Corporation elections were terminated and the Company will be subject to
corporate income taxes subsequent to the merger date (see Note 18).

(13) PROFIT-SHARING PLAN:

The Company has a profit-sharing plan that covers substantially all
nonunion employees meeting the age and length of service requirements of the
plan. Contributions to the plan are at the discretion of the Company's Board of
Directors and are based on a percentage of the participants' compensation.
Profit-sharing expense was $161,860 for the year ended December 31, 1997. In
conjunction with the terms of the subsequent merger of the Company, the
profit-sharing plan was terminated February 9, 1998 (see Note 18).

(14) MULTIEMPLOYER PENSION PLANS:

The Company made contributions to multiemployer pension plans that cover
its various union employees. These plans provide benefits based on union
members' earnings and periods of coverage under the respective plans. It is not
cost-effective to accumulate information regarding the pension expense under
these plans. In the event of plan terminations or company withdrawal from the
plans, the Company may be liable for a portion of the plans' unfunded vested
benefits, the amounts of which, if any, have not been determined.

(15) MAJOR CUSTOMERS:

The Company earned approximately 15% and 10%, respectively, from two major
customers during the year ended December 31, 1997.

(16) BACKLOG:

Backlog represents the amount of revenue the Company expects to realize
from work to be performed on uncompleted contracts in progress at year end and
from contractual agreements on which work has not commenced. Backlog consists of
the following:

Estimated revenue to be recognized
from:
Uncompleted contracts in
progress....................... $ 18,896,494
Contracts on which work has not
commenced...................... 11,589,000
--------------
Total...................... $ 30,485,494
==============

F-142

F & G MECHANICAL CORP. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

(17) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:

Retained earnings at January 1, 1997 were restated to account for a change
in accounting principle due to a business combination. The change in accounting
principle is related to accounting for warranty costs which management believes
results in a closer matching of costs and revenues. The cummulative effect of
this change on prior years' retained earnings was $296,418.

(18) SUBSEQUENT EVENT:

On February 12, 1998, F&G Mechanical Corp merged with Comfort Systems and
Meadowlands Fire Protection Corp. merged with INRI Acquisition Corp., a wholly
owned subsidiary of Comfort Systems.

In conjunction with the merger, the outstanding balances of notes
payable -- bank were paid in full, the profit-sharing plan was terminated, and
the stockholders of F&G Mechanical Corp. entered into 5 year employment
agreements with Comfort Systems. In addition, the Company distributed
$11,800,000 to the stockholders at the closing.

F-143

INSIDE BACK COVER

[photos - HVAC systems and building]

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

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

PAGE
-----
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 11
Dividend Policy................................ 11
Price Range of Common Stock.................... 11
Capitalization................................. 12
Selected Financial Data........................ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 15
Business....................................... 23
Management..................................... 31
Certain Relationships and Related
Transactions................................. 37
Principal and Selling Stockholders............. 41
Description of Capital Stock................... 43
Shares Eligible for Future Sale................ 46
Underwriting................................... 48
Legal Matters.................................. 49
Experts........................................ 49
Additional Information......................... 49
Index to Financial Statements.................. F-1

[LOGO]
COMFORT SYSTEMS USA, INC.
COMMON STOCK

-------------------
PROSPECTUS
-------------------

BT ALEX. BROWN
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SANDERS MORRIS MUNDY

, 1998

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses payable by the
Company in connection with the registration of the securities being registered.
In connection with future acquisitions, additional printing, legal, accounting
and miscellaneous expenses are expected to be incurred with respect to the
issuance and distribution of the securities being registered hereby. All amounts
are estimates except for the fees payable to the SEC.

AMOUNT TO BE
PAID
-------------
SEC registration fee.................... $ 26,376
NYSE listing fee........................ 10,000
Printing expenses....................... 100,000
Legal fees and expenses................. 60,000
Accounting fees and expenses............ 80,000
Transfer Agent's and Registrar's fees... 15,000
Miscellaneous........................... 208,624
-------------
TOTAL......................... $ 500,000
=============

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

The Company's Certificate of Incorporation, as amended, and Bylaws
incorporate substantially the provisions of the Delaware General Corporation Law
("DGCL") providing for indemnification of directors and officers of the
Company against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that such person is or was an officer or director of the
Company or is or was serving at the request of the Company as a director,
officer or employee of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise.

