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

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

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission file number: 1-13011

COMFORT SYSTEMS USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 76-0526487
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

777 POST OAK BLVD.
SUITE 500
HOUSTON, TEXAS 77056
(713) 830-9600
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)

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

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------------------------- --------------------------------------------------------
Common Stock, $.01 par value New York Stock Exchange

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

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

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

As of March 26, 1999, the aggregate market value of the 30,606,521 shares
of the registrant's common stock held by non-affiliates of the registrant was
$459,097,815, based on the $15.00 last sale price of the registrant's common
stock on the New York Stock Exchange on that date.

As of March 26, 1999, 38,586,426 shares of the registrant's common stock
were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III
(other than the required information regarding executive officers) is
incorporated by reference from the registrant's definitive proxy statement,
which will be filed with the Commission not later than 120 days following
December 31, 1998.

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

FORWARD-LOOKING STATEMENTS

This report 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 report 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 risks, 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. Important factors that
could cause actual results to differ are discussed under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Which May Affect Future Results."

PART I

ITEM 1. BUSINESS

Comfort Systems USA, Inc., a Delaware corporation ("Comfort Systems" and
collectively with its subsidiaries, the "Company"), is a leading 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, 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 97% of the Company's pro
forma combined 1998 revenues were derived from commercial and industrial
customers with approximately 55% of the revenues attributable to installation
services and 45% attributable to maintenance, repair and replacement services.

On July 2, 1997, Comfort Systems completed the initial public offering (the
"IPO") of its common stock (the "Common Stock") and simultaneously acquired
twelve companies (collectively referred to as the "Founding Companies")
engaged in providing HVAC services. The Founding Companies had 18 operating
locations in ten states. Subsequent to the IPO, and through December 31, 1998,
the Company acquired 82 HVAC and complementary businesses (collectively with the
Founding Companies, the "Acquired Companies"). The companies acquired
subsequent to the IPO added 88 operating locations in 18 additional states.
These acquisitions included 15 "tuck-in" operations that have been or are
currently being integrated with existing Company operations. In addition, during
the first three months of 1999, the Company acquired 10 HVAC businesses with
aggregate 1998 annual revenues of approximately $35 million. These acquisitions
along with the existing Founding Companies allow the Company to provide services
in 114 operating locations and 46 of the top 150 major markets.

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 cause many facility owners to
consider early replacement of older systems.

Growth in the HVAC industry is positively affected by a number of factors,
particularly (i) the aging of the installed base, (ii) the increasing
efficiency, sophistication and complexity of HVAC systems, (iii) the increasing
opportunities associated with utility deregulation and (iv) 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 continue to exist for a
well-capitalized, national company to excel in the HVAC industry.

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

INSTALLATION SERVICES. Installation services consist 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 may 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 1998 revenues related to installation services
and the majority of the revenues from installation projects were performed on a
"design and build/negotiated" basis.

MAINTENANCE, REPAIR AND REPLACEMENT SERVICES. These services include 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 service line. 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 1998 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 operating strategy
are:

FOCUS ON COMMERCIAL AND INDUSTRIAL MARKETS. The Company primarily
focuses on the commercial and industrial markets with particular emphasis
on "design and build" installation services and maintenance, repair and
replacement services. 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. Approximately 97% of the Company's pro forma combined 1998
revenues were derived from commercial and industrial customers.

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. Moreover, the Company is reviewing its 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.

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:

EXPAND ALLIANCES WITH UTILITY COMPANIES. The Company believes that
there is significant potential for mutually beneficial relationships with
companies that market energy and energy services. The Company has begun
working with companies in the utility industry through its Preferred
Partners program which involves cooperative marketing of the Company's
services and provides utilities the opportunity to profit and to benefit
from the Company's own customer relationships and marketing programs. The
Company believes it can expand these relationships as it gains experience
with successful programs and as its geographic presence increases.

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. 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.

This expertise has been and will be increasingly shared within the
Company's family of HVAC businesses.

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 and begins to leverage 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.

ACQUISITIONS. The Company believes the HVAC industry is highly fragmented,
with small, owner-operated businesses with limited capital resources, which
outnumber 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.

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.

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 enables the Company to offer, on a comprehensive
basis and from a single provider, HVAC, mechanical and electrical services
in certain markets.

ACQUISITION PROGRAM

The Company 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) increased employee benefits and job opportunities for their
employees, (v) the potential for increased profitability due to certain
centralized administrative functions, enhanced systems capabilities and access
to increased marketing resources and (vi) 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 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 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 has
centralized certain administrative functions such as insurance, employee
benefits, safety programs and cash management to enable the management of each
Acquired Company to focus on pursuing new business opportunities and improving
operating efficiencies. Additional administrative functions which the Company is
currently centralizing include Company-wide training programs, project financing
programs and national purchasing programs.

INSTALLATION SERVICES. The Company's installation business comprised
approximately 55% of the Company's 1998 pro forma combined revenues. These
services consist 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 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, 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
in addition to "design and build" projects.

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 SERVICES. The Company's maintenance,
repair and replacement services comprised approximately 45% of the Company's
1998 pro forma combined revenues, and include the maintenance, repair,
replacement, reconfiguration and monitoring of HVAC systems and industrial
process piping. Over two-thirds of the Company's maintenance, repair and
replacement 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. 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 commercial 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 2% of pro forma combined 1998 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 are available to the Company
as a regional or national provider of comprehensive commercial and industrial
HVAC and related services. Management believes that it can increasingly 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 December 31, 1998, the Company had 8,893 employees, including 490
management personnel, 7,278 engineers, and service and installation technicians,
253 sales personnel and 872 administrative personnel. As it executes its
internal growth and acquisition strategies, the Company expects the number of
employees to increase. Certain of the Company's subsidiaries have collective
bargaining agreements that cover, in the aggregate, approximately 2,375
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 future 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, Comfort Systems provides on-the-job training, apprenticeship
programs, attractive benefit packages, steady employment and opportunities for
advancement within the national network of Comfort Systems' companies.

The Company is working 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 has implemented a "best practices"
safety program throughout its operations, which will provide employees with
incentives to improve safety performance and decrease workplace 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, third party property damage
and workers' compensation 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 of 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
market and the maintenance, repair and replacement market, 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, a few 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 providing
maintenance, repair and replacement services in 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

The Company leases the majority of its facilities. In most instances these
leases are with the former owners who are now employed by the Company. 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 196,000 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.

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.

EXECUTIVE OFFICERS

The Company has six executive officers.

Fred M. Ferreira, age 55, has served as Chairman of the Board, Chief
Executive Officer and President of Comfort Systems since January 1997. Mr.
Ferreira was responsible for introducing the consolidation opportunity in the
commercial and industrial HVAC industry to Notre Capital Ventures II, L.L.C.
("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.

Michael Nothum, Jr., age 44, is a director of the Company and became its
Chief Operating Officer in January 1998. He was employed by Tri-City Mechanical,
Inc., an Arizona corporation that is a wholly-owned subsidiary of the Company,
since 1979, serving as President from 1992 to December 1997.

J. Gordon Beittenmiller, age 40, has served as Executive Vice President,
Chief Financial Officer and a director of Comfort Systems since May 1998, and
was Senior Vice President, Chief Financial Officer and a director of Comfort
Systems from February 1997 to April 1998. 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, age 35, has served as Senior Vice President of Comfort
Systems 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 held various positions and
was a Certified Public Accountant with Arthur Andersen LLP.

William George, III, age 34, has served as Senior Vice President, General
Counsel and Secretary of Comfort Systems since May 1998, and was Vice President,
General Counsel and Secretary of Comfort Systems from March 1997 to April 1998.
From October 1995 to February 1997, Mr. George was 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 antitrust law at Ropes & Gray, a law firm.

Gary E. Hess, age 51, has served as Senior Vice President of Comfort
Systems since February 1999. He served Comfort Systems as director of its
northeast region from August 1998 to January 1999. Prior to that, he was
employed by Hess Mechanical Corporation, a wholly-owned subsidiary of the
Company, since 1980, serving as President and Chief Executive Officer. Mr. Hess
was President of Associated Builders and Contractors during 1996 and was
selected as their 1997 Contractor of the Year.

ITEM 2. PROPERTIES

Most of the Company's subsidiaries lease the real property and buildings
from which it operates. The Company's facilities consist of offices, shops,
maintenance and warehouse facilities. Generally, leases range from five to ten
years and are on terms the Company believes to be commercially reasonable.
Certain of these facilities are leased from related parties. In order to
maximize available capital, the Company generally intends to continue to lease
the majority of its properties. The Company believes that its facilities are
adequate for its current needs.

The Company leases its executive and administrative offices in Houston,
Texas and Phoenix, Arizona.

ITEM 3. LEGAL PROCEEDINGS

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as traded at the New York Stock
Exchange. The Common Stock is traded under the symbol FIX.

HIGH LOW
--------- -----------

June 27-30, 1997..................... $ 16.125 $ 13.00
Third Quarter, 1997.................. $ 21.5625 $ 15.50
Fourth Quarter, 1997................. $ 20.0625 $ 15.00
First Quarter, 1998.................. $ 22.25 $ 18.125
Second Quarter, 1998................. $ 24.75 $ 19.125
Third Quarter, 1998.................. $ 26.625 $ 15.25
Fourth Quarter, 1998................. $ 20.50 $ 14.1875
January 1 - March 26, 1999........... $ 18.50 $ 11.375

As of March 26, 1999, there were approximately 1,512 stockholders of record
of the Company's Common Stock, and the last reported sale price on that date was
$15.00 per share.

The Company has never declared or paid a dividend on its Common Stock. The
Company currently expects to retain future earnings in order to finance its
growth and, consequently, does not intend to declare any dividend on the Common
Stock for the foreseeable future. In addition, the Company's revolving credit
agreement restricts the ability of the Company to pay dividends without the
lender's consent. No market exists for the Company's Restricted Voting Common
Stock, which converts to Common Stock upon sale and under certain other
conditions.

RECENT SALES OF UNREGISTERED SECURITIES

On November 15, 1998, the Company issued 1,610,889 unregistered shares of
its Common Stock in connection with the acquisition of Shambaugh & Son, Inc. On
December 11, 1998, the Company issued 382,384 unregistered shares of its Common
Stock in connection with the acquisition of an HVAC business, which was not
material. In each case, the shares were issued without registration under the
Securities Act in reliance on the exemption provided by Section 4(2), no public
offering being involved.

