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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 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 BOULEVARD
SUITE 500
HOUSTON, TEXAS 77056
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number, including area code: (713) 830-9600

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

The number of shares outstanding of the issuer's common stock, as of May
10, 2001, was 37,380,773.

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2

COMFORT SYSTEMS USA, INC.

INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001

PAGE
----

Part I -- Financial Information
Item 1 -- Financial Statements
COMFORT SYSTEMS USA, INC.
Consolidated Balance Sheets.......................... 1
Consolidated Statements of Operations................ 2
Consolidated Statements of Stockholders' Equity...... 3
Consolidated Statements of Cash Flows................ 4
Condensed Notes to Consolidated Financial
Statements.......................................... 5
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations... 11
Item 3 -- Quantitative and Qualitative Disclosures about
Market Risk............................................ 14

Part II -- Other Information
Item 1 -- Legal Proceedings............................... 15
Item 2 -- Recent Sales of Unregistered Securities......... 15
Item 6 -- Exhibits and Reports on Form 8-K................ 15
Item 9 -- Changes and Disagreements with Accountants on
Accounting and Financial Disclosure............. 15
Signature................................................. 16

i
3

COMFORT SYSTEMS USA, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

DECEMBER 31, MARCH 31,
2000 2001
------------ ------------
(UNAUDITED)

ASSETS

CURRENT ASSETS:
Cash and cash equivalents................................. $ 16,021 $ 21,810
Accounts receivable, less allowance of $6,789 and
$7,350................................................. 334,152 319,040
Other receivables......................................... 5,879 4,977
Inventories............................................... 19,399 19,035
Prepaid expenses and other................................ 10,568 9,711
Costs and estimated earnings in excess of billings........ 44,078 44,226
Net assets held for sale.................................. 3,197 2,198
-------- --------
Total current assets.............................. 433,294 420,997
PROPERTY AND EQUIPMENT, net................................. 40,085 38,695
GOODWILL, less accumulated amortization of $32,904 and
$35,850................................................... 450,493 447,547
OTHER NONCURRENT ASSETS..................................... 2,538 3,610
-------- --------
Total assets...................................... $926,410 $910,849
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 216 $ 140
Current maturities of notes to affiliates and former
owners................................................. 8,850 12,567
Accounts payable.......................................... 114,613 102,162
Accrued compensation and benefits......................... 40,880 33,229
Billings in excess of costs and estimated earnings........ 68,574 71,512
Other current liabilities................................. 26,942 28,479
-------- --------
Total current liabilities......................... 260,075 248,089
LONG-TERM DEBT, NET OF CURRENT MATURITIES................... 224,111 222,959
NOTES TO AFFILIATES AND FORMER OWNERS, NET OF CURRENT
MATURITIES................................................ 41,424 37,707
OTHER LONG-TERM LIABILITIES................................. 561 564
-------- --------
Total liabilities................................. 526,171 509,319
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,
39,258,913 shares issued............................... 393 393
Treasury stock, at cost, 2,002,629 and 1,878,140 shares,
respectively........................................... (13,119) (11,728)
Additional paid-in capital................................ 341,923 340,723
Retained earnings......................................... 71,042 72,142
-------- --------
Total stockholders' equity........................ 400,239 401,530
-------- --------
Total liabilities and stockholders' equity........ $926,410 $910,849
======== ========

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

1
4

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31,
-------------------
2000 2001
-------- --------