As permitted by Section 102 of the DGCL, the Company's Certificate of
Incorporation, as amended, contains provisions eliminating a director's personal
liability for monetary damages to the Company and its stockholders arising from
a breach of a director's fiduciary duty except for liability (a) for any breach
of the director's duty of loyalty to the Company or its stockholders, (b) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) under Section 174 of the DGCL, or (d) for any
transaction from which the director derived an improper personal benefit.

Section 145 of the DGCL provides generally that a person sued as a
director, officer, employee or agent of a corporation may be indemnified by the
corporation for reasonable expenses, including attorneys' fees, if in the case
of other than derivative suits such person has acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation (and, in the case of a criminal proceeding, had no
reasonable cause to believe that such person's conduct was unlawful). In the
case of a derivative suit, an officer, employee or agent of the corporation
which is not protected by the Certificate of Incorporation may be indemnified by
the corporation for reasonable expenses, including attorneys' fees, if such
person has acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in the case of a derivative suit in respect of any
claim as to which an officer, employee or agent has been adjudged to be liable
to the corporation unless that person is fairly and reasonably entitled to
indemnity for proper expenses. Indemnification is mandatory in the case of a
director, officer, employee, or agent who is successful on the merits in defense
of a suit against such person.

II-1

The Company has entered into Indemnity Agreements with its directors and
certain key officers pursuant to which the Company generally is obligated to
indemnify its directors and such officers to the full extent permitted by the
DGCL as described above.

The Company has purchased liability insurance policies covering directors
and officers in certain circumstances.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

On December 12, 1996, Comfort Systems issued and sold 1,000 shares of
Common Stock to Notre for a consideration of $1,000. This sale was exempt from
registration under Section 4(2) of the Securities Act, no public offering being
involved.

On January 6, 1997, Comfort Systems issued and sold shares of Common Stock
to the following parties in the amounts and for the consideration indicated.
These sales were exempt from registration under Section 4(2) of the Securities
Act: Notre -- 23,516.623 shares for a consideration of $28,699.12; Fred M.
Ferreira -- 3957.7359 shares for a consideration of $4,794.35; J. Gordon
Beittenmiller -- 825.5 shares for a consideration of $1,000.00; Reagan S.
Busbee -- 825.5 shares for a consideration of $1,000.00; S. Craig
Lemmon -- 825.5 shares for a consideration of $1,000.00; Milburn E.
Honeycutt -- 412.75 shares for a consideration of $500.00; Brian J.
Vensel -- 412.75 shares for a consideration of $500.00; Emmett E.
Moore -- 412.75 shares for a consideration of $500.00; John W.
Bouloubasis -- 412.75 shares for a consideration of $500.00; Stephen R.
Baur -- 330.2 shares for a consideration of $400.00; Shellie LePori -- 206.375
shares for a consideration of $250.00; Constance Drew -- 288.925 shares for a
consideration of $350.00; John Mercandante, Jr. -- 82.55 shares for a
consideration of $100.00; Larry Martin -- 82.55 shares for a consideration of
$100.00; Norton Family Trust -- 61.9125 shares for a consideration of $75.00;
Larry E. Jacobs -- 61.9125 shares for a consideration of $75.00; Richard T.
Howell -- 41.275 shares for a consideration of $50.00; Rod Crosby -- 41.275
shares for a consideration of $50.00; Jennifer Summerford -- 24.765 shares for a
consideration of $30.00; Infoscope Partners, Inc. -- 8.255 shares for a
consideration of $10.00; Melinda Malik -- 4.1275 shares for a consideration of
$5.00; and Steven T. Zellers -- 16.51 shares for a consideration of $20.00.

On February 25, 1997, Comfort Systems issued and sold shares of Common
Stock to the following parties in the amounts and for the consideration
indicated. These sales were exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved: William George,
III -- 619.125 shares for a consideration of $750.00; J. Gordon
Beittenmiller -- 132.08 shares for a consideration of $160.00; Reagan S.
Busbee -- 132.08 shares for a consideration of $160.00; S. Craig
Lemmon -- 132.08 shares for a consideration of $160.00; Milburn E.
Honeycutt -- 66.04 shares for a consideration of $80.00; and Brian J.
Vensel -- 66.04 shares for a consideration of $80.00.