ITEM 6. SELECTED FINANCIAL DATA

Comfort Systems acquired the twelve Founding Companies in connection with
the IPO on July 2, 1997. Subsequent to the IPO and through December 31, 1998,
the Company completed 82 acquisitions, 17 of which were accounted for as
poolings-of-interests (the "Pooled Companies") and 65 of which were accounted
for as purchases (the "Purchased Companies"). The following selected
historical financial data has been derived from the audited financial statements
of the Company for each of the three years ended December 31, 1996, 1997, and
1998. The remaining selected historical financial data of the Company has been
derived from unaudited financial statements of the Company. These unaudited
financial statements have been prepared on the same basis as the audited
financial statements of the Company, and in the opinion of the Company, reflect
all adjustments necessary for a fair presentation of that historical
information. The historical financial statement data reflects the acquisitions
of the Founding Companies and Purchased Companies as of their respective
acquisition dates and reflects 15 of the Pooled Companies (the "Restated
Companies") for all periods presented. Two of the Pooled Companies are
considered immaterial poolings based upon criteria set forth by the Securities
and Exchange Commission and have not been

restated for all periods presented. The selected historical financial data below
should be read in conjunction with the consolidated historical financial
statements and related notes.

YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------

STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 126,023 $ 126,794 $ 161,419 $ 297,646 $ 853,961
Operating income................ 3,653 4,011 6,575 5,699 68,497
Net income (loss)............... 2,896 3,137 4,589 (2,064) 35,013
BALANCE SHEET DATA:
Working capital................. $ 8,803 $ 10,110 $ 13,971 $ 63,137 $ 133,390
Total assets.................... 36,366 42,035 50,366 308,779 789,293
Total debt, including current
portion....................... 6,738 9,076 8,376 24,726 236,446
Stockholders' equity............ 9,385 10,731 15,429 217,635 379,932

ITEM 7. 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 financial statements of the Company and related notes
thereto. This discussion contains forward-looking statements regarding the
business and industry of Comfort Systems 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 are discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Which May Affect Future Results."

Comfort Systems was founded in December 1996 to become a leading national
provider of HVAC services, primarily focusing on commercial and industrial
markets.

On July 2, 1997, Comfort Systems completed the IPO and simultaneously
acquired the twelve Founding Companies, which are engaged in providing HVAC
services. Subsequent to the IPO, and through December 31, 1998, the Company
acquired 82 additional HVAC businesses. Of these additional acquisitions, 17
acquisitions were accounted for as poolings-of-interests and are referred to
herein as the Pooled Companies, and the remaining 65 acquisitions were accounted
for as purchases and are referred to herein as the Purchased Companies. The
consolidated historical financial statements of the Company have been
retroactively restated to give effect to the operations of 15 of the Pooled
Companies. Two of the Pooled Companies are considered immaterial poolings based
upon criteria set forth by the Securities and Exchange Commission and have not
been restated for all periods presented.

Pro forma 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 results
of the Company have historically been subject to seasonal fluctuations. These
pro forma combined and historical statements of operations should be read in
conjunction with the consolidated historical financial statements and related
notes of Comfort Systems, filed herewith, and the additional information and the
respective financial statements and related notes of Comfort Systems and the
Founding Companies included in the Company's Registration Statement on Form S-1
(File No. 333-24021) (the "Registration Statement"), as amended, filed with
the Securities and Exchange Commission in connection with the IPO.

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

The following pro forma combined information is presented as a supplement
to reflect the pro forma results of operations as if the IPO and the acquisition
of the Founding Companies occurred on January 1, 1997. Therefore, the
accompanying unaudited pro forma combined statements of operations and the
related management's discussion and analysis of the Company for the years ended
December 31, 1998 and 1997, respectively, include the combined operations of the
Pooled Companies and the Founding Companies from January 1, 1997, and the
Purchased Companies from the dates of their acquisition.

The Founding Companies, Pooled Companies and Purchased 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 historical 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 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 prior to the
IPO. This pro forma combined financial information includes the effects of (a)
the IPO, (b) certain reductions in salaries and benefits to the former owners
("the Compensation Differential") of the Founding and Pooled Companies which
the former owners agreed would take effect as of the date of the acquisitions,
(c) 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
those salaries were being paid prior to the IPO, (d) amortization of goodwill
resulting from the acquisitions of the Purchased and Founding Companies, (e)
interest expense on borrowings of $11.0 million that would have been necessary
to fund certain S Corporation Distributions if they had occurred at the
beginning of each period presented, (f) the elimination of the $11.6 million
non-recurring, non-cash compensation charge referred to above and (g) the
reduction of the 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 Pooled Companies which
were C Corporations had been subject to federal and state income taxes.

This pro forma combined financial information may not be comparable to and
may not be indicative of the Company's future results of operations because
these acquired companies were not under common control or management prior to
their acquisition by the Company. Important factors that could cause actual
results to differ are discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Which May Affect Future
Results."

RESULTS OF OPERATIONS -- PRO FORMA COMBINED (UNAUDITED)

YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998
--------------------- ---------------------

(IN THOUSANDS)
Revenues............................. $ 384,546 100.0% $ 853,961 100.0%
Cost of services..................... 282,814 73.5 647,512 75.8
---------- --------- ---------- ---------
Gross profit......................... 101,732 26.5 206,449 24.2
Selling, general and administrative
expenses........................... 63,110 16.4 129,055 15.1
Goodwill amortization................ 3,593 0.9 7,132 0.8
---------- --------- ---------- ---------
Operating income..................... 35,029 9.1 70,262 8.2
Other income (expense)............... (692) (0.2) (6,435) 0.8
---------- --------- ---------- ---------
Income before taxes.................. 34,337 8.9 63,827 7.5
Provision for income taxes........... 13,987 -- 27,756 --
---------- --------- ---------- ---------
Pro forma net income................. $ 20,350 5.3% $ 36,071 4.2%
========== ========= ========== =========

1998 COMPARED TO 1997

PRO FORMA REVENUES -- Pro forma combined revenues increased $469.4 million,
or 122.1%, to $854.0 million in 1998 compared to 1997. The acquisition of the
Purchased Companies, excluding "tuck-ins", acquired subsequent to the IPO
through the end of 1998 contributed approximately $426.2 million of revenue in
1998.

PRO FORMA GROSS PROFIT -- Pro forma combined gross profit increased $104.7
million, or 102.9% to $206.4 million in 1998 compared to 1997 primarily due to
increased revenues at the Founding Companies, the addition of the Purchased
Companies and incremental increases in volume and gross margin at some of the
Pooled Companies. As a percentage of revenues, pro forma combined gross profit
decreased from 26.5% in 1997 to 24.2% in 1998. This decline resulted primarily
from the acquisition of the Purchased Companies, which, taken as a whole, have
gross margins that are lower than the Company's historical average.

PRO FORMA SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) -- Pro forma
combined SG&A, excluding goodwill amortization, increased $65.9 million, or
104.5%, to $129.1 million in 1998 compared to 1997. These increases were due
principally to the addition of the Purchased Companies along with corporate
office and management expenses associated with the Company's establishment as a
public company. As a percentage of revenues, pro forma combined SG&A, excluding
goodwill amortization, decreased from 16.4% to 15.1% in 1998, compared to the
prior year. This decrease is due to the Company's acquisition of the Purchased
Companies, which, taken as a whole, have SG&A as a percentage of revenues that
is lower than the Company's historical average.

PRO FORMA OPERATING INCOME -- Pro forma combined operating income increased
$35.2 million, or 100.6%, to $70.3 million in 1998 compared to 1997 primarily
due to increased revenues at the Founding Companies, the addition of the
Purchased Companies and incremental increases in volume at some of the Pooled
Companies. As a percentage of revenues, pro forma operating income decreased
from 9.1% in 1997 to 8.2% in 1998. This decline resulted primarily from the
acquisition of the Purchased Companies, which, taken as a whole, have operating
income margins that are lower than the Company's historical average.

PRO FORMA OTHER INCOME (EXPENSE) -- Pro forma combined other expense, net,
increased to $6.4 million in 1998 primarily due to the increase in interest
expense related to the acquisition of the Purchased Companies acquired
subsequent to the IPO and through the end of 1998.

HISTORICAL

The following historical consolidated financial information represents the
operations of the Restated Companies for all periods presented and the Founding
Companies and Purchased Companies from their respective dates of acquisition.
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. The following historical financial information for 1997 includes
the non-recurring, non-cash compensation charge of $11.6 million recorded by
Comfort Systems in the first quarter of 1997, non-recurring acquisition-related
costs and reflects normal recurring corporate costs of Comfort Systems
subsequent to the IPO. This compensation charge is not deductible for federal
and state income taxes. This historical consolidated information has been
derived from the audited consolidated financial statements of the Company.

RESULTS OF OPERATIONS -- HISTORICAL

YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1997 1998
--------------------- --------------------- ---------------------

(IN THOUSANDS)
Revenues............................. $ 161,419 100.0% $ 297,646 100.0% $ 853,961 100.0%
Cost of services..................... 128,049 79.3 220,419 74.1 647,512 75.8
---------- --------- ---------- --------- ---------- ---------
Gross profit......................... 33,370 20.7 77,227 25.9 206,449 24.2
Selling, general and
administrative expenses............ 26,795 16.6 69,677 23.4 130,820 15.3
Goodwill amortization................ -- -- 1,851 0.6 7,132 0.8
---------- --------- ---------- --------- ---------- ---------
Operating income..................... 6,575 4.1 5,699 1.9 68,497 8.1
Other income (expense)............... (478) (0.3) (161) -- (6,435) (0.8)
---------- --------- ---------- --------- ---------- ---------
Income before taxes.................. 6,097 3.8 5,538 1.9 62,062 7.3
Provision for income taxes........... 1,508 -- 7,602 -- 27,049 --
---------- --------- ---------- --------- ---------- ---------
Net income (loss).................... $ 4,589 2.8% $ (2,064) (0.7)% $ 35,013 4.1%
========== ========= ========== ========= ========== =========

1998 COMPARED TO 1997

REVENUES -- Revenues increased $556.3 million, or 186.9%, to $854.0 million
in 1998 compared to 1997. The increase in revenues over the prior year is
primarily due to the acquisition of the Founding Companies and Purchased
Companies coupled with broad growth in the Cincinnati, Syracuse and Kansas City,
Kansas markets.