REVENUES.................................................... $362,566 $368,128
COST OF SERVICES............................................ 291,699 304,231
-------- --------
Gross profit...................................... 70,867 63,897
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 54,828 52,494
GOODWILL AMORTIZATION....................................... 3,183 3,021
RESTRUCTURING CHARGES....................................... -- 238
-------- --------
Operating income.................................. 12,856 8,144
OTHER INCOME (EXPENSE):
Interest income........................................... 169 43
Interest expense.......................................... (6,095) (6,228)
Other..................................................... 102 144
-------- --------
Other expense, net................................ (5,824) (6,041)
-------- --------
INCOME BEFORE INCOME TAXES.................................. 7,032 2,103
INCOME TAX EXPENSE.......................................... 3,024 1,003
-------- --------
NET INCOME.................................................. $ 4,008 $ 1,100
======== ========
NET INCOME PER SHARE:
Basic..................................................... $ 0.11 $ 0.03
======== ========
Diluted................................................... $ 0.11 $ 0.03
======== ========
SHARES USED IN COMPUTING NET INCOME PER SHARE:
Basic..................................................... 37,560 37,385
======== ========
Diluted................................................... 37,560 37,386
======== ========

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

2
5

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

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

BALANCE AT DECEMBER 31, 1999.... 39,258,913 $393 (1,695,524) $(11,978) $342,655 $87,895 $418,965
Issuance of Common Stock:
Issuance of Employee Stock
Purchase Plan shares...... -- -- 329,212 2,254 (732) -- 1,522
Common Stock repurchases...... -- -- (175,513) (1,224) -- -- (1,224)
Shares exchanged in repayment
of notes receivable......... -- -- (385,996) (1,975) -- -- (1,975)
Shares received from sale of
businesses.................. -- -- (74,808) (196) -- -- (196)
Net loss...................... -- -- -- -- -- (16,853) (16,853)
---------- ---- ---------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 2000.... 39,258,913 393 (2,002,629) (13,119) 341,923 71,042 400,239
Issuance of Common Stock:
Issuance of Employee Stock
Purchase Plan shares
(unaudited)............... -- -- 269,481 1,766 (1,200) -- 566
Shares received from sale of
businesses (unaudited)...... -- -- (144,992) (375) -- -- (375)
Net income (unaudited)........ -- -- -- -- -- 1,100 1,100
---------- ---- ---------- -------- -------- ------- --------
BALANCE AT MARCH 31, 2001
(unaudited)................... 39,258,913 $393 (1,878,140) $(11,728) $340,723 $72,142 $401,530
========== ==== ========== ======== ======== ======= ========

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

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6

COMFORT SYSTEMS USA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31,
-------------------
2000 2001
-------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 4,008 $ 1,100
Adjustments to reconcile net income to net cash provided by
(used in) operating activities --
Restructuring charges..................................... -- 238
Depreciation and amortization expense..................... 6,107 5,969
Bad debt expense.......................................... 155 1,217
Deferred tax expense...................................... 1,834 95
Gain on sale of property and equipment.................... (96) (75)
Changes in operating assets and liabilities --
(Increase) decrease in --
Receivables, net..................................... 7,327 14,496
Inventories.......................................... 685 36
Prepaid expenses and other current assets............ 1,734 (1,522)
Costs and estimated earnings in excess of billings... (10,662) 117
Other noncurrent assets.............................. 161 (1,436)
Increase (decrease) in --
Accounts payable and accrued liabilities............. (11,165) (16,036)
Billings in excess of costs and estimated earnings... (800) 2,634
Other, net........................................... (184) 3
-------- --------
Net cash provided by (used in) operating activities.... (896) 6,836
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (3,656) (1,589)
Proceeds from sales of property and equipment............. 176 309
Proceeds from businesses sold............................. -- 895
-------- --------
Net cash used in investing activities.................. (3,480) (385)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................ (65,325) (59,537)
Borrowings of long-term debt.............................. 74,554 58,309
Proceeds from issuance of common stock.................... 762 566
Repurchases of common stock............................... (935) --
-------- --------
Net cash provided by (used in) financing activities.... 9,056 (662)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 4,680 5,789
CASH AND CASH EQUIVALENTS, beginning of period.............. 3,664 16,021
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 8,344 $ 21,810
======== ========

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

4
7

COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)

1. BUSINESS AND ORGANIZATION:

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. The Company operates
primarily in the 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 provides specialized
applications such as process cooling, building automation control systems,
electronic monitoring and process piping. Certain locations also perform related
services such as electrical and plumbing.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

These interim statements should be read in conjunction with the historical
Consolidated Financial Statements and related notes of Comfort Systems included
in the Annual Report on Form 10-K as filed with the Securities and Exchange
Commission for the year ended December 31, 2000 (the "Form 10-K").

