<PAGE>   1


                       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                         Commission File Number
February 28, 1997                                        0-12490


                                ACR GROUP, INC.
             (Exact name of registrant as specified in its Charter)



               Texas                                 74-2008473
  (State or other jurisdiction of                (I.R.S. Employer
  incorporation or organization)                 Identification No.)


             3200 Wilcrest Drive, Suite 440, Houston, Texas  77042
              (Address of principal executive offices)  (Zip Code)

     Registrant's telephone number, including area code:     (713) 780-8532

       Securities registered pursuant to Section 12(b) of the Act:  None
          Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share
                                (Title of class)

         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
                                               -----    -----

         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 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. [  ]
<PAGE>   2
         The aggregate market value of the common stock held by nonaffiliates
of the registrant on April 30, 1997 was $23,302,056.  The aggregate market
value was computed by reference to the last trading price as reported on the
National Association of Securities Dealers Automated Quotation System.  For the
purposes of this response, Executive Officers, Directors and holders of more
than 10% of the Registrant's common stock are considered affiliates of the
registrant.

         The number of shares outstanding of the registrant's common stock as
of April 30, 1997:  10,371,555 shares

                      DOCUMENTS INCORPORATED BY REFERENCE

         The registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held in August 1997 is incorporated by reference in answer
to Part III of this report.





                                     - 2 -
<PAGE>   3
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                                     Page
                                                                                                                     ----
<S>     <C>                                                                                                           <C>
PART I

         Item 1. Business                                                                                              4

         Item 2. Properties                                                                                            9

         Item 3. Legal Proceedings                                                                                     9

         Item 4. Submission of Matters to a Vote of
                 Security-Holders                                                                                      9
PART II

         Item 5. Market for Registrant's Common Equity and Related Stockholder Matters                                10

         Item 6. Selected Financial Data                                                                              11

         Item 7. Management's Discussion and Analysis of Financial Condition
                 and Results of Operations                                                                            13

         Item 8. Financial Statements and Supplementary Data                                                          20

         Item 9. Changes in and Disagreements with Accountants on Accounting
                 and Financial Disclosure                                                                             41
PART III

        Item 10. Directors and Executive Officers of the Registrant                                                   41

        Item 11. Executive Compensation                                                                               41

        Item 12. Security Ownership of Certain Beneficial Owners and Management                                       41

        Item 13. Certain Relationships and Related Transactions                                                       41

PART IV

        Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                     42
</TABLE>





                                     - 3 -
<PAGE>   4
                                     PART I

ITEM 1.  BUSINESS.

General

         ACR Group, Inc. (which, together with its subsidiaries is herein
referred to as the "Company" or "ACRG") is a Texas corporation based in
Houston.  In 1990, the Company began to acquire and operate businesses engaged
in the wholesale distribution of heating, ventilating, air conditioning and
refrigeration ("HVACR") equipment and supplies.  The Company acquired its first
operating company in 1990.  Since 1990, ACRG has acquired or started up seven
additional HVACR distribution companies and now has 31 branch operations in
seven states.  The Company plans to continue expanding in the Sunbelt of the
United States and in other geographic areas with a high rate of economic
growth, both through acquisitions and internal growth.

The HVACR Industry

         The Company's interest in the HVACR distribution industry is a direct
result of the business experience of its Chairman and President, Alex Trevino,
Jr., who has been associated with the industry for over thirty years in varying
capacities, first as owner of his own distribution company and then as
president of various successor companies following the sale of his business.

         The Company sells supplies and equipment to installing contractors and
dealers and to other technically trained customers responsible for the
installation, repair and maintenance of HVACR systems.  Maintenance of a large
and diverse inventory base is an important element in the Company's sales.