Effective March 20, 1997, Comfort Systems effected a 121.1387 to 1 stock
split on outstanding shares of Common Stock as of March 19, 1997.

Effective March 20, 1997, Comfort Systems issued and sold 2,742,912 shares
of Restricted Voting Common Stock to Notre in exchange for 2,742,912 shares of
Common Stock. This sale was exempt from registration under Section 4(2) of the
Securities Act, no public offering being involved.

Excluding the issuance on July 2, 1997, described above, during the third
quarter of 1997, the Company issued 2,057,823 unregistered shares of its Common
Stock in connection with acquisitions of HVAC businesses, none of which was
individually material. Of such shares, 583,878 were subsequently registered
pursuant to the Company's Registration Statement filed with the Securities
Exchange Commission on October 16, 1997. Each of these transactions was
completed without registration under the Securities Act in reliance upon the
exemption provided by Section 4(2), no public offering being involved.

In the fourth quarter of 1997, the Company issued 2,708,289 unregistered
shares of its Common Stock in connection with the acquisition of HVAC
businesses, none of which was individually material. Each of these transactions
was complete without registration under the Securities Act in reliance on the
exemption provided by Section 4(2), no public offering being involved.

II-2

In the first quarter of 1998, the Company issued 1,778,631 unregistered
shares of its Common Stock in connection with the acquisition of HVAC
businesses, none of which was individually material. Each of these transactions
was complete without registration under the Securities Act in reliance on the
exemption provided by Section 4(2), no public offering being involved. There
were no issuances of unregistered securities in the second quarter of 1998.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) EXHIBITS

The exhibits listed below are filed as exhibits to this registration
statement and are filed manually herewith or incorporated by reference to the
statements or reports indicated below:

3.1 -- Second Amended and Restated 3.1 333-24021
Certificate of Incorporation of
Comfort Systems USA, Inc.
3.2 -- Bylaws of Comfort Systems USA, Inc., 3.2 333-24021
as amended.
4.1 -- Form of certificate evidencing 4.1 333-24021
ownership of Common Stock of Comfort
Systems USA, Inc.
5.1 -- Opinion of Bracewell & Patterson, Filed herewith
L.L.P.
10.1 -- Comfort Systems USA, Inc. 1997 Long- 10.1 333-24021
Term Incentive Plan
10.2 -- Comfort Systems USA, Inc. 1997 Non- 10.2 333-24021
Employee Directors' Stock Plan
10.3 -- Form of Employment Agreement between 10.3 333-24021
Comfort Systems USA, Inc. and Fred M.
Ferreira.
10.4 -- Form of Employment Agreement between 10.4 333-24021
Comfort Systems USA, Inc. and J.
Gordon Beitenmiller.
10.5 -- Form of Employment Agreement between 10.5 333-34021
Comfort Systems USA, Inc. and William
George, III.
10.6 -- Form of Employment Agreement between 10.6 333-24021
Comfort Systems USA, Inc. and Reagan
S. Busbee.
10.7 -- Form of Employment Agreement between 10.7 333-34021
Comfort Systems USA, Inc., Accurate
Air System, Inc. and Thomas J. Beaty.
10.8 -- Form of Employment Agreement between 10.8 333-24021
Comfort Systems USA, Inc., Atlas
Comfort Services USA, Inc. and Brian
S. Atlas
10.9 -- Form of Employment Agreement between 10.9 333-24021
Comfort Systems USA, Inc., Contract
Service, Inc. and John C. Phillips.
10.10 -- Form of Employment Agreement between 10.10 333-24021
Comfort Systems USA, Inc., Eastern
Heating & Cooling, Inc. and Alfred J.
Giardenelli, Jr.