There were no significant changes in the accounting policies of the Company
during the periods presented. For a description of the significant accounting
policies of the Company, refer to Note 2 of Notes to Consolidated Financial
Statements of Comfort Systems included in the Form 10-K.

The accompanying unaudited consolidated financial statements were prepared
using generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and applicable rules of Regulation S-X.
Accordingly, these financial statements do not include all information or
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the Form 10-K. The
Company believes all adjustments necessary for a fair presentation of these
interim statements have been included and are of a normal and recurring nature.
The results of operations for interim periods are not necessarily indicative of
the results for the fiscal year.

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

Cash Flow Information

Cash paid for interest for the three months ended March 31, 2000 and 2001
was approximately $5.1 million and $5.5 million, respectively. Cash paid for
income taxes for the three months ended March 31, 2000 and 2001 was
approximately $4.5 million and $0.7 million, respectively.

Accounting Pronouncement

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). This standard requires entities to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivatives' fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended, is effective for
the Company beginning

5
8
COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

January 1, 2001. The Company adopted these standards effective January 1, 2001
and there was no impact as the Company does not currently hold or trade
derivative instruments.

3. RESTRUCTURING CHARGES:

During the first quarter of 2001, the Company recorded restructuring
charges of approximately $0.2 million, primarily related to contractual
severance obligations of two operating presidents in connection with the
Company's significant restructuring program undertaken in the second half of
2000. These restructuring charges are net of a gain of approximately $0.1
million related to management's decision to sell a small operation during the
first quarter of 2001.

During fiscal 2000, the Company recorded restructuring charges of
approximately $25.3 million primarily associated with restructuring efforts at
certain underperforming operations and its decision to cease its e-commerce
activities at Outbound Services, a subsidiary of the Company. As announced by
the Company in the third quarter of 2000, management performed an extensive
review of its operations during the second half of 2000. As part of this review,
management decided to cease operating at three locations, sell five operations
(including two smaller satellite operations), and merge two companies into other
operations. These actions are substantially complete except that the Company is
seeking buyers for two operations it is holding for sale. The Company
anticipates that these operations will be sold during 2001. The restructuring
charges were primarily non-cash and included goodwill impairments of
approximately $11.5 million and the writedown of other long-lived assets of
approximately $8.5 million. The remaining restructuring items primarily include
severance and lease termination costs.

Severance costs recorded in 2000 and 2001 relate to the termination of 147
employees (142 of these employees had been terminated as of March 31, 2001)
including certain corporate personnel and the management and employees of
certain underperforming locations, and to the departure of the Company's former
chief executive officer. The following table shows the remaining liabilities
associated with the cash portion of the restructuring charges as of March 31,
2001 (in thousands):

BALANCE AT BALANCE AT
JANUARY 1, MARCH 31,
2001 ADDITIONS PAYMENTS 2001
---------- --------- -------- ----------

Severance.................................... $1,218 $350 $ (370) $1,198
Lease termination costs and other............ 2,312 -- (642) 1,670
------ ---- ------- ------
Total.............................. $3,530 $350 $(1,012) $2,868
====== ==== ======= ======

Aggregated financial information related to the operations addressed by
restructuring is as follows (in thousands):

THREE MONTHS ENDED
MARCH 31,
-------------------
2000 2001
-------- --------

Revenues.................................................... $18,264 $ 4,015
Operating loss.............................................. $ (578) $(1,221)

As of March 31, 2001, net assets held for sale are comprised of the
following (in thousands):

Current assets (primarily accounts receivable)............. $ 3,949
Long-term assets........................................... 5
Current liabilities (primarily accounts payable)........... (1,737)
Long-term liabilities...................................... (19)
-------
Total............................................ $ 2,198
=======

6
9
COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The restructuring charges recorded in fiscal 2000 associated with the
operations that were held for sale at March 31, 2001 were $3.7 million and
primarily related to impairments of goodwill and other long-lived assets based
upon the estimated proceeds from the anticipated sale of these operations.