         The HVACR supply industry is segmented into discrete categories.
First, it serves both commercial and residential HVACR businesses.  Each of
these segments is further divided into two markets - new construction sales and
replacement and/or repair sales.  Some companies choose to specialize in
serving the new construction markets while others focus on the
repair/replacement market, commonly referred to as the "aftermarket."  ACRG is
not oriented toward any particular segment but instead concentrates on
acquiring and developing profitable businesses in the Sunbelt region of the
United States which have a significant market share within their segment of the
HVACR distribution industry.  The Company believes that its growth strategy is
appropriate in view of the competitive nature of the HVACR industry and the
continuing consolidation in that industry, discussed below.

         There are many manufacturers of products used in the HVACR industry,
and no single manufacturer dominates the market for a range of products. Some
manufacturers





                                     - 4 -
<PAGE>   5
limit the number and territory of wholesalers that may distribute their
products, but exclusivity is rare. Many manufacturers will generally permit any
distributor who satisfies customary commercial credit standards to sell their
products. In addition, there are some manufacturers, primarily of equipment,
that distribute their own products through factory branches.  The widespread
availability of HVACR products to distributors results in significant
competition.  There are several thousand HVACR wholesale distributors in the
United States, and there is no single company or group of companies that
dominates the HVACR distribution industry. The industry traditionally has been
characterized by closely- held businesses with operations limited to local or
regional geographic areas; however, a process of consolidation in this industry
is ongoing, as many of these companies reach maturity and face strategic
business issues such as ownership succession, changing markets and lack of
capital to finance growth.  Management's goal is to attract the present owners
and management of such businesses by offering certain advantages related to
economies of scale: lower cost of products from volume purchasing, new product
lines, and financial, administrative and technical support.

         The Company believes that investing in the HVACR distribution industry
has fewer economic risks than many other industries. Although the HVACR
industry is affected by general economic conditions such as cycles in new home
construction, sales of replacement equipment and repair parts for the existing
base of installed air conditioning and heating systems provides a cushion
against economic swings. The aftermarket is far less susceptible to changes in
economic conditions than the new construction market and now represents
approximately 70% of all units installed annually.  This percentage should
continue to increase as the base of installed systems expands.  Much of the
HVACR industry is also seasonal; sales of air conditioning and heating systems
are generally largest during the times of the year when climatic conditions
require the greatest use of such systems. Sales of refrigeration systems, which
are generally to commercial customers, are subject to less seasonality.

Investments in HVACR Distribution Companies:

         ACR Supply, Inc.

         The Company acquired ACR Supply, Inc. ("ACRS") effective February 28,
         1993, after making an initial investment in the company in 1991.  At
         the end of fiscal 1997, ACRS had twelve branches in Texas and one in
         Louisiana.  Most of ACRS's branches have attained market share
         leadership in their respective areas. In major metropolitan areas such
         as San Antonio and Houston, ACRS encounters significantly more
         competition than in smaller cities.  However, through aggressive sales
         efforts, the Houston branches have achieved a significant, but not
         dominant, share of their local HVACR markets.  The company has yet to
         achieve a significant market share in either San Antonio or McAllen,
         Texas.  In May 1997, ACRS opened its fourteenth





                                     - 5 -
<PAGE>   6
         branch in College Station, Texas.

         ACRS sells primarily to licensed contractors serving the residential
         and light commercial (restaurants, strip shopping centers, etc.)
         markets.  The company's sales mix is approximately 35% equipment and
         65% parts and supplies, with the equipment and parts generally
         directed to the aftermarket and the supplies used principally in new
         construction.

         Heating and Cooling Supply, Inc.

         The Company acquired Heating and Cooling Supply, Inc. ("HCS") in 1990.
         HCS operates from one location in Las Vegas, Nevada. There are
         approximately 20 independent HVACR distributors in the Las Vegas area
         that compete with HCS. Management believes that HCS is among the top
         three of such distributors in terms of annual sales from branch
         operations in the local area.