GROSS PROFIT -- Gross profit increased $129.2 million, or 167.3%, to $206.4
million in 1998 compared to 1997. The increase in gross profit was primarily due
to the acquisitions described above. As a percentage of revenues, gross profit
decreased from 25.9% in 1997 to 24.2% in 1998. This decline resulted primarily
from the acquisition of the Purchased Companies, which, taken as a whole, have
gross margins that are lower than the Company's historical average.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- SG&A, excluding goodwill
amortization, in 1997 and 1998 includes $10.3 million and $1.8 million,
respectively, of Compensation Differential and acquisition related costs which
will be eliminated prospectively. Additionally, the Company recorded the non-
recurring, non-cash 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 $81.3 million to $129.1million in 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.

OPERATING INCOME -- Operating income increased $62.8 million, or 1,101.9%
to $68.5 million in 1998 compared to 1997 primarily due to increased revenues at
the Founding Companies, the addition of the Purchased Companies and incremental
increases in volume at some of the Pooled Companies. As a percentage of revenue,
operating income increased from 1.9% in 1997 to 8.1% in 1998. As discussed
above, this increase primarily resulted from the Compensation Differential and
the Compensation Charge recorded in 1997.

OTHER INCOME (EXPENSE) -- Other expense, net, increased to $6.4 million in
1998 compared to 1997 primarily due to the increase in interest expense related
to the acquisition of the Purchased Companies acquired subsequent to the IPO and
through the end of 1998.

1997 COMPARED TO 1996

REVENUES -- Revenues increased $136.2 million, or 84.4%, to $297.6 million
in 1997 compared to 1996. The acquisition of the Founding Companies and
Purchased Companies in the second half of 1997 accounted for over 90% of the
increase in revenues over the prior year. The remaining increase over the

prior year is primarily attributed to increased demand for the Company's
commercial service capabilities in the Cincinnati market.

GROSS PROFIT -- Gross Profit increased $43.9 million, 131.4% to $77.2
million in 1997 compared to 1996. The acquisition of the Founding Companies and
Purchased Companies accounted for approximately three-fourths of the increase
over the prior year. 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 to the largest increase as a percentage of revenues 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 $42.9 million, or 160.0%, to $69.7 million in 1997
compared to 1996. Approximately 45% of this increase is related to the
acquisition of the Founding and Purchased Companies in the second half of 1997.
Historical SG&A for 1997 includes 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.
The Company's establishment as a public company in 1997 resulted in $2.8 million
of corporate office and management expenses in 1997 whereas no such corporate
expenses are reflected in 1996 as the Company was not yet public. Of this
amount, approximately $0.6 million was non-recurring acquisition costs in 1997
related to the Pooled Companies. The remaining increase related to increases in
personnel and infrastructure to support growth at certain of the Pooled
Companies, and does not reflect the reduction in management compensation and
benefits as a result of the mergers of these Pooled Companies with Comfort
Systems.

OPERATING INCOME -- Operating income decreased $0.9 million, or 13.3%, to
$5.7 million in 1997 compared to 1996 primarily due to revenues attributed by
the acquisition of the Founding and Purchased Companies offset by the
Compensation Charge and corporate office and management expenses recorded in
1997 as discussed above.

OTHER INCOME (EXPENSE) -- Other expense, net, decreased to $0.2 million in
1997 compared to 1996 due primarily to the increase in interest income of $0.7
million resulting from the investment of temporary excess cash from the IPO.

LIQUIDITY AND CAPITAL RESOURCES -- HISTORICAL

For the year ended December 31, 1998, net cash used in operating activities
was $5.5 million primarily due to a decrease in accounts payable of $15.0
million, an increase in accounts receivable of $34.9 million and an increase in
cost and estimated earnings in excess of billings of $7.9 million. The increase
in receivables is attributed to growth. Accounts payable balances decreased from
the date of acquisition at various locations as certain companies took advantage
of cash discounts for early payment. Cash provided from operations for 1997 and
1996 was $1.0 million and $7.2 million, respectively.

Cash used in investing activities was $143.1 million for the year ended
December 31, 1998, primarily in connection with the acquisition of Purchased
Companies for $133.3 million, net of cash acquired. Cash flows used in investing
activities for 1997 and 1996 were $57.6 million and $3.4 million, respectively.
The uses of cash in 1997 and 1996 were primarily for the acquisition of the
Founding Companies and Purchased Companies and additions to equipment,
respectively.

Cash provided by financing activities for the year ended December 31, 1998
was $137.5 million and was primarily attributable to the $16.7 million received
from the second public offering (the "Second Public Offering") and net
borrowings of long-term debt of $124.2 million which were primarily used to fund
acquisitions. Net cash provided by financing activities in 1997 was $66.6
million and was primarily attributable to the $79.9 million from the IPO, which
was partially offset by a net reduction in outstanding debt. Net cash used in
financing activities in 1996 was $2.3 million primarily due to the net reduction
in outstanding debt.

In connection with the IPO, the Company granted its underwriters an option
to sell additional 915,000 shares at $13.00 per share. On July 9, 1997, the
underwriters exercised this option. Net proceeds to the Company from this sale
of shares were $11.1 million after deducting underwriting commissions.

On June 16, 1998, the Company completed a Second Public Offering of 400,000
shares of its Common Stock to the public at $20.00 per share. The net proceeds
from this offering (after deducting underwriting commissions and offering
expenses) of $7.6 million were used to repay debt.

In connection with the Second Public Offering, the Company granted its
underwriters an option to sell additional shares at $20.00 per share. On July
21, 1998, the underwriters exercised this option. An additional 461,479 shares
of Common Stock was sold and the net proceeds of $8.8 million, after deducting
underwriting commissions, were used to repay debt.

Subsequent to December 31, 1998, and through March 26, 1999, the Company
completed acquisitions of 10 companies for approximately $9.8 million in cash,
381,690 shares of Common Stock, approximately $2.2 million in convertible
subordinated notes and approximately $3.3 million in subordinated notes. These
acquisitions will be accounted for as purchase transactions.

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. At that time, the Credit Facility
provided the Company with an unsecured revolving line of credit of $75 million.
The Credit Facility was further amended in April 1998 and again in December 1998
in order to increase borrowing capacity and to provide for additional banks to
lend to the Company under the Credit Facility. The Credit Facility currently
provides the Company with a revolving line of credit of up to $300 million
secured by accounts receivable, inventory and the shares of capital stock of the
Company's subsidiaries. The Company currently 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 0.5% or
the bank's prime rate. An additional margin of zero to 1.25% is then added to
the higher of these two rates. Under the other interest rate option, borrowings
bear interest based on designated short-term Eurodollar rates (which generally
approximate LIBOR) plus 1.0% to 2.5%. The additional margin for both options
depends on the ratio of the Company's debt to EBITDA. Commitment fees of 0.25%
to 0.5% per annum, also depending on the ratio of debt to EBITDA, are payable on
the unused portion of the facility. The Credit Facility prohibits the payment of
dividends by the Company without the lenders' approval and requires the Company
to comply with certain financial covenants. The amended Credit Facility expires
on November 1, 2001, at which time all amounts outstanding under the Credit
Facility are due.

As of December 31, 1998, the Company had borrowed $170.7 million under the
Credit Facility at an average interest rate of approximately 6.8% for the year
ended December 31, 1998. As of March 26, 1999, $188.0 million (unaudited) was
outstanding under this Facility.

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

YEAR 2000

Computers, software, and other equipment utilizing embedded technology that
use only two digits to identify a year in a date field may be unable to process
accurately certain date-based information at or after the year 2000. This is
commonly referred to as the "Year 2000 issue." The Company has implemented a
Year 2000 program and is using both internal and external resources to assess
and replace or reprogram computers, software and other equipment as needed. Key
areas of the Company's operations that are being addressed include external
customers, external suppliers and internal computers, software and potential
back-up and contingency plans.

Year 2000 considerations may have an effect on some of the Company's
customers and suppliers, and thus indirectly on the Company. If the Company's
vendors or suppliers of the Company's necessary dispatching, power,
telecommunications, transportation and financial services fail to provide the
Company with equipment and service, the Company will be unable to provide
services to its customers. If any of these uncertainties were to occur, the
Company's business, financial condition and results of operations could be
materially adversely affected. The Company is studying the potential effect on
the Company with respect to customers and suppliers with Year 2000 issues and
does not currently expect a material effect on the Company's financial condition
or results of operations at this time. The Company has initiated communications
with its significant customers and suppliers to assess the extent to which the
Company is vulnerable to those third parties with which the Company transacts
business.

The Company's initial assessment identified Year 2000 issues within the
Company's operating systems. The total cost of anticipated Year 2000
enhancements is approximately $500,000 and is being funded from operating cash
flows. The majority of such costs is for the acquisition of hardware and
software and will be capitalized. The remaining costs will be expensed as
incurred and are not expected to have a material effect on the results of
operations. The Company expects, but cannot be certain, that it will be
substantially complete with Year 2000 enhancements for internal operating
systems by September 1999.

The ability of third parties with which the Company transacts business to
adequately address 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
adequately address their respective Year 2000 issues will not have a material
adverse effect on the Company's financial condition or results of operations.
Accordingly, as part of the Year 2000 program, contingency plans are being
assessed and developed to respond to any failures as they may occur. Such
contingency plans are scheduled to be completed during 1999. At this time, the
Company does not expect that any failure of the Company or third parties to
achieve Year 2000 compliance will adversely affect the Company.

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.

FACTORS WHICH MAY AFFECT FUTURE RESULTS

The Company's future operating results are difficult to predict and may be
affected by a number of factors, including the lack of a combined operating
history and the difficulty of integrating acquired businesses, cyclical and
seasonal fluctuations in the demand for HVAC systems, difficulties in
implementing its acquisition strategy and the availability of acquisition
financing. As a result of these and other

factors, there can be no assurance that the Company will not experience material
fluctuations in future operating results on a quarterly or annual basis.

The Company's success depends in part on its ability to integrate the
Acquired Companies and the future businesses that it acquires. The businesses
operated as separate, independent entities prior to their affiliation with the
Company, and there can be no assurance that the Company will be able to
integrate the operations of these businesses successfully or institute the
necessary systems and procedures, including accounting and financial reporting
systems, to effectively manage the combined enterprise on a profitable basis.
The pro forma combined historical financial results of the acquired businesses
primarily cover periods when such businesses were not under common control or
management and, therefore, may not be indicative of the Company's future
financial or operating results.