4. LONG-TERM DEBT OBLIGATIONS:

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

DECEMBER 31, MARCH 31,
2000 2001
------------ -----------
(UNAUDITED)

Revolving credit facility................................... $223,700 $222,600
Notes to affiliates and former owners....................... 50,274 50,274
Other....................................................... 627 499
-------- --------
Total debt........................................ 274,601 273,373
Less: current maturities.......................... 9,066 12,707
-------- --------
$265,535 $260,666
======== ========

Revolving Credit Facility

The Company amended its revolving credit facility (the "Credit Facility" or
the "Facility") provided by Bank One, Texas, N.A. ("Bank One") and other banks
(the "Bank Group") in March 2001. As amended, the Credit Facility provides the
Company with a revolving line of credit of up to the lesser of $270 million or
80% of net accounts receivable. The Facility decreases to the lesser of $250
million or 80% of net accounts receivable as of December 31, 2001, and to the
lesser of $240 million or 80% of net accounts receivable as of June 30, 2002.
Borrowings under the Facility are secured by accounts receivable, inventory,
fixed assets other than real estate, and the shares of capital stock of the
Company's subsidiaries. The Credit Facility expires on January 1, 2003, at which
time all amounts outstanding are due.

The Company has a choice of two interest rate options under the Facility.
Under one option, the interest rate is determined based on the higher of the
Federal Funds Rate plus 0.5% or Bank One's prime rate. An additional margin of
1% to 2% 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 London Interbank Offered Rates or
"LIBOR") plus 2.5% to 3.5%. The additional margin for both options depends on
the ratio of the Company's debt to earnings before interest, taxes, depreciation
and amortization ("EBITDA"), as defined. Commitment fees of 0.375% 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 payment of dividends and the repurchase of
shares by the Company, limits certain non-Bank Group debt, and restricts outlays
of cash by the Company relating to certain investments, capital expenditures,
vehicle leases, acquisitions and subordinate debt. The Credit Facility also
provides for the maintenance of certain levels of shareholder equity and EBITDA,
and for the maintenance of certain ratios of the Company's EBITDA to interest
expense and debt to EBITDA.

7
10
COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

typical for such agreements due to the Company's weaker results in 2000. While
management believes its restructuring efforts and operating strategies along
with general market conditions in the commercial/industrial HVAC and building
automation controls industry will enable the Company to meet the Facility's
requirements, there can be no assurance that the Company will be successful in
doing so. Management intends to seek more flexible terms under its borrowing
relationships as its results and credit market conditions allow.

As of March 31, 2001, the Company had $222.6 million in borrowings
outstanding under the Credit Facility and had incurred interest expense at an
average rate of approximately 8.9% per annum for the first three months of 2001.
The Credit Facility's interest rate terms as summarized above are effective as
of March 22, 2001 and currently result in an all-in floating interest rate under
the Facility's LIBOR option of approximately 8.3%. As of March 31, 2001, the
Company also had $2.3 million in letters of credit outstanding under the
Facility, and unused borrowing capacity under the Facility of $33.1 million. As
of May 10, 2001, $215.0 million in borrowings and $2.0 million in letters of
credit were outstanding under the Facility, and $41.0 million in unused capacity
was available.

Notes to Affiliates and Former Owners

Subordinated notes were issued to former owners of certain purchased
companies as part of the consideration used to acquire their companies. These
notes had an outstanding balance of $50.3 million as of March 31, 2001. These
notes bear interest, payable quarterly, at a weighted average interest rate of
9.66%. In addition, $1.0 million of these notes are convertible by the holders
into shares of the Company's common stock ("Common Stock") at a weighted average
price of $24.47 per share.