II-3

INCORPORATED BY REFERENCE TO
THE EXHIBIT INDICATED BELOW
AND TO THE FILING WITH THE
COMMISSION INDICATED BELOW
------------------------------------
EXHIBIT EXHIBIT FILING OR
NUMBER DESCRIPTION OF EXHIBITS NUMBER FILE NUMBER
- ------------------------------------------------------------- ------- -----------------------
10.11 -- Form of Employment Agreement between 10.11 333-24021
Comfort Systems USA, Inc., Quality
Air Heating & Cooling, Inc. and
Robert J. Powers

10.12 -- Form of Employment Agreement between 10.12 333-24021
Comfort Systems USA, Inc., S. M.
Lawrence Company, Inc. and Samuel M.
Lawrence III.
10.13 -- Form of Employment Agreement between 10.13 333-24021
Comfort Systems USA, Inc., Tech
Heating and Air Conditioning, Inc.
and Robert R. Cook
10.14 -- Form of Employment Agreement between 10.14 333-24021
Comfort Systems USA, Inc., Tri-City
Mechanical, Inc. and Michael Nothum,
Jr.
10.15 -- Form of Employment Agreement between 10.15 333-24021
Comfort Systems USA, Inc., Western
Building Services, Inc. and Charles
W. Klapperich
10.16 -- Employment Agreement between Comfort February 1998
Systems USA, Inc., F&G Mechanical Form 8-K
Corporation and Salvatore P. Giardina
10.17 -- Form of Agreement among certain 10.16 333-24021
stockholders
10.18 -- Lease between M & B Interests, Inc. 10.17 333-32595
and Atlas Air Conditioning Company,
Inc. dated October 1, 1994.
10.19 -- Lease between Thomas J. and Bonnie J. 10.18 333-32595
Beaty and Accurate Air Systems, Inc.
dated July 1, 1997.
10.20 -- Amended and Restated Agreement of 10.19 333-32595
Lease between Thomas J. and Bonnie J.
Beaty and Accurate Air Systems, Inc.
dated July 1, 1997.
10.21 -- Lease between Nothum Development, 10.20 333-32595
L.L.C. and Tri-City Mechanical, Inc.
dated July 1, 1997.
10.22 -- Lease between Samuel Matthews 10.21 333-32595
Lawrence, Jr. and S.M. Lawrence
Company, incorportated dated November
1, 1996.
10.23 -- Lease between K and P Warehouse #1 10.22 333-32595
and Quality Trane Heating and
Cooling, Inc. (n/k/a/ Quality Air
Heating and Cooling, Inc.) dated
April 1`, 1998, together with
amendments thereto.
10.24 -- Lease between J&J Investments and 10.23 333-32595
Contract Service, Inc. dated March 1,
1997.

II-4

10.25 -- Lease by Tech Heating and Air 10.24 333-32595
Conditioning, Inc. dated April 2,
1995 as amended by Amendment between
Cook Properties, Inc. and Tech
Heating and Air Conditioning, Inc. on
March 13, 1997.
10.26 -- First Amended and Restated Credit 10.25 333-38009
Agreement among the Company and its
subsidiaries, Bank One, Texas, N.A.,
as agent and the banks listed therein
dated September 22, 1997.
10.27 -- Lease dated June 30, 1994, between 10.27 1997 Form 10-K
Salpat Realty and F&G Mechanical
Corp., together with lease
modification agreements dated June
30, 1994 and February 12, 1998.
10.28 -- Promissory Note dated February 12, 10.28 1997 Form 10-K
1998 by Sorce Properties LLC in favor
of F&G Mechanical Corporation.
10.29 -- Pledge Agreement dated February 12, 10.29 1997 Form 10-K
1998 by Salvatore Fichera and
Salvatore P. Giardina in favor of F&G
Mechanical Corporation.
10.30 -- Form of Indemnity Agreement entered 10.26 333-32595
into by the Company with each of the
following persons: Fred M. Ferreira,
J. Gordon Beittenmiller, Reagan S.
Busbee, William George, III, Steven
S. Harter, Robert J. Powers, Michael
Nothum, Jr., Robert R. Cook, Brian S.
Atlas, Thomas J. Beaty, John C.
Phillips, Samuel M. Lawrence III,
Alfred J. Giardenelli, Jr., Charles
W. Klapperich, Larry Martin and John
Mercadante, Jr. on June 27, 1997.
10.31 -- Indemnity Agreement between the 10.27 333-32595
Company and Notre Capital Ventures
II, L.L.C.
10.32 -- Comfort Systems USA, Inc. 1998 10.28 333-38009
Employee Stock Purchase Plan.
10.33 -- Agreement Regarding Sale of Stock 10.1 Third Quarter 1997
between Fred M. Ferreira and the Form 10-Q
Registrant dated October 31, 1997.
10.34 -- Agreement Regarding Sale of Stock 10.2 Third Quarter 1997
between Steve S. Harter and the Form 10-Q
Registrant dated October 31, 1997.
10.35 -- Agreement Regarding Sale of Stock 10.3 Third Quarter 1997
between J. Gordon Beittenmiller and Form 10-Q
the Registrant dated October 31,
1997.