Key elements of the Company's strategy are to both maintain and improve the
profitability of the acquired businesses and to continue to expand the revenues
of acquired businesses. The Company's level of success in this strategy, if any,
will be affected by demand for new or replacement HVAC systems. In part, such
demand will be contingent upon factors outside the Company's control, such as
the level of new construction or the potential for slower replacement based upon
the overall level of activity in the economy. The HVAC industry is subject to
both seasonal and cyclical variations, meaning that temperate weather and
downturns in the domestic or regional economies will negatively affect overall
demand for the Company's services.

The Company has grown significantly through the acquisition of additional
HVAC and complementary businesses and intends to continue such acquisition
activity in the future. However, the Company could face difficulties in
implementing its acquisition strategy. The Company faces continuing competition
for acquisition candidates, a fact that may limit the number of acquisition
opportunities and may lead to higher acquisition prices. The HVAC industry is
currently undergoing rapid consolidation on both a national and a regional level
by the Company and by other companies that have acquisition objectives that are
similar to the Company's objectives. Additionally, HVAC equipment manufacturers
and certain public utilities are beginning to provide maintenance, repair and
replacement services within 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.

Acquisitions also involve a number of special risks, including failure of
the acquired business to achieve expected results, diversion of management's
attention and failure to retain key personnel of the acquired business. There
are also risks associated with unanticipated events or liabilities resulting
from the acquired businesses' operations prior to their acquisition. Any of
these risks, or a combination of them, could have a material adverse effect on
the Company's business, financial condition and results of operations.

The timing, size and success of the Company's acquisition efforts depend in
large part on the availability of financing. The Company intends to continue to
finance future acquisitions by using shares of its Common Stock for a portion of
the consideration to be paid. If the Common Stock does not have 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 maintain its acquisition program. One factor that may affect
the Common Stock's market price in the future, and thus its usefulness as
acquisition currency, is the dilutive effect of the continued issuance of shares
in connection with acquisitions. The availability of such shares in the market
when they become eligible for sale could affect the Company's stock valuation
(i.e., upon the expiration of contractual restrictions or of specified holding
periods for unregistered shares). If the Company fails to maintain its stock
valuation, and 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 financing.

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. In addition, the Company depends on the
senior management of the businesses it acquires to remain committed to the
success of the businesses after their acquisition. Accordingly, the Company's
ability to maintain and

increase its productivity and profitability are also affected by its ability to
employ, train and retain the skilled technicians necessary to meet the Company's
service requirements, and to retain senior management in acquired businesses.

HVAC systems are also 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. The Company's
failure to comply, or the costs of compliance, with such laws and regulations
could adversely affect the Company's future results.

Because of these and other factors, past financial performance should not
necessarily be considered an indicator of future performance. Investors should
not rely solely on historical trends to anticipate future results and should be
aware that the trading price of the Company's Common Stock may be subject to
wide fluctuations in response to quarter-to-quarter variations in operating
results, general conditions in the HVAC industry, the increasing supply of
tradable stock, changes in analysts' earnings estimates, recommendations by
analysts, or other events.

ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk primarily related to potential
adverse changes in interest rates as discussed below. Management is actively
involved in monitoring exposure to market risk and continues to develop and
utilize appropriate risk management techniques. The Company is not exposed to
any other significant market risks including commodity price risk, foreign
currency exchange risk or interst rate risks from the use of derivative
financial instruments. Management does not use derivative financial instruments
for trading or to speculate on changes in interest rates or commodity prices.

Therefore, the Company's exposure to changes in interest rates primarily
results from its short-term and long-term debt with both fixed and floating
interest rates. The Company's debt with fixed interest rates consists of capital
leases, convertible subordinate notes, subordinated notes and various other
notes payable. The Company's debt with variable interest rates consists entirely
of its revolving credit facility. The following table presents principal amounts
(stated in thousands) and related average interest rates by year of maturity for
the Company's debt obligations and their indicated fair market value at December
31, 1998:

FAIR
1999 2000 2001 2002 2003 THEREAFTER VALUE
--------- --------- ---------- --------- --------- ---------- --------

Liabilities -- Long-Term Debt:
Variable Rate Debt................. $ -- $ -- $ 170,700 $ -- $ -- $-- $170,700
Average Interest Rate......... -- % -- % 6.8% -- % -- % -- % 6.8%
Fixed Rate Debt.................... $ 9,077 $ 11,218 $ 43,711 $ 1,176 $ 564 $-- $ 65,746
Average Interest Rate......... 6.0% 6.0% 4.7% 5.4% 6.0% -- % 5.11%

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

COMFORT SYSTEMS USA, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 & 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

These pro forma combined financial statements should be read in conjunction
with the audited consolidated historical financial statements of Comfort Systems
USA, Inc. included elsewhere in this report.

YEAR ENDED DECEMBER
31,
----------------------
1997 1998
---------- ----------

(IN THOUSANDS)
Revenues................................ $ 384,546 $ 853,961
Cost of services........................ 282,814 647,512
---------- ----------
Gross profit............................ 101,732 206,449
Selling, general and administrative
expenses.............................. 63,110 129,055
Goodwill amortization................... 3,593 7,132
---------- ----------
Operating income........................ 35,029 70,262
Other income (expense).................. (692) (6,435)
---------- ----------
Income before taxes..................... 34,337 63,827
Provision for income taxes.............. 13,987 27,756
---------- ----------
Pro forma net income.................... $ 20,350 $ 36,071
========== ==========
Pro forma net income per share
(basic)............................... $ 0.79 $ 1.09
Pro forma net income per share
(diluted)............................. 0.78 1.07
Shares used in computing pro forma net
income per
share (basic)......................... 25,747 32,962
Shares used in computing pro forma net
income per
share (diluted)....................... 25,940 34,329

The pro forma combined financial information for the years ended December
31, 1998 and 1997, includes the results of Comfort Systems and the Founding
Companies from January 1, 1997, the Purchased Companies from date of their
respective acquisitions and the retroactive restatement to January 1, 1997 of
the Pooled Companies. The Founding Companies, Pooled Companies and Purchased
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 historical 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 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
prior to the IPO. This pro forma combined financial information includes the
effects of (a) the IPO, (b) certain reductions in salaries and benefits to the
former owners ("the Compensation Differential") of the Founding and Pooled
Companies which the former owners agreed would take effect as of the date of the
acquisitions, (c) 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 those salaries were being paid prior to the IPO, (d)
amortization of goodwill resulting from the acquisitions of the Purchased and
Founding Companies, (e) interest expense on borrowings of $11.0 million that
would have been necessary to fund certain S Corporation Distributions if they
had occurred at the beginning of each period presented, (f) the elimination of
the $11.6 million non-recurring, non-cash compensation charge referred to above
and (g) the elimination of the 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

Pooled Companies which were C Corporations had been subject to federal and state
income taxes. Diluted earnings per share data presented above was calculated in
accordance with Statement of Financial Accounting Standards No. 128. The diluted
earnings per share data presented above reflects the dilutive effect, if any, of
stock options and convertible subordinated notes which were outstanding during
the periods presented.

This pro forma combined financial information may not be comparable to and
may not be indicative of the Company's future results of operations because
these Acquired Companies were not under common control or management.

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,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1997 and 1998,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Houston, Texas
February 18, 1999

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

DECEMBER 31,
----------------------
1997 1998
---------- ----------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 18,097 $ 6,985
Accounts receivable................ 86,120 241,332
Less -- Allowance............. 1,698 4,758
---------- ----------
Accounts receivable,
net................... 84,422 236,574
Other receivables.................. 879 2,733
Inventories........................ 7,360 14,768
Prepaid expenses and other......... 4,993 14,264
Costs and estimated earnings in
excess of billings................ 14,034 37,228
---------- ----------
Total current assets..... 129,785 312,552
PROPERTY AND EQUIPMENT, net............. 13,676 34,413
GOODWILL, net........................... 163,126 430,526
OTHER NONCURRENT ASSETS................. 2,192 11,802
---------- ----------
Total assets............. $ 308,779 $ 789,293
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term
debt.............................. $ 2,030 $ 1,568
Current maturities of notes to
affiliates and former owners...... 315 7,509
Accounts payable................... 28,353 74,161
Accrued compensation and
benefits.......................... 7,603 25,869
Billings in excess of costs and
estimated earnings................ 11,525 43,968
Income taxes payable............... 5,135 1,299
Other current liabilities.......... 11,687 24,788
---------- ----------
Total current
liabilities........... 66,648 179,162
DEFERRED INCOME TAXES................... 1,061 1,124
LONG-TERM DEBT, NET OF CURRENT
MATURITIES............................ 16,956 171,039
NOTES TO AFFILIATES AND FORMER OWNERS... 5,425 56,330
OTHER LONG-TERM LIABILITIES............. 1,054 1,706
---------- ----------
Total liabilities........ 91,144 409,361
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par,
5,000,000 shares authorized, none
issued and outstanding............ -- --
Common stock, $.01 par, 102,969,912
shares authorized, 28,013,436 and
38,141,180 shares issued and
outstanding, respectively......... 280 381
Additional paid-in capital......... 205,829 333,978
Retained earnings.................. 11,526 45,573
---------- ----------
Total stockholders'
equity................ 217,635 379,932
---------- ----------
Total liabilities and
stockholders'
equity................ $ 308,779 $ 789,293
========== ==========

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.

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

YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------

REVENUES............................. $ 161,419 $ 297,646 $ 853,961
COST OF SERVICES..................... 128,049 220,419 647,512
---------- ---------- ----------
Gross profit............... 33,370 77,227 206,449
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 26,795 69,102 130,370
GOODWILL AND OTHER AMORTIZATION...... -- 1,851 7,132
ACQUISITION RELATED EXPENSES......... -- 575 450
---------- ---------- ----------
Operating income........... 6,575 5,699 68,497
OTHER INCOME (EXPENSE):
Interest income................. 376 1,187 957
Interest expense................ (561) (1,331) (7,633)
Other........................... (293) (17) 241
---------- ---------- ----------
Other income (expense)..... (478) (161) (6,435)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES........... 6,097 5,538 62,062
PROVISION FOR INCOME TAXES........... 1,508 7,602 27,049
---------- ---------- ----------
NET INCOME (LOSS).................... $ 4,589 $ (2,064) $ 35,013
========== ========== ==========
NET INCOME (LOSS) PER SHARE:
Basic........................... $ 0.45 $ (0.11) $ 1.06
========== ========== ==========
Diluted......................... $ 0.45 $ (0.11) $ 1.04
========== ========== ==========
SHARES USED IN COMPUTING NET INCOME
(LOSS) PER SHARE:
Basic........................... 10,117 18,954 32,962
========== ========== ==========
Diluted......................... 10,117 18,954 34,329
========== ========== ==========

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.