As a result of the Company's covenant violations in 2000 under the Credit
Facility, the Bank Group required that originally scheduled principal payments
to subordinate debt holders be suspended. This requirement took effect in
October 2000. The holders of the Company's subordinate debt generally must wait
one year from any payment defaults to pursue collection remedies against the
Company. In March 2001, the Company entered into amended agreements with
subordinate debt holders representing $46.3 million in principal, including all
the principal originally scheduled to be paid through 2001. These amended
agreements allow for partial payments against certain originally scheduled
payment amounts, defer remaining principal balances to April 2003, and increase
the interest rate on this debt to 10% per annum, payable quarterly. Under these
amended agreements, $5.3 million of principal has been paid from April 1, 2001
to May 10, 2001. The amended agreements also cured all defaults that arose out
of the suspension of principal payments to subordinate debt holders that began
in October 2000. As a result of these amended agreements, the Company's annual
maturities of subordinate debt are now $8.9 million in 2001, $4.7 million in
2002, and $36.7 million in 2003.

Other Long-Term Obligation Disclosures

The Company anticipates that available borrowings under its Credit Facility
and cash flow from operations will be sufficient to meet the Company's normal
working capital and capital expenditure needs. As noted above, the Company has
agreed to relatively tight restrictions under the Credit Facility. If the
Company violates any of these restrictions, it will be required to negotiate new
terms with its banks. There can be no assurance that in that event, the Company
will receive satisfactory new terms from its banks, or that if the Company needs
additional financing, that such financing can be secured when needed or on terms
the Company deems acceptable.

8
11
COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES:

Claims and Lawsuits

The Company is 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 has provided accruals for probable losses and
related legal fees associated with certain of these actions in the accompanying
consolidated financial statements.

Self-Insurance

The Company retains the risk for worker's compensation, employer's
liability, auto liability, general liability and employee group health claims
resulting from uninsured deductibles per accident or occurrence. Losses up to
the deductible amounts are accrued based upon the Company's known claims
incurred and an estimate of claims incurred but not reported. The accruals are
based upon known facts and historical trends, and management believes such
accruals to be adequate. A wholly-owned insurance company subsidiary reinsures a
portion of the risk associated with surety bonds issued by a third party
insurance company. Because no claims have been made against these financial
instruments in the past, management does not expect these instruments will have
a material effect on the Company's consolidated financial statements.

6. STOCKHOLDERS' EQUITY:

Treasury Stock

On October 5, 1999, the Company announced that its Board of Directors had
approved a share repurchase program authorizing the Company to buy up to 4.0
million shares of its Common Stock. During 1999, the Company purchased
approximately 1.8 million shares at a cost of approximately $12.9 million.
During 2000, the Company purchased approximately 0.2 million shares at a cost of
approximately $1.2 million. Under the current terms of the Credit Facility, the
Company is prohibited from purchasing additional shares of its Common Stock.

Restricted Common Stock

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

Each share of Restricted Voting Common Stock will automatically convert to
Common Stock on a share-for-share basis (i) in the event of a disposition of
such share of Restricted Voting Common Stock by the holder thereof (other than a
distribution which is a distribution by a holder to its partners or beneficial
owners, or a transfer to a related party of such holders (as defined in Sections
267, 707, 318 and/or 4946 of the Internal Revenue Code of 1986, as amended)),
(ii) in the event any person acquires beneficial ownership of 15% or more of the
total number of outstanding shares of Common Stock of the Company, or (iii) in
the event any person offers to acquire 15% or more of the total number of
outstanding shares of Common Stock of the Company. After July 1, 1998, the Board
of Directors may elect to convert any remaining shares of Restricted Voting
Common Stock into shares of Common Stock in the event 80% or more of the
originally outstanding shares of Restricted Voting Common Stock have been
previously converted into shares of Common Stock. As of March 31, 2001, there
are 1,393,612 shares of Restricted Voting Common Stock remaining.