II-5

10.36 -- Agreement Regarding Sale of Stock 10.4 Third Quarter 1997
between Thomas J. Beaty and the Form 10-Q
Registrant dated October 31, 1997.
10.37 -- Agreement Regarding Sale of Stock 10.5 Third Quarter 1997
between Brian S. Atlas and the Form 10-Q
Registrant dated October 31, 1997.
10.38 -- Agreement Regarding Sale of Stock 10.6 Third Quarter 1997
between John C. Phillips and the Form 10-Q
Registrant dated October 31, 1997.
10.39 -- Agreement Regarding Sale of Stock 10.7 Third Quarter 1997
between Alfred J. Giardenelli, Jr. Form 10-Q
and the Registrant dated October 31,
1997.
10.40 -- Agreement Regarding Sale of Stock 10.8 Third Quarter 1997
between Robert J. Powers and the Form 10-Q
Registrant dated October 31, 1997.
10.41 -- Agreement Regarding Sale of Stock 10.9 Third Quarter 1997
between Samuel M. Lawrence and the Form 10-Q
Registrant dated October 31, 1997.
10.42 -- Agreement Regarding Sale of Stock 10.10 Third Quarter 1997
between Michael Nothum, Jr. and the Form 10-Q
Registrant dated October 31, 1997.
10.43 -- Agreement Regarding Sale of Stock 10.11 Third Quarter 1997
between Bob R. Cook and the Form 10-Q
Registrant dated October 31, 1997.
10.44 -- Agreement Regarding Sale of Stock 10.12 Third Quarter 1997
between Charles W. Klapperich and the Form 10-Q
Registrant dated October 31, 1997.
10.45 -- Agreement Regarding Sale of Stock 10.13 Third Quarter 1997
between Reagan S. Busbee and the Form 10-Q
Registrant dated October 31, 1997.
10.46 -- Agreement Regarding Sale of Stock 10.14 Third Quarter 1997
between William George and the Form 10-Q
Registrant dated October 31, 1997.
10.47 -- Agreement and Plan of Organization, 2.1 333-24021
dated as of March 18, 1997, by and
among Comfort Systems USA, Inc.,
Accurate Acquisition Corp., Accurate
Air Systems, Inc. and the Stockholder
named therein.
10.48 -- Agreement and Plan of Organization, 2.2 333-24021
dated as of March 18, 1997, by and
among Comfort Systems USA, Inc.,
Atlas Air Acquisition I Corp., Atlas
Comfort Services USA, Inc. and the
Stockholders named therein.