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, 1995............ 5,875,989 $ 58 $ 200 $ 10,473 $ 10,731
S Corporation distributions made by
certain Pooled Companies......... -- -- -- (1,107) (1,107)
Adjustments to conform fiscal year
ends of Pooled Companies......... -- -- -- 1,104 1,104
Initial Capitalization............. 121,139 1 -- -- 1
Net income......................... -- -- -- 4,589 4,589
Pooled Companies not restated...... 69,184 1 11 317 329
Other.............................. -- -- 5 (223) (218)
------------ ------ ---------- --------- -------------
BALANCE AT DECEMBER 31, 1996............ 6,066,312 60 216 15,153 15,429
Issuance of Common Stock:
Proceeds of the Initial Public
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......... -- -- -- (2,191) (2,191)
Adjustments to conform fiscal
year-ends of Pooled Companies.... -- -- -- 727 727
Net loss........................... -- -- -- (2,064) (2,064)
Other.............................. -- -- -- (99) (99)
------------ ------ ---------- --------- -------------
BALANCE AT DECEMBER 31, 1997............ 28,013,436 280 205,829 11,526 217,635
Issuance of Common stock:
Proceeds of the Second Public
Offering................... 861,479 9 15,892 -- 15,901
Acquisition of Purchased
Companies.................. 9,212,573 92 111,456 -- 111,548
Issuance of Employee Stock
Purchase Plan shares....... 29,362 -- 482 -- 482
Issuance of shares for options
exercised.................. 24,330 -- 319 -- 319
S Corporation distributions made by
certain Pooled Companies......... -- -- -- (966) (966)
Net income......................... -- -- -- 35,013 35,013
------------ ------ ---------- --------- -------------
BALANCE AT DECEMBER 31, 1998............ 38,141,180 $ 381 $ 333,978 $ 45,573 $ 379,932
============ ====== ========== ========= =============

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.

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

YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- ---------- ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $ 4,589 $ (2,064) $ 35,013
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities --
Depreciation and amortization
expense........................... 1,788 4,786 14,001
Bad debt expense................... 177 583 1,253
Compensation expense related to
issuance of management shares..... -- 11,556 --
Deferred tax expense (benefit)..... 306 (630) 960
Gain on sale of property and
equipment......................... (2) (95) (274)
Pooled Companies not restated...... 32 -- --
Adjustment to conform year-end of
certain pooled companies.......... 1,104 727 --
Changes in operating assets and
liabilities, net of effects of
acquisitions of Founding and
Purchased Companies --
(Increase) decrease in --
Receivables, net......... (3,347) (12,066) (34,915)
Inventories.............. (315) 1,008 (788)
Prepaid expenses and
other current
assets............... (1,210) 503 2,437
Cost and estimated
earnings in excess of
billings............. 109 (5,167) (7,926)
Other noncurrent
assets............... 338 65 113
Increase (decrease) in --
Accounts payable and
accrued
liabilities.......... 2,510 1,170 (14,991)
Billings in excess of
costs and estimated
earnings............. 1,046 546 208
Other, net......................... 64 31 (616)
--------- ---------- ------------
Net cash provided by (used in)
operating activities...... 7,189 953 (5,525)
--------- ---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment......................... (3,489) (4,501) (11,137)
Proceeds from sales of property and
equipment......................... 87 936 1,369
Cash paid for Founding Companies,
net of cash acquired.............. -- (42,295) --
Cash paid for Purchased Companies,
net of cash acquired.............. -- (11,781) (133,338)
--------- ---------- ------------
Net cash used in investing
activities................ (3,402) (57,641) (143,106)
--------- ---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt......... (4,655) (38,157) (109,508)
Borrowings of long-term debt....... 3,449 27,107 233,684
S Corporation distributions paid by
certain Pooled Companies.......... (1,107) (2,090) (966)
Proceeds from issuance of common
stock, net of offering costs...... -- 79,916 16,702
Other.............................. 52 (189) (2,393)
--------- ---------- ------------
Net cash provided by (used in)
financing activities...... (2,261) 66,587 137,519
--------- ---------- ------------
NET INCREASE (DECREASE) IN CASH......... 1,526 9,899 (11,112)
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 6,672 8,198 18,097
--------- ---------- ------------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 8,198 $ 18,097 $ 6,985
========= ========== ============

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

COMFORT SYSTEMS USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998

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 July 2, 1997, Comfort Systems completed the initial public offering (the
"IPO") of its Common Stock (the "Common Stock") and simultaneously acquired
twelve companies (collectively referred to as the "Founding Companies")
engaged in providing HVAC services. The Founding Companies had 18 operating
locations in ten states. Subsequent to the IPO, and through December 31, 1998,
the Company acquired 82 HVAC and complementary businesses (collectively with the
Founding Companies, the "Acquired Companies"). The companies acquired
subsequent to the IPO added 88 operating locations in 18 additional states.
These acquisitions included 15 "tuck-in" operations that have been or are
currently being integrated with existing Company operations. In addition, during
the first three months of 1999, the Company acquired 10 additional acquisitions
(the "Additional Acquisitions") with aggregate 1998 annual revenues of
approximately $35 million (unaudited). These acquisitions along with the
existing Founding Companies allow the Company to provide services in 114
operating locations (unaudited).

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 82 acquisitions
noted above, 17 were accounted for as poolings-of-interests (the "Pooled
Companies") and 65 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 15 of the Pooled Companies (the "Restated
Companies") for all periods presented. Two of the Pooled Companies are
considered immaterial poolings based upon criteria set forth by the Securities
and Exchange Commission 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, seven of the Pooled
Companies reported annual results based on fiscal year-ends other than December
31. An adjustment to conform the year-ends of five of these companies to
December 31 year-ends was made in 1996 resulting in an increase of approximately
$1.1 million to retained earnings and cash flows for 1996. An adjustment to
conform the year-ends of two of these companies to December 31 year-ends was
made in 1997 resulting in an increase of approximately $727,000 to retained
earnings and cash flows for 1997.

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.

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

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 1996, 1997 and 1998 was approximately $548,000,
$736,000, and $6,575,000, respectively. Cash paid for income taxes in 1996, 1997
and 1998 was approximately $738,000, $995,000, and $33,329,000, respectively.

The Company recorded capital leases in 1996, 1997 and 1998 of approximately
$ -- , $114,000 and $20,000, 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, 1998 and 1997, accumulated amortization of goodwill was
approximately $9.1 million and $1.9 million, respectively.

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.
Contract costs include all direct material, labor and subcontract costs and
those indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. 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

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

collected in the upcoming fiscal year. The reatainage retainage balances at
December 31, 1997 and 1998 are $11.6 million and $45.3 million, respectively.

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 based upon the historical
level of warranty claims and management's estimate of future costs.

INCOME TAXES

The Company files 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.

The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, receivables from related parties, other receivables,
accounts payable, a line of credit, notes payable, notes payable to related
parties and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximate their fair
value.

RECLASSIFICATIONS

Certain reclassifications have been made in prior years' financial
statements to conform to the 1998 presentation.

3. BUSINESS COMBINATIONS:

POOLINGS

During 1997 and 1998, the Company acquired all of the outstanding stock of
the Pooled Companies in exchange for 4,507,406 and 1,437,767 shares of Common
Stock, respectively. These acquisitions have been accounted for as
poolings-of-interests as described in Note 2. These companies provide HVAC and
related services.

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

The historical financial statements for 1996 and 1997 represent the
operations of the Restated Companies prior to their acquisition by the Company.
The combined revenues and net income of the Pooled Companies acquired in 1998
for the preacquisition period in 1998 were $50.7 million and $1.4 million,
respectively.

The following table summarizes the restated revenues, net income and per
share data of the Company after giving effect to the acquisition of the 1998
Pooled Companies:

YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
---------------------- ------------------------
REVENUES NET INCOME REVENUES NET INCOME
-------- ---------- -------- ------------

Revenues and net income (loss):
As previously reported.......... $ 97,315 $3,759 $237,709 $ (2,830)
Pooled Companies................ 64,104 830 59,937 766
-------- ---------- -------- ------------
As restated..................... $161,419 $4,589 $297,646 $ (2,064)
======== ========== ======== ============
Earnings per share:
As previously reported.......... $ 0.43 $ (0.16)
Pooled Companies................ 0.02 0.05
---------- ------------
As restated..................... $ 0.45 $ (0.11)
========== ============

Diluted earnings per share and basic earnings per share are the same for
all periods presented above.

PURCHASES

Subsequent to the IPO, and through December 31, 1997, Comfort Systems
acquired 13 of the 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.
These notes are convertible at various dates in 1999 and thereafter into 220,449
shares of Common Stock.

During 1998, the Company acquired 52 of the Purchased Companies, which were
accounted for as purchase transactions. These companies provide HVAC and related
services. The aggregate consideration paid in these transactions was $161.2
million in cash, 9,212,573 shares of Common Stock with a market value at the
date of acquisition totaling $111.7 million, $57.4 million in the form of
convertible subordinated notes and $3.1 million in the form of subordinated
notes (collectively the "Notes"). The convertible notes are convertible at
various dates in 1999, 2000, 2001, or 2002 and thereafter into 1,243,673,
1,699,729, 1,797,937, or 53,655 shares of Common Stock, respectively.