9
12
COMFORT SYSTEMS USA, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Earnings Per Share

Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted EPS is computed considering the dilutive effect of stock options and
convertible subordinated notes. Options to purchase 7.3 million shares of Common
Stock at prices ranging from $2.43 to $21.438 per share were outstanding for the
three months ended March 31, 2001, but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the
respective average market price of the Common Stock. 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 convertible subordinated notes had an anti-dilutive effect during
the three months ended March 31, 2000 and 2001, and therefore, are not included
in the diluted EPS calculation.

The following table reconciles the number of shares outstanding with the
number of shares used in computing basic and diluted earnings per share for each
of the periods presented (in thousands):

THREE MONTHS
ENDED MARCH 31,
---------------
2000 2001
------ ------

Common shares outstanding, end of period.................... 37,559 37,381
Effect of using weighted average common shares
outstanding............................................... 1 4
------ ------
Shares used in computing earnings per share -- basic........ 37,560 37,385
Effect of shares issuable under stock option plans based on
the treasury stock method................................. -- 1
------ ------
Shares used in computing earnings per share -- diluted...... 37,560 37,386
====== ======

10
13

COMFORT SYSTEMS USA, INC.

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

INTRODUCTION

The following discussion should be read in conjunction with the historical
Consolidated Financial Statements of Comfort Systems USA, Inc. ("Comfort
Systems" and collectively with its subsidiaries, the "Company") and related
notes thereto included elsewhere in this Form 10-Q and the Annual Report on Form
10-K as filed with the Securities and Exchange Commission for the year ended
December 31, 2000 (the "Form 10-K"). 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 include risks set forth in "Factors Which May Affect Future Results,"
included in the Form 10-K.

The Company is a leading national provider of comprehensive heating,
ventilation and air conditioning ("HVAC") installation, maintenance, repair and
replacement services. The Company operates primarily in the 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 provides specialized applications such as process cooling, building
automation control systems, electronic monitoring and process piping. Certain
locations also perform related services such as electrical and plumbing.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31,
-------------------------------------
2000 2001
---------------- ----------------
(IN THOUSANDS)

Revenues............................................ $362,566 100.0% $368,128 100.0%
Cost of services.................................... 291,699 80.5% 304,231 82.6%
-------- --------
Gross profit........................................ 70,867 19.5% 63,897 17.4%
Selling, general and administrative expenses........ 54,828 15.1% 52,494 14.3%
Goodwill amortization............................... 3,183 0.9% 3,021 0.8%
Restructuring charges............................... -- -- 238 0.1%
-------- --------
Operating income.................................... 12,856 3.5% 8,144 2.2%
Other expense, net.................................. (5,824) (1.6)% (6,041) (1.6)%
-------- --------
Income before income taxes.......................... 7,032 1.9% 2,103 0.6%
Income tax expense.................................. 3,024 1,003
-------- --------
Net income.......................................... $ 4,008 1.1% $ 1,100 0.3%
======== ========

Revenues -- Revenues increased $5.6 million, or 1.5%, to $368.1 million for
the first quarter of 2001 compared to 2000. The 1.5% revenue growth was
comprised of approximately 4.8% internal growth largely offset by (3.3)% related
to operations that were sold or shut down since the first quarter of last year.

This revenue growth rate is lower than those the Company experienced
throughout 2000. A portion of the reduction in the growth rate results from an
increase in the amount of project deferrals in certain markets during the first
quarter of 2001. The lower internal growth rate is also consistent with
management's decreased emphasis on revenue growth in favor of improvement in
profit margins, operating efficiency, and cash flow. It is likely, therefore,
that the Company will continue to experience modest revenue growth in upcoming
periods. There can be no assurance, however, that this strategy will lead to
improved profit margins in the near term. In addition, if general economic
activity in the U.S. slows significantly from current levels, the Company may
realize further decreases in revenue growth and operating margins.