         HCS's sales growth in the past several years has mirrored the
         well-documented growth of the Las Vegas economy, and approximately 80%
         of HCS's sales are in the new construction markets.  HCS has
         successfully expanded its business in the commercial HVACR market by
         emphasizing the company's capabilities in both the plan and
         specifications market and the specialty products market.  HCS's
         proficiency in these two niches distinguishes it from most other HVACR
         distributors and, as a result, sales to commercial accounts were
         approximately 40% of total sales at the end of fiscal 1997.

         Total Supply, Inc.

         In 1990, the Company organized Total Supply, Inc. ("TSI") to fabricate
         air conditioning ductwork out of fiber glass ductboard, and in 1992
         converted the company's business to HVACR wholesale distribution.
         Since December 1992, TSI has distributed the GMC brand of HVACR
         equipment in the Atlanta trade area.  In 1995, TSI acquired a small
         distributor in south Georgia, which gave the company GMC distribution
         rights to almost the entire state of Georgia.  TSI sells almost
         exclusively to the residential market, and management estimates that
         sales are approximately evenly split between new construction and the
         aftermarket.  The company's sales mix is approximately 68% equipment
         and 32% parts and supplies.

         TSI has four branches located in the Atlanta metropolitan area, one
         branch in Warner-Robins, a suburb of Macon, and one branch in Valdosta
         in far south Georgia.





                                     - 6 -
<PAGE>   7
         Valley Supply, Inc.

         In 1994, the Company organized Valley Supply, Inc. ("VSI") as an HVACR
         distributor in the Memphis, Tennessee trade area, which includes
         southwestern Tennessee, northern Mississippi and western Arkansas.
         The Company was granted the franchise to distribute the GMC line of
         equipment within this trade area, succeeding another distributor which
         ceased business operations.  VSI employs most of the key personnel
         from that former GMC distributor.  Although sales of GMC equipment
         initially comprised virtually all of VSI's sales, management has
         continuously emphasized increasing the breadth of higher profit HVACR
         parts and supplies stocked at VSI.  Approximately 78% of VSI's sales
         consisted of GMC equipment in fiscal 1997.  In fiscal 1997, the
         Company opened a second branch of VSI in Memphis to serve the southern
         section of the city and the north Mississippi trade area.

         Ener-Tech Industries, Inc.

         Effective January 1, 1996, the Company acquired Ener-Tech Industries,
         Inc. ("ETI"), an HVACR distributor with one branch in Nashville,
         Tennessee.  Unlike the Company's other HVACR distribution operations,
         ETI specializes in an industry segment.  ETI sells controls and
         control systems to commercial and industrial end-users, HVACR
         contractors, dealers and other distributors.  ETI also designs and
         assembles control systems used in commercial applications such as
         hospitals, restaurants and supermarkets.  Such control systems perform
         a variety of functions including temperature control and monitoring,
         lighting control and energy management.

         ETI is an authorized distributor for Honeywell, Inc. for much of
         Tennessee and parts of Kentucky.  By providing engineering services
         and assembly processes for its customers in connection with the sale
         of control systems, ETI obtains a higher gross margin on its sales
         than the Company's other distribution businesses.  Additionally, ETI's
         sales tend to be greater in the cooler seasons of the year, when gas
         controls are in higher demand.  In fiscal 1997, a branch of ETI was
         opened in the same physical location as the south Memphis branch of
         VSI.

         Florida Cooling Supply, Inc.

         In March 1996, the Company organized Florida Cooling Supply, Inc.
         ("FCS") and in April 1996, opened four branch operations in central
         Florida.  The state of Florida is among the three largest in the
         United States in terms of installed HVACR systems.  FCS is managed by
         two persons with extensive industry experience in FCS's trade area.
         During fiscal 1997, FCS closed one of the initial four branches, and
         in May





                                     - 7 -
<PAGE>   8
         1997, opened a new branch in Tampa.

         Lifetime Filter, Inc.