II-6

10.49 -- Agreement and Plan of Organization, 2.3 333-24021
dated as of March 18, 1997, by and
among Comfort Systems USA, Inc.,
Contract Acquisition Corp., Contract
Service, Inc. and the Stockholders
named therein.
10.50 -- Agreement and Plan of Organization, 2.4 333-24021
dated as of March 18, 1997, by and
among Comfort Systems USA, Inc.,
Eastern Acquisition Corp., Eastern II
Acquisition Corp., Eastern Heating &
Cooling, Inc. Eastern Refrigeration
Co., Inc. and the Stockholder named
therein.
10.51 -- Agreement and Plan of Organization, 2.6 333-24021
dated as of March 18, 1997, by and
among Comfort Systems USA, Inc.,
Quality Acquisition Corp., Quality
Air Heating & Cooling, Inc. and the
Stockholders named therein.
10.52 -- Agreement and Plan of Organization, 2.7 333-24021
dated as of March 18, 1997, by and
among Comfort Systems USA, Inc., S.
M. Lawrence Acquisition Corp., S. M.
Lawrence II Acquisition Corp., S. M.
Lawrence Company, Inc., Lawrence
Service, Inc. and the Stockholders
named therein.
10.53 -- Agreement and Plan of Organization, 2.10 333-24021
dated as of March 18, 1997, by and
among Comfort Systems USA, Inc., Tech
I Acquisition Corp., Tech II
Acquisition Corp., Tech Heating and
Air Conditioning, Inc., Tech
Mechanical, Inc. and the Stockholder
named therein.
10.54 -- Agreement and Plan of Organization, 2.11 333-24021
dated as of March 18, 1997, by and
among Comfort Systems USA, Inc., Tri-
City Acquisition Corp., Tri-City
Mechanical, Inc. and the Stockholders
named therein.
10.55 -- Agreement and Plan of Organization, 2.12 333-24021
dated as of March 18, 1997, by and
among Comfort Systems USA, Inc.
Western Building Acquisition Corp.,
Western Building Services, Inc. and
the Stockholders named therein.
10.56 -- Agreement and Plan of Merger dated 2.1 February 1998
February 12, 1998, by and among Form 8-K
Comfort Systems USA, Inc., F&G
Mechanical Corporation, Salvatore
Fichera and Salvatore P. Giardina.

II-7

21.1 -- List of subsidiaries of Comfort Filed herewith
Systems USA, Inc.
23.1 -- Consent of Arthur Andersen L.L.P. Filed herewith
23.2 -- Consent of Marden, Harrison & Kreuter Filed herewith

(b) FINANCIAL STATEMENT SCHEDULES

All schedules for which provision is made in the applicable accounting
regulation of the SEC are not required under the related instructions, are
inapplicable, or the information is included in the consolidated financial
statements, and therefore have been omitted.

ITEM 17. UNDERTAKINGS.

(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the provisions described in Item 14, or otherwise,
the Company has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

(b) The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b), if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement.

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change in the registration statement.

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.

II-8

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, COMFORT SYSTEMS
USA, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF
TEXAS, ON MAY , 1998.

COMFORT SYSTEMS USA, INC.
By _____/s/__FRED M. FERREIRA_________
FRED M. FERREIRA
CHIEF EXECUTIVE OFFICER

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints
each of Fred M. Ferreira and William George with full power to act without the
other, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign any and all amendments
(including post-effective amendments) to this Registration Statement, to file
the same, together with all exhibits thereto and other documents in connection
therewith, with the SEC, to sign any and all applications, registration
statements, notices and other documents necessary or advisable to comply with
the applicable state securities laws, and to file this same, together with all
other documents in connection therewith, with the appropriate state securities
authorities, granting unto said attorneys-in-fact and agents or any of them or
their or his substitutes or substitute, full power and authority to perform and
does each and every act and thing necessary and advisable as fully to all
intents and purposes as he might or could perform and do in person, thereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT OR AMENDMENT THERETO HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE INDICATED CAPACITIES ON MAY , 1998.

SIGNATURE TITLE
- ------------------------------------ ------------------------------------------
/s/FRED M. FERREIRA Chairman of the Board, Chief Executive
FRED M. FERREIRA Officer and President
/s/J. GORDON BEITTENMILLER Senior Vice President, Chief Financial
J. GORDON BEITTENMILLER Officer and Director
(PRINCIPAL ACCOUNTING OFFICER)
Director
STEVEN S. HARTER
Director
MICHAEL NOTHUM, JR.
/s/BRIAN S. ATLAS Director
BRIAN S. ATLAS
/s/THOMAS J. BEATY Director
THOMAS J. BEATY
/s/ROBERT R. COOK Director
ROBERT R. COOK

II-9

SIGNATURES -- (CONTINUED)

/s/ALFRED J. GIARDENELLI Director
ALFRED J. GIARDENELLI
/s/CHARLES W. KLAPPERICH Director
CHARLES W. KLAPPERICH
/s/SAMUEL M. LAWRENCE III Director
SAMUEL M. LAWRENCE III
/s/JOHN C. PHILLIPS Director
JOHN C. PHILLIPS
/s/ROBERT J. POWERS Director
ROBERT J. POWERS
/s/LARRY MARTIN Director
LARRY MARTIN
/s/JOHN MERCADANTE, JR. Director
JOHN MERCADANTE, JR.
/s/SALVATORE P. GIARDINA Director
SALVATORE P. GIARDINA