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

The accompanying balance sheet as of December 31, 1998 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 in 1997 and 1998 resulted in $25.4 million and $277.4 million in
goodwill, respectively, 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):

1997 1998
---------- ------------

Fair value of assets acquired, net of
cash acquired...................... $ (21,677) $ (261,754)
Liabilities assumed.................. 17,010 233,669
Cash paid, net of cash acquired...... 11,781 133,338
Estimated market value of stock
consideration...................... 13,264 111,681
Issuance of Notes.................... 4,978 60,482
---------- ------------
Goodwill............................. $ 25,356 $ 277,416
========== ============

The unaudited pro forma data presented below consists of the income
statement data presented in these consolidated financial statements plus income
statement data for the Founding Companies and Purchased Companies as if the
acquisitions were effective on January 1, 1997 through the respective dates of
acquisitions (in thousands, except per share data):

YEAR ENDED DECEMBER 31,
--------------------------
1997 1998
------------ ------------

(UNAUDITED)
Revenues............................. $ 1,066,147 $ 1,227,013
Net income........................... 37,839 37,568
Net income per share................. 1.05 0.99

Pro forma adjustments included in the preceding table regarding the
Founding Companies and the Purchased Companies primarily relate to (a) the IPO,
(b) certain reductions in salaries and benefits to the former owners (the
"Compensation Differential") of the Founding Companies, Pooled Companies and
Purchased Companies which the former owners agreed would take effect as of the
acquisition date, (c) 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, (d) elimination of merger costs in connection with the acquisition of
the Pooled Companies, (e) amortization of goodwill related to the Purchased and
Founding Companies, (f) 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 (g) 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 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 (UNAUDITED)

Subsequent to December 31, 1998, and through March 26, 1999, the Company
completed the 10 Additional Acquisitions for approximately $9.8 million in cash,
381,690 shares of Common Stock, approximately $2.2 million in convertible
subordinated notes and approximately $3.3 million in

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

subordinated notes. Annualized revenues from the businesses acquired in the
Additional Acquisitions were approximately $35 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 1997 1998
------------- --------- ---------

Land................................. N/A $ 95 $ 124
Transportation equipment............. 3-7 17,171 31,776
Machinery and equipment.............. 3-15 8,789 23,002
Computer and telephone equipment..... 3-7 4,768 10,168
Buildings and leasehold
improvements....................... 3-20 3,532 8,564
Furniture and fixtures............... 3-10 3,394 8,082
--------- ---------
37,749 81,716
Less -- Accumulated depreciation..... 24,073 47,303
--------- ---------
Property and equipment, net..... $ 13,676 $ 34,413
========= =========

5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:

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

DECEMBER 31,
--------------------
1997 1998
--------- ---------
Balance at beginning of year......... $ 994 $ 1,698

Additions for bad debt expense....... 583 1,253
Deductions for recoveries and for
uncollectible receivables written
off................................ (488) (909)
Allowance for doubtful accounts of
Founding and Purchased Companies at
acquisition dates.................. 609 2,716
--------- ---------
Balance at end of year.......... $ 1,698 $ 4,758
========= =========

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

DECEMBER 31,
--------------------
1997 1998
--------- ---------
Accrued warranty costs............... $ 2,053 $ 4,596

Accrued insurance expense............ 737 4,851
Deferred income taxes................ 1,445 4,939
Deferred revenue..................... 770 525
Other current liabilities............ 6,682 9,877
--------- ---------
$ 11,687 $ 24,788
========= =========

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

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

DECEMBER 31,
----------------------
1997 1998
---------- ----------
Costs incurred on contracts in
progress........................... $ 169,426 $ 748,542

Estimated earnings, net of losses.... 43,072 151,792
---------- ----------
Less -- Billings to date............. 209,989 907,074
---------- ----------
$ 2,509 $ (6,740)
========== ==========
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 14,034 $ 37,228
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (11,525) (43,968)
---------- ----------
$ 2,509 $ (6,740)
========== ==========

6. LONG-TERM DEBT OBLIGATIONS:

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

DECEMBER 31,
---------------------
1997 1998
--------- ----------

Revolving credit facility............ $ 15,300 $ 170,700
Notes to affiliates and former
owners............................... 5,425 63,839
Other................................ 4,001 1,907
--------- ----------
Total long-term...................... 24,726 236,446
Less: current maturities............. 2,345 9,077
--------- ----------
$ 22,381 $ 227,369
========= ==========

At December 31, 1998, future principal payments of long-term debt are as
follows (in thousands):

YEAR ENDING DECEMBER 31 --

1999............................ $ 9,077
2000............................ 11,218
2001............................ 214,411
2002............................ 1,176
2003............................ 564
Thereafter...................... --
----------
$ 236,446
==========

REVOLVING CREDIT AGREEMENT

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

determined based on the higher of the Federal Funds Rate plus 0.5% or the bank's
prime rate. An additional margin of zero to 1.25% is then added to the higher of
these two rates. Under the other interest rate option, borrowings bear interest
based on designated short-term Eurodollar rates (which generally approximate
LIBOR) plus 1.0% to 2.5%. The additional margin for both options depends on the
ratio of the Company's debt to EBITDA. Commitment fees of 0.25% to 0.5% per
annum, also depending on the ratio of debt to EBITDA, are payable on the unused
portion of the facility. The Credit Facility prohibits the payment of dividends
by the Company without the lenders' approval and requires the Company to comply
with certain financial covenants. The amended Credit Facility expires on
November 1, 2001, at which time all amounts outstanding under the Credit
Facility are due.

NOTES TO AFFILIATES AND FORMER OWNERS

The Notes in the amount of $63.8 million, net of $1.6 million of
repayments, referred to above were issued to former owners of certain Purchased
Companies as partial consideration of the acquisition purchase price. Of these
Notes, $62.4 million bear interest, payable quarterly, at a weighted average
interest rate of 5.11% and are convertible by the holder into shares of the
Company's Common Stock at a weighted average price of $25.84 per share. The
remaining Notes in the amount of $1.4 million are non-interest bearing, and
require principal payments of $1.0 million in 1999 and $0.4 million in equal
installments in 2000, 2001, 2002 and 2003. The terms of the convertible
subordinated notes require $6.5 million of principal payments in 1999, $10.9
million of principal payments in 2000, $43.5 million of principal payments in
2001, $1.1 million of principal payments in 2002, and $0.4 million of principal
payments in 2003.

The Company estimates the fair value of long-term debt as of December 31,
1998 and 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,
-------------------------------
1996 1997 1998
--------- --------- ---------

Current --
Federal......................... $ 912 $ 6,469 $ 21,650
State and Puerto Rico........... 290 1,763 4,439
--------- --------- ---------
1,202 8,232 26,089
--------- --------- ---------
Deferred --
Federal......................... 302 (688) 907
State and Puerto Rico........... 4 58 53
--------- --------- ---------
306 (630) 960
--------- --------- ---------
$ 1,508 $ 7,602 $ 27,049
========= ========= =========

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,
-------------------------------
1996 1997 1998
--------- --------- ---------

Income tax expense at the statutory
rate................................. $ 2,134 $ 1,937 $ 21,713
Increase (decrease) resulting from --
State income taxes, net of
federal tax effect............ 163 1,245 3,148
Non-deductible expenses......... 30 428 364
Non-recurring, non-cash
compensation charge........... -- 4,045 --
Effect of S Corporation income
previously taxed to the former
owners........................ (807) (1,089) (308)
Non-deductible goodwill
amortization.................. -- 633 2,047
Non-deductible acquisition costs
related to Pooled Companies... -- 201 157
Provision (benefit) recognized
upon termination of Subchapter
S election.................... -- 100 (101)
Other........................... (12) 102 29
--------- --------- ---------
$ 1,508 $ 7,602 $ 27,049
========= ========= =========

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,
--------------------
1997 1998
--------- ---------

(IN THOUSANDS)
Deferred income tax assets --
Accounts receivable and
allowance for doubtful
accounts...................... $ (497) $ (1,699)
Accrued liabilities and
expenses...................... (1,788) (6,038)
Other........................... (514) (470)
--------- ---------
Total deferred income tax
assets.................. (2,799) (8,207)
--------- ---------
Deferred income tax liabilities --
Property and equipment.......... 325 873
Long-term installation
contracts..................... 1,984 4,716
Other........................... 153 475
--------- ---------
Total deferred income tax
liabilities............. 2,462 6,064
--------- ---------
Net deferred income tax
assets.................. $ (337) $ (2,143)
========= =========

The deferred tax assets and liabilities reflected above are included in the
consolidated balance sheet at December 31, 1998, as $7.8 million of current
deferred income tax assets in prepaid expenses and other, $0.4 million of
non-current deferred income tax assets in other non-current assets, $5.0 million
of current deferred income tax liabilities in other current liabilities and $1.1
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

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

and cover employees at substantially all of the Company's operating locations.
The defined contribution plans provide for contributions ranging from 1% to 6%
of covered employees' salaries or wages and totaled $2.2 million for 1996, $1.8
million for 1997 and $3.6 million for 1998. Of these amounts, approximately
$670,000 and $2.2 million was payable to the plans at December 31, 1997 and
1998, 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 $2.0 million
for 1996, $2.1 million for 1997 and $8.1 million for 1998. 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, 1996, 1997, and
1998 was $0.9 million, $2.2 million, and $6.7 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 1998 and 1997 rent expense above is
approximately $3.9 million and $1.2 million of rent paid to these related
parties, respectively. The following represents future minimum rental payments
under noncancelable operating leases (in thousands):

Year ending December 31 --

1999............................ $ 11,740
2000............................ 10,461
2001............................ 9,188
2002............................ 8,084
2003............................ 6,293
Thereafter...................... 13,346
---------
$ 59,112
=========

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. STOCKHOLDERS' 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. Subsequent to
December 31, 1997, the Company increased the number of authorized shares of
Common Stock to 102,969,912.

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

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. In December 1996, 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
Capital 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.

On July 2, 1997, Comfort Systems completed the offering of 6,100,000 shares
of Common Stock to the public at $13.00 per share. The net proceeds to Comfort
Systems from the IPO (after deducting underwriting commissions and offering
expenses) were $68.8 million. Of this amount, $45.3 million was used to pay the
cash portion of the purchase prices of the Founding Companies. In connection
with the IPO, the Company granted its underwriters an option to sell an
additional 915,000 shares at $13.00 per share. On July 9, 1997, the underwriters
exercised this option. Net proceeds to the Company from this sale of shares were
$11.1 million after deducting underwriting commissions.

On June 16, 1998, the Company completed a second public offering (the
"Second Public Offering") of 400,000 shares of its Common Stock. The net
proceeds from this offering of $7.6 million, after deducting underwriting
commissions, were used to repay debt. On July 21, 1998, the underwriters
exercised their overallotment option in connection with the Second Public
Offering completed in June 1998. An additional 461,479 shares of Common Stock
were sold and the net proceeds of $8.8 million were used to repay debt.