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Gross Profit -- Gross profit decreased $7.0 million, or 9.8%, to $63.9
million for the first quarter of 2001 compared to 2000. As a percentage of
revenues, gross profit decreased from 19.5% for the three months ended March 31,
2000 to 17.4% for the three months ended March 31, 2001.

The exclusion of operations that were sold or shut down since the first
quarter of last year had virtually no effect on the decrease in gross profit as
a percentage of revenues. The decrease relates primarily to declines in first
quarter performance at four ongoing operations. These included a larger
operation involved in multi-unit markets in the South and Northeast, the
Company's largest operating unit which is based in the Midwest, and one of the
Company's mid-sized operations in the South. Management believes these entities
will show improved results over the balance of this year. The Company also saw
weak performance in an additional market where the Company's operations are
undergoing operational and management consolidation. More broadly, the Company
noted an increase in the amount of project deferrals in certain markets while in
other, stronger markets, skilled and technical labor availability continued to
be tight.

Selling, General and Administrative Expenses ("SG&A") -- SG&A decreased
$2.3 million, or 4.3%, to $52.5 million for the first quarter of 2001 compared
to 2000. The decrease in SG&A primarily related to operations that were sold or
shut down. As a percentage of revenues, SG&A decreased from 15.1% for the three
months ended March 31, 2000 to 14.3% for the three months ended March 31, 2001.
Exclusion of the operations that were sold or shut down had virtually no effect
on this decline in SG&A as a percentage of revenues. Rather, the decrease
resulted from increased internal revenue volume without a commensurate increase
in overhead costs.

Restructuring Charges -- During the first quarter of 2001, the Company
recorded restructuring charges of approximately $0.2 million, primarily related
to contractual severance obligations of two operating presidents in connection
with the Company's significant restructuring program undertaken in the second
half of 2000. These restructuring charges are net of a gain of approximately
$0.1 million related to management's decision to sell a small operation during
the first quarter of 2001.

Income Tax Expense -- The Company's effective tax rates for the three
months ended March 31, 2001 and 2000 were 47.7% and 43.0%, respectively. The
Company's provision for income taxes differs from the federal statutory rate
primarily due to state income taxes (net of federal income tax benefit) and the
non-deductibility of the amortization of goodwill attributable to certain
acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow -- Cash provided by operating activities less customary capital
expenditures plus the proceeds from asset sales is generally called free cash
flow and, if positive, represents funds available to invest in significant
operating initiatives, to acquire other companies or to reduce a company's
outstanding debt or equity. If free cash flow is negative, additional debt or
equity is generally required to fund the outflow of cash.

For the three months ended March 31, 2001, the Company had positive free
cash flow of $5.6 million, an increase of $10.0 million as compared to negative
free cash flow of $4.4 million in the first quarter of 2000. This improvement
primarily resulted from faster billing by the Company for its project work while
maintaining the same average days to collect receivables once billed, as well as
a decrease in net capital expenditures versus the prior year.

Cash used in financing activities for the three months ended March 31, 2001
was $0.7 million and was primarily attributable to net payments of long-term
debt of $1.2 million. Net cash provided by financing activities for the three
months ended March 31, 2000 was $9.1 million and was primarily attributable to
net borrowings of long-term debt primarily used for working capital and capital
expenditures.

Revolving Credit Facility -- The Company amended its revolving credit
facility (the "Credit Facility" or the "Facility") provided by Bank One, Texas,
N.A. ("Bank One") and other banks (the "Bank Group") in March 2001. As amended,
the Credit Facility provides the Company with a revolving line of credit of up
to the lesser of $270 million or 80% of net accounts receivable. The Facility
decreases to the lesser of $250 million or 80% of net accounts receivable as of
December 31, 2001, and to the lesser of $240 million or 80% of net accounts
receivable as of June 30, 2002. Borrowings under the Facility are secured by
accounts receivable,
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inventory, fixed assets other than real estate, and the shares of capital stock
of the Company's subsidiaries. The Credit Facility expires on January 1, 2003,
at which time all amounts outstanding are due.