II-10

                                                                     EXHIBIT 5.1
                                  May 14, 1998

Comfort Systems USA, Inc.
Three Riverway
Suite 200
Houston, Texas 77056

Gentlemen:

We have acted as counsel to Comfort Systems USA, Inc., a Delaware corporation
(the "Company"), in connection with the preparation of its Registration
Statement on Form S-1 (the "Registration Statement"), filed by the Company under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the offering and sale to the public by the Company and certain Selling
Stockholders of shares of the Company's common stock, par value $.01 per share
(the "Common Stock").

We have examined originals or copies of (i) the Amended and Restated Certificate
of Incorporation of the Company; (ii) the Bylaws of the Company, as amended;
(iii) certain resolutions of the Board of Directors of the Company; and (iv)
such other documents and records as we have deemed necessary and relevant for
purposes hereof. We have relied upon certificates of public officials and of
officers of the Company as to certain matters of fact relating to this opinion
and have made such investigations of law as we have deemed necessary and
relevant as a basis hereof.

We have assumed the genuineness of all signatures, the authenticity of all
documents, certificates and records submitted to us as originals, and the
conformity to original documents, certificates and records of all documents,
certificates and records submitted to us as copies.

Based upon the foregoing, and subject to the limitations and assumptions set
forth herein, and having due regard for such legal considerations as we deem
relevant, we are of the opinion that:

        1. The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware.

Comfort Systems USA, Inc.
May 14, 1998
Page 2

        2. The issuance of the Common Stock has been duly authorized, and when
issued and delivered by the Company against payment therefor as described in the
Registration Statement, such shares will be validly issued, fully paid and
nonassessable.

The foregoing opinion is based on and is limited to the General Corporation Laws
of the State of Delaware and the relevant law of the United States of America, 
and we render no opinion with respect to the law of any other jurisdiction.

We hereby consent to the filing of this opinion with the Securities and Exchange
Commission as Exhibit 5.1 to the Registration Statement and to the reference to
this firm as having passed on the validity of the issuance of the Common Stock
under the caption "Legal Matters" in the prospectus contained in the
Registration Statement. By giving such consent, we do not admit that we are
included within the category of persons whose consent is required under Section
7 of the Securities Act or the rules and regulations issued thereunder.

                                            Very truly yours,

                                            Bracewell & Patterson, L.L.P.