RESTRICTED COMMON STOCK

In March 1997, Notre exchanged 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 that 80% or more of the
originally outstanding shares of Restricted Voting Common Stock have been
previously converted into shares of Common Stock. At December 31, 1998, no
Restricted Voting Common Stock had been converted to 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

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

of common stock outstanding during the year. Diluted EPS is computed in a
similar 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. Diluted EPS
is also computed by adjusting both net earnings and shares outstanding as if the
conversion of the convertible subordinated notes occurred on the first day of
the year. The net earnings adjustment related to the conversion of the
convertible subordinated notes in 1998 was $753,000. The Company has adopted
SFAS No. 128 and restated EPS for all periods presented.

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

YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------

Shares issued in connection with the
acquisitions of Founding Companies.... -- 5,008 9,721
Shares sold pursuant to the IPO......... -- 3,142 6,100
Shares held by Notre, management and
consultants........................... 4,240 4,240 4,240
Shares issued in connection with the
acquisitions of Pooled Companies...... 5,877 5,946 5,946
Weighted average shares issued in
connection with the underwriter's
overallotment......................... -- 434 1,122
Weighted average shares issued in
connection with the acquisitions of
the Purchased Companies............... -- 184 5,597
Weighted average portion of shares sold
in the Second Public Offering......... -- -- 215
Weighted average portion of shares
issued in connection with the Employee
Stock Purchase Plan................... -- -- 12
Weighted average portion of shares
issued in connection with the exercise
of stock options...................... -- -- 9
--------- --------- ---------
Weighted average shares
outstanding -- Basic.................. 10,117 18,954 32,962
Weighted average portion of shares
related to stock options under the
treasury stock method................. -- -- 462
Weighted average shares related to the
issuance of convertible notes......... -- -- 905
--------- --------- ---------
Weighted average shares
outstanding -- Diluted................ 10,117 18,954 34,329
========= ========= =========

11. STOCK OPTION PLANS:

LONG-TERM INCENTIVE PLANS

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.

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

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

1997 1998
---------------------------- -----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------------------------- --------- ---------------- ----------- ----------------

Outstanding at beginning of year........ -- -$- 2,537,203 $13.72
Granted................................. 2,537,203 13.72 1,495,500 18.54
Exercised............................... -- -- (24,330) 13.45
Forfeited............................... -- -- (53,344) 16.01
--------- -----------
Outstanding at end of year.............. 2,537,203 $13.72 3,955,029 $15.51
========= ===========

Options exercisable at year-end......... -- 518,281
Weighted-average fair value of options
granted during the year as of December
31, 1998.............................. $3.53 $7.33

The following table summarizes information about fixed stock options
outstanding at December 31, 1998:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCSE PRICE AT 12/31/98 EXERCISE PRICE
- ------------------------------------- ------------ ------------------ ------------------ ------------ -----------------

$13.00 to $19.38..................... 3,585,529 5.9 years $14.98 503,281 $ 13.68
$19.69 to $21.44..................... 369,500 6.5 21.04 15,000 21.13
------------ ------------
$13.00 to $21.44..................... 3,955,029 6.0 $15.51 518,281 $ 13.90
============ ============

In September 1997, the Company's stockholders approved the Company's 1998
Employee Stock Purchase Plan which allows employees to purchase shares from the
Company's authorized but unissued shares of Common Stock or from shares of
Common Stock reacquired by the Company, including shares repurchased on the open
market.

The Company's 1998 Employee Stock Purchase Plan provides for the purchase
of 300,000 shares at semi-annual intervals. Full-time employees are eligible to
purchase shares with payroll deductions ranging from 2% to 8% of compensation
with a maximum deduction of $2,000 for any purchase period for each participant.
The purchase price per share is 85% of the lower of the market price on the
first business day of the purchase period or the purchase date.

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 the stock
option plan or the stock purchase plan is recognized in the consolidated
statements of operations. 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-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 1998
--------- ---------

Net Income As reported........................ $ (2,064) $ 35,013
Pro forma for SFAS No. 123......... $ (2,436) $ 33,341
Income Per Share -- Basic As reported........................ $ (.11) $ 1.06
Pro forma for SFAS No. 123......... $ (.13) $ 1.01
Income Per Share -- Diluted As reported........................ $ (.11) $ 1.04
Pro forma for SFAS No. 123......... $ (.13) $ 0.97

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

LONG-TERM INCENTIVE PLAN -- The effects of applying SFAS No. 123 in the pro
forma disclosure may not be indicative of future amounts as additional option
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......... 44.87%
Risk free interest rate................. 5.00%-6.15%
Expected life of options................ 4 years

EMPLOYEE STOCK PURCHASE PLAN -- The effects of applying SFAS No. 123 in the
pro forma disclosure may not be indicative of future amounts as the granting of
additional purchase rights is anticipated. Compensation cost associated with the
stock purchase plan is recognized for the fair value of the employees' purchase
rights, which is estimated using the Black-Scholes model with the following
assumptions:

Expected dividend yield.............. 0.00%
Expected volatility.................. 42.10%
Risk free interest rate.............. 5.19%-5.25%
Expected life of purchase rights..... 0.5 years

The weighted average fair value of these purchase rights granted in 1998
was $5.37.

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 provided for the automatic grant of
options to purchase 10,000 shares to each non-employee director serving at the
commencement of the IPO.

Each non-employee director will be granted options to purchase 10,000
shares at the time of the initial election. In addition, each non-employee
director is automatically granted options to purchase an additional 5,000 shares
at each annual meeting of the stockholders that is more than two months after
the date of the director's initial election. All options are 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 IPO price and each of
these three directors received an option for 5,000 shares on the 1998 Annual
Meeting date. 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. No Deferred Shares have been issued.

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, 1998, there were no
significant vendors. For the year ended

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

December 31, 1997, one vendor accounted for 10.5% of the Company's purchases.
For the year ended December 31, 1996, there were no significant vendors.

13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

Quarterly financial information for the year ended December 31, 1998 is
summarized as follows (in thousands, except per share data):

MARCH JUNE SEPTEMBER DECEMBER
QUARTER QUARTER QUARTER QUARTER
-------- -------- ---------- ----------

Revenues............................. $132,608 $194,350 $ 232,381 $ 294,622
Gross Profit......................... $ 31,339 $ 47,704 $ 57,073 $ 70,333
Net income........................... $ 3,385 $ 8,418 $ 10,799 $ 12,411
Earnings Share:
Basic........................... $ 0.12 $ 0.27 $ 0.32 $ 0.34
Diluted......................... $ 0.11 $ 0.26 $ 0.31 $ 0.33

The quarterly information has been restated to include the results of the
1998 Pooled Companies.

The sum of the individual quarterly earnings per share amounts do not agree
with year-to-date earnings per share as each quarter's computation is based on
the weighted average number of shares outstanding during the quarter, the
weighted average stock price during the quarter and the dilutive effects of the
convertible subordinated notes in each quarter.

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.

PART III

ITEMS 10 TO 13 INCLUSIVE

These items have been omitted in accordance with the instructions to Form
10-K. The Company will file with the Commission a definitive proxy statement
including the information to be disclosed under the items in the 120 days
following December 31, 1998.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

(1) Consolidated Financial Statements of the Company, which are
included at Item 8 of this report.

(2) Exhibits.

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

3.1 -- Second Amended and Restated Certificate of Incorporation of "the 3.1 333-24021
Registrant."
3.2 -- Certificate of Amendment dated May 21, 1998 3.2 Filed Herewith
3.3 -- Bylaws of "the Registrant", as amended 3.3 Filed Herewith
4.1 -- Form of certificate evidencing ownership of Common Stock of "the 4.1 333-24021
Registrant".
10.1 -- Comfort Systems USA, Inc. 1997 Long-Term Incentive Plan 10.1 333-24021
10.2 -- Comfort Systems USA, Inc. 1997 Non-Employee Directors' Stock 10.2 333-24021
Plan.
10.3 -- Form of Employment Agreement between the Registrant and Fred M. 10.3 333-24021
Ferreira.
10.4 -- Form of Employment Agreement between the Registrant and J. Gordon 10.4 333-24021
Beittenmiller.
10.5 -- Form of Employment Agreement between the Registrant and William 10.5 333-24021
George, III.
10.6 -- Form of Employment Agreement between the Registrant and Reagan S. 10.6 333-24021
Busbee.
10.7 -- Form of Employment Agreement between the Registrant, Accurate Air 10.7 333-24021
Systems, Inc. and Thomas J. Beaty.
10.8 -- Form of Employment Agreement between the Registrant, Atlas 10.8 333-24021
Comfort Services USA, Inc. and Brian S. Atlas.
10.9 -- Form of Employment Agreement between the Registrant, Contract 10.9 333-24021
Service, Inc. and John C. Phillips.
10.10 -- Form of Employment Agreement between the Registrant, Eastern 10.10 333-24021
Heating & Cooling, Inc. and Alfred J. Giardenelli, Jr.
10.11 -- Form of Employment Agreement between the Registrant, Quality Air 10.11 333-24021
Heating & Cooling, Inc. and Robert J. Powers.
10.12 -- Form of Employment Agreement between the Registrant, S. M. 10.12 333-24021
Lawrence Company, Inc. and Samuel M. Lawrence III.
10.13 -- Form of Employment Agreement between the Registrant, Tech Heating 10.13 333-24021
and Air Conditioning, Inc. and Robert R. Cook.
10.14 -- Form of Employment Agreement between the Registrant, Tri-City 10.14 333-24021
Mechanical, Inc. and Michael Nothum, Jr.
10.15 -- Form of Employment Agreement between the Registrant, Western 10.15 333-24021
Building Services, Inc. and Charles W. Klapperich.
10.16 -- Employment Agreement between the Registrant, F&G Mechanical February 1998
Corporation and Salvatore P. Giardina. Form 8-K

10.17 -- Employment Agreement between the Registrant, Shambaugh & Son, Filed Herewith
Inc. and Mark P. Shambaugh.

10.18 -- Form of Agreement among certain stockholders. 10.16 333-24021

10.19 -- Lease between M & B Interests, Inc. and Atlas Air Conditioning 10.17 333-32595
Company, Inc. dated October 1, 1994.

10.20 -- Lease between Thomas J. and Bonnie J. Beaty and Accurate Air 10.18 333-32595
Systems, Inc. dated July 1, 1997.

10.21 -- Amended and Restated Agreement of Lease between Thomas J. and 10.19 333-32595
Bonnie J. Beaty and Accurate Air Systems, Inc. dated July 1,
1997.