Under the terms of the Credit Facility that were in effect as of June 30
and September 30, 2000, the Company was in violation of certain of the
Facility's financial balance and ratio requirements. The Bank Group waived these
violations. The restrictions and financial balance and ratio requirements
currently effective under the Facility allow for performance during the first
and second quarters of 2001 consistent with the Company's results in recent
quarters, excluding restructuring and other nonrecurring charges. The Facility's
restrictions and requirements then call for improvement from recent performance
levels in the third and fourth quarters of 2001 and on a quarterly basis in
2002. The Facility's requirements reflect tighter restrictions, greater
specificity and smaller allowable variances on most financial balances and
ratios than is typical for such agreements due to the Company's weaker results
in 2000. While management believes its restructuring efforts and operating
strategies along with general market conditions in the commercial/ industrial
HVAC and building automation controls industry will enable the Company to meet
the Facility's requirements, there can be no assurance that the Company will be
successful in doing so. Management intends to seek more flexible terms under its
borrowing relationships as its results and credit market conditions allow.

Notes to Affiliates and Former Owners -- Subordinated notes were issued to
former owners of certain purchased companies as part of the consideration used
to acquire their companies. These notes had an outstanding balance of $50.3
million as of March 31, 2001. These notes bear interest, payable quarterly, at a
weighted average interest rate of 9.66%. In addition, $1.0 million of these
notes are convertible by the holders into shares of the Company's common stock
("Common Stock") at a weighted average price of $24.47 per share.

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balances to April 2003, and increase the interest rate on this debt to 10% per
annum, payable quarterly. Under these amended agreements, $5.3 million of
principal has been paid from April 1, 2001 to May 10, 2001. The amended
agreements also cured all defaults that arose out of the suspension of principal
payments to subordinate debt holders that began in October 2000. As a result of
these amended agreements, the Company's annual maturities of subordinate debt
are now $8.9 million in 2001, $4.7 million in 2002, and $36.7 million in 2003.

Outlook -- The Company anticipates that available borrowings under its
Credit Facility and cash flow from operations will be sufficient to meet the
Company's normal working capital and capital expenditure needs. As noted above,
the Company has agreed to relatively tight restrictions under the Credit
Facility. If the Company violates any of these restrictions, it will be required
to negotiate new terms with its banks. There can be no assurance that in that
event, the Company will receive satisfactory new terms from its banks, or that
if the Company needs additional financing, that such financing can be secured
when needed or on terms the Company deems acceptable.

Treasury Stock -- On October 5, 1999, the Company announced that its Board
of Directors had approved a share repurchase program authorizing the Company to
buy up to 4.0 million shares of its Common Stock. During 1999, the Company
purchased approximately 1.8 million shares at a cost of approximately $12.9
million. During 2000, the Company purchased approximately 0.2 million shares at
a cost of approximately $1.2 million. Under the current terms of the Credit
Facility, the Company is prohibited from purchasing additional shares of its
Common Stock.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk primarily related to potential
adverse changes in interest rates. Management is actively involved in monitoring
exposure to market risk and continues to develop and utilize appropriate risk
management techniques.

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COMFORT SYSTEMS USA, INC.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 related 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 adverse effect on the Company's financial
position or results of operations.

ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES

During the three month period ended March 31, 2001, the Company did not
issue any unregistered shares of its common stock.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

None.

(b) Reports on Form 8-K

None.

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

None.

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SIGNATURE

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

COMFORT SYSTEMS USA, INC.

By: /s/ J. GORDON BEITTENMILLER
----------------------------------
J. Gordon Beittenmiller
Executive Vice President,
Chief Financial Officer and
Director

Dated: May 14, 2001