GREEDS\017464\007003
HOUSTON\846733.1

                                                                    EXHIBIT 21.1

                              LIST OF SUBSIDIARIES

   1.  ACCURATE AIR SYSTEMS, INC., A TEXAS CORPORATION
   2.  ATLAS AIR CONDITIONING COMPANY, A TEXAS CORPORATION
   3.  ATLAS COMFORT SERVICES USA, INC., A TEXAS CORPORATION
   4.  CONTRACT SERVICE INC., A UTAH CORPORATION
   5.  EASTERN HEATING & COOLING, INC., A NEW YORK CORPORATION
   6.  EASTERN REFRIGERATION CO., INC., A NEW YORK CORPORATION
   7.  FREEWAY HEATING & AIR CONDITIONING, INC., A UTAH CORPORATION
   8.  QUALITY AIR HEATING & COOLING, INC., A MICHIGAN CORPORATION
   9.  S.M. LAWRENCE COMPANY, INC.,  A TENNESSEE CORPORATION
   10. LAWRENCE SERVICE, INC., A TENNESSEE CORPORATION
   11. SEASONAIR, INC., A MARYLAND CORPORATION
   12. STANDARD HEATING & AIR CONDITIONING COMPANY, AN ALABAMA CORPORATION
   13. TECH HEATING AND AIR CONDITIONING, INC., AN OHIO CORPORATION
   14. TECH MECHANICAL, INC., AN OHIO CORPORATION
   15. TRI-CITY MECHANICAL, INC., AN ARIZONA CORPORATION
   16. WESTERN BUILDING SERVICES, INC., A COLORADO CORPORATION
   17. WALKER-J-WALKER, INC., A TENNESSEE CORPORATION
   18. RIVER CITY MECHANICAL, INC., A MICHIGAN CORPORATION
   19. S&K AIR CONDITIONING CO., INC., A GEORGIA CORPORATION
   20. FRED HAYES MECHANICAL CONTRACTORS, INC., A DELAWARE CORPORATION
   21. KUEMPEL SERVICE, INC., AN OHIO CORPORATION
   22. SALMON & ALDER, INC., A UTAH CORPORATION
   23. TROOST SERVICE CO., A MICHIGAN CORPORATION
   24. TEMP-RIGHT SERVICE, INC., A DELAWARE CORPORATION
   25. HILLCREST SHEET METAL, INC., A DELAWARE CORPORATION
   26. NOGLE & BLACK MECHANICAL, INC.,  A DELAWARE CORPORATION
   27. NORTH JERSEY MECHANICAL CONTRACTORS, INC., A NEW JERSEY CORPORATION
   28. DESIGN MECHANICAL INCORPORATED, A DELAWARE CORPORATION
   29. EDS, INC., A MINNESOTA CORPORATION
   30. MECHANICAL SERVICE GROUP, INC., A DELAWARE CORPORATION
   31. CEL, INC., A DELAWARE CORPORATION
   32. BCM CONTROLS CORPORATION, A MASSACHUSETTS CORPORATION
   33. ALLSTATE MECHANICAL, INC., A COLORADO CORPORATION
   34. DYNASTAR, INC. A COLORADO CORPORATION
   35. LOWRIE ELECTRIC CO., INC., A TENNESSEE CORPORATION
   36. BATCHELOR'S MECHANICAL CONTRACTORS, INC., AN ALABAMA CORPORATION
   37. JAMES AIR CONDITIONING ENTERPRISES, INC., A PUERTO RICO CORPORATION
   38. MJ MECHANICAL SERVICES, INC., A DELAWARE CORPORATION
   39. MEADOWLANDS FIRE PROTECTION CORP., A NEW JERSEY CORPORATION
   40. F&G MECHANICAL CORPORATION, A DELAWARE CORPORATION
   41. HELM CORPORATION, A COLORADO CORPORATION
   42. GMS AIR CONDITIONING, INC., A DELAWARE CORPORATION
   43. MARTIN HEATING, INC., A DELAWARE CORPORATION
   44. OK SHEET METAL & AIR CONDITIONING, INC., A DELAWARE CORPORATION
   45. AIR POWER SYSTEMS, INC., A DELAWARE CORPORATION
   46. MANDELL MECHANICAL CORPORATION, A NEW YORK CORPORATION
   47. ADAMS MECHANICAL SERVICES, INC., A TEXAS CORPORATION
   48. ROSS & ASSOCIATES,  INC., A DELAWARE CORPORATION
   49. HESS MECHANICAL CORPORATION, A DELAWARE CORPORATION
   50. RADNEY PLUMBING, INC., A DELAWARE CORPORATION
   51. NORTH AMERICAN MECHANICAL, INC., A DELAWARE CORPORATION
   52. THE HARVEY ROBBIN COMPANY, A DELAWARE CORPORATION
   53. UNITED ENVIRONMENTAL SERVICES, INC., A DELAWARE CORPORATION
   54. S.I. GOLDMAN COMPANY, INC., A DELAWARE CORPORATION
   55. N.J.M. SERVICE CO., INC., A NEW JERSEY CORPORATION
   56. HELM CORPORATION SAN DIEGO, A CALIFORNIA CORPORATION
   57. TEMPRITE AIR CONDITIONING AND REFRIGERATION, INC., A DELAWARE CORPORATION
   58. CENTRAL MECHANICAL, INC., A DELAWARE CORPORATION

                                                                    EXHIBIT 23.1

                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

     As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.

ARTHUR ANDERSEN LLP
Houston, Texas
April 22, 1998

                                                                    EXHIBIT 23.2

                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

     As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.

MARDEN, HARRISON & KREUTER
Certified Public Accountants
Port Chester, New York
April 23, 1998