10.22 -- Lease between Nothum Development, L.L.C. and Tri-City Mechanical, 10.20 333-32595
Inc. dated July 1, 1997.

10.23 -- Lease between Samuel Matthews Lawrence, Jr. and S.M. Lawrence 10.21 333-32595
Company, Incorporated dated November 1, 1996.

10.24 -- Lease between K and P Warehouse #1 and Quality Trane Heating and 10.22 333-32595
Cooling, Inc. (n/k/a Quality Air Heating and Cooling, Inc.) dated
April 1, 1986, together with amendments thereto.

10.25 -- Lease between J&J Investments and Contract Service, Inc. dated 10.23 333-32595
March 1, 1997.

10.26 -- Lease by Tech Heating and Air Conditioning, Inc. dated April 2, 10.24 333-32595
1995 as amended by Amendment between Cook Properties, Inc. and
Tech Heating and Air Conditioning, Inc. on March 13, 1997.

10.27 -- Third Amended and Restated Credit Agreement among the Company and 10.25 Filed Herewith
its subsidiaries, Bank One, Texas, N.A., as agent and the banks
listed therein dated December 14, 1998.

10.28 -- Lease dated June 30, 1994, between Salpat Realty and F&G 10.27 1997 Form 10-K
Mechanical Corp, together with lease modification agreements
dated June 30, 1994 and February 12, 1998.

10.28 -- Lease dated October 31, 1998, between Mark Shambaugh and Filed Herewith
Shambaugh & Sons, Inc. (Opportunity Drive)

10.29 -- Lease dated October 31, 1998, between Mark Shambaugh and Filed Herewith
Shambaugh & Sons, Inc. (Di Salle Boulevard).

10.30 -- Lease dated October 31, 1998, between Mark Shambaugh and Filed Herewith
Shambaugh & Sons, Inc. (Speedway Drive).

10.31 -- Lease dated October 31, 1998, between Mark Shambaugh and Filed Herewith
Shambaugh & Sons, Inc. (South Bend).

10.32 -- Lease dated October 31, 1998, between Mark Shambaugh and Filed Herewith
Shambaugh & Sons, Inc. (Lafayette).

10.33 -- Promissory Note dated February 12, 1998 by Sorce Properties LLC 10.28 1997 Form 10-K
in favor of F&G Mechanical Corporation.

10.34 -- Pledge Agreement dated February 12, 1998 by Salvatore Fichera and 10.29 1997 Form 10-K
Salvatore P. Giardina in favor of F&G Mechanical Corporation.

10.35 -- Form of Indemnity Agreement entered into by the Company with each 10.26 333-32595
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.
10.36 -- Indemnity Agreement between the Company and Notre Capital 10.27 333-32595
Ventures II, L.L.C.
10.37 -- Comfort Systems USA, Inc. 1998 Employee Stock Purchase Plan. 10.28 333-338009
10.38 -- Agreement Regarding Sale of Stock between Fred M. Ferreira an the 10.1 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.39 -- Agreement Regarding Sale of Stock between Steve S. Harter and the 10.2 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.40 -- Agreement Regarding Sale of Stock between J. Gordon Beittenmiller 10.3 Third Quarter 1997
and the Registrant dated October 31, 1997. Form 10-Q
10.41 -- Agreement Regarding Sale of Stock between Thomas J. Beaty and the 10.4 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.42 -- Agreement Regarding Sale of Stock between Brian S. Atlas and the 10.5 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.43 -- Agreement Regarding Sale of Stock between John C. Phillips and 10.6 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.44 -- Agreement Regarding Sale of Stock between Alfred J. Giardenelli, 10.7 Third Quarter 1997
Jr. and the Registrant dated October 31, 1997. Form 10-Q
10.45 -- Agreement Regarding Sale of Stock between Robert J. Powers and 10.8 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.46 -- Agreement Regarding Sale of Stock between Samuel M. Lawrence and 10.9 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.47 -- Agreement Regarding Sale of Stock between Michael Nothum, Jr. and 10.10 Third Quarter 1997
the Registrant dated October 31, 1997. Form 10-Q
10.48 -- Agreement Regarding Sale of Stock between Bob R. Cook and the 10.11 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.49 -- Agreement Regarding Sale of Stock between Charles W. Klapperich 10.12 Third Quarter 1997
and the Registrant dated October 31, 1997. Form 10-Q
10.50 -- Agreement Regarding Sale of Stock between Reagan S. Busbee and 10.13 Third Quarter 1997
the Registrant dated October 1997. Form 10-Q
10.51 -- Agreement Regarding Sale of Stock between William George and the 10.14 Third Quarter 1997
Registrant dated October 31, 1997. Form 10-Q
10.52 -- Agreement and Plan of Organization, dated as of March 18, 1997, 2.1 333-24021
by and among the Registrant, Accurate Acquisition Corp., Accurate
Air Systems, Inc. and the Stockholder named therein.
10.53 -- Agreement and Plan of Organization, dated as of March 18, 1997, 2.2 333-24021
by and among the Registrant, Atlas Air Acquisition I Corp., Atlas
Comfort Services USA, Inc. and the Stockholders named therein.

10.54 -- Agreement and Plan of Organization, dated as of March 18, 1997, 2.3 333-24021
by and among the Registrant, Contract Acquisition Corp., Contract
Service, Inc. and the Stockholders named therein.
10.55 -- Agreement and Plan of Organization, dated as of March 18, 1997, 2.4 333-24021
by and among the Registrant, Eastern Acquisition Corp., Eastern
II Acquisition Corp., Eastern Heating & Cooling, Inc., Eastern
Refrigeration Co., Inc. and the Stockholder named therein.
10.56 -- Agreement and Plan of Organization, dated as of March 18, 1997, 2.6 333-24021
by and among the Registrant, Quality Acquisition Corp., Quality
Air Heating & Cooling, Inc. and the Stockholder named therein.
10.57 -- Agreement and Plan of Organization, dated as of March 18, 1997, 2.7 333-24021
by and among the Registrant, S.M. Lawrence Acquisition Corp.,
S.M. Lawrence II Acquisition Corp., S.M. Lawrence Company, Inc.,
Lawrence Service, Inc. and the Stockholders named therein.
10.58 -- Agreement and Plan of Organization, dated as of March 18, 1997, 2.10 333-24021
by and among the Registrant, Tech I Acquisition Corp, Tech II
Acquisition Corp., Tech Heating and Air Conditioning, Inc., Tech
Mechanical, Inc. and the Stockholder named therein.
10.59 -- Agreement and Plan of Organization, dated as of March 18, 1997, 2.11 333-24021
by and among the Registrant, Tri-City Acquisition Corp., Tri-City
Mechanical, Inc., and the Stockholder named therein.
10.60 -- Agreement and Plan of Organization, dated as of March 18, 1997, 2.12 333-24021
by and among the Registrant, Western Building Acquisition Corp.,
Western Building Services, Inc., and the Stockholders named
therein.
10.61 -- Agreement and Plan of Merger dated February 12, 1998, by and 2.1 February 1998
among the Registrant, F&G Mechanical Corporation, Salvatore Form 8-K
Fichera and Salvatore P. Giardina.
10.62 -- Agreement and Plan of Merger dated November 15, 1998, by and 2.1 November 1998
among the Registrant, Shambaugh & Son, Inc. Form 8-K
10.63 -- First Amendment to Credit Agreement among the Company and its Filed Herewith
subsidiaries, Bank One, Texas, N.A., as agent and the banks
listed therein dated January 14, 1999.
21.1 -- List of subsidiaries of Comfort Systems USA, Inc. Filed Herewith
23.1 -- Consent of Arthur Andersen L.L.P. Filed Herewith
27.1 -- Financial Data Schedule Filed Herewith

(b)Reports on Form 8-K

-- The Company filed a report on Form 8-K with the Securities and Exchange
Commission on November 27, 1998. Under Item 2 of that report, the
Company described its acquisition of Shambaugh & Son, Inc., a mechanical
contractor engaged primarily in HVAC.

(d) The following financial statements are filed as part of this report: as set
forth in the Index to Financial Statements beginning on Page F-1.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

COMFORT SYSTEMS USA, INC.
By: ___/s/__FRED M. FERREIRA__________
FRED M. FERREIRA
CHIEF EXECUTIVE OFFICER
Date: _______March 26, 1999___________

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons in
the capacities and on the date indicated.

SIGNATURE TITLE DATE
- ------------------------------------------------------------------------------------------- ---------------

/s/FRED M. FERREIRA Chairman of the Board, Chief March 26, 1999
FRED M. FERREIRA Executive Officer and President
/s/J. GORDON BEITTENMILLER Executive Vice President, Chief March 26, 1999
J. GORDON BEITTENMILLER Financial Officer and Director
(PRINCIPAL ACCOUNTING OFFICER)
/s/MICHAEL NOTHUM, JR. Chief Operating Officer and Director March 26, 1999
MICHAEL NOTHUM, JR.
/s/STEVEN S. HARTER Director March 26, 1999
STEVEN S. HARTER
/s/BRIAN S. ATLAS Director March 26, 1999
BRIAN S. ATLAS
/s/THOMAS J. BEATY Director March 26, 1999
THOMAS J. BEATY
/s/ROBERT R. COOK Director March 26, 1999
ROBERT R. COOK
/s/ALFRED J. GIARDENELLI, JR. Director March 26, 1999
ALFRED J. GIARDENELLI, JR.
/s/CHARLES W. KLAPPERICH Director March 26, 1999
CHARLES W. KLAPPERICH
/s/SAMUEL M. LAWRENCE III Director March 26, 1999
SAMUEL M. LAWRENCE III

SIGNATURES -- (CONTINUED)

SIGNATURE TITLE DATE
- ------------------------------------------------------------------------------------------- ---------------

/s/LARRY MARTIN Director March 26, 1999
LARRY MARTIN
/s/JOHN MERCADANTE, JR. Director March 26, 1999
JOHN MERCADANTE, JR.
/s/JOHN C. PHILLIPS Director March 26, 1999
JOHN C. PHILLIPS
/s/ROBERT J. POWERS Director March 26, 1999
ROBERT J. POWERS
/s/SALVATORE P. GIARDINA Director March 26, 1999
SALVATORE P. GIARDINA
/s/MARK P. SHAMBAUGH Director March 26, 1999
MARK P. SHAMBAUGH