         Effective as of January 1, 1997, the Company acquired Lifetime Filter,
         Inc. ("LFI"), a manufacturer of electrostatic air filters which sells
         its products principally to HVACR contractors and dealers by mail
         order.  LFI is based in Katy, Texas, a suburb of Houston.  The Company
         expects to augment LFI's sales by distributing LFI's filters
         throughout the Company's existing wholesale distribution network.


Energy Service Business

         In the early 1980's, the Company's primary business was the design,
installation and management of integrated systems intended to reduce energy
costs ("Systems") for users of commercial, industrial and institutional
facilities.  ACRG did not install any new Systems after 1985.  Pursuant to
service contracts, customers paid ACRG a specified percentage of the utility
cost savings attributable to the Systems over the term of the contract.  The
Company's contracts for its remaining Systems all expired during fiscal 1996,
but the Company continues to manage 13 Systems for a single customer on a month
to month basis.  The Company cannot predict for how long such an informal
arrangement may continue.


Executive Officers of the Registrant

         The Company's executive officers are as follows:

<TABLE>
<CAPTION>
         Name                     Age                    Position with the Company
         ----                     ---                    -------------------------
<S>                               <C>              <C>
Alex Trevino, Jr.                 60               Chairman of the Board and President

Anthony R. Maresca                46               Senior Vice President, Secretary, Treasurer,
                                                   and Chief Financial Officer
</TABLE>

         Alex Trevino, Jr. has served as Chairman of the Board since 1988, and
as President and Chief Executive Officer of the Company since July 1990.  From
September 1987 to February 1990, he served as President of Western Operations
of the Refrigeration and Air Conditioning Group of MLX Corporation (now Pameco
Corporation), which is a national distributor of HVACR equipment and supplies.





                                     - 8 -
<PAGE>   9
         Anthony R. Maresca has been employed by the Company since June 1985,
serving as Corporate Controller until November 1985 when he was promoted to
Senior Vice President, Chief Financial Officer and Treasurer.  Mr. Maresca is a
certified public accountant.

Employees

         As of February 28, 1997, the Company and its subsidiaries had
approximately 195 full-time employees.  In addition, LFI had approximately 15
workers who are leased from a national staff leasing company.  In May 1997,
these workers became employees of LFI.  Neither the Company nor its
subsidiaries routinely use temporary labor. None of the Company's employees are
represented by any collective bargaining units.  Management considers the
Company's relations with its employees to be good.


ITEM 2.  PROPERTIES.

         The Company and its subsidiaries occupy office and warehouse space
under operating leases with various terms.  Generally, a branch location will
contain 10,000 to 20,000 square feet of showroom and warehouse space.  Branch
locations that include a subsidiary's corporate office will be larger.  The
Company owns the facility occupied by the Pasadena, Texas branch of ACRS.
During fiscal 1997, the Company acquired land in Las Vegas, Nevada and in
Temple, Texas for the purpose of constructing buildings to replace the existing
leased premises.  The Company expects to sell each of the properties to parties
who would construct office/warehouse buildings according to the Company's
specifications and lease them to the Company under long-term arrangements.


ITEM 3.  LEGAL PROCEEDINGS.

         As of February 28, 1997 the Company was not a party to any pending
legal proceeding that is deemed to be material to the Company and its
subsidiaries.


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

         No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended February 28, 1997.





                                     - 9 -
<PAGE>   10
                                    PART II



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

         The Company's common stock trades on the NASDAQ small-cap market under
the symbol "ACRG."  The table below sets forth the high and low sales prices
based upon actual transactions.
<TABLE>
<CAPTION>
                                                                      High               Low   
                                                                    -------            --------
         <S>                                                        <C>                <C>
         Fiscal Year 1997
                 1st quarter ended 5/31/96                          $   13/16          $   9/16
                 2nd quarter ended 8/31/96                            1   1/8              9/16
                 3rd quarter ended 11/30/96                           2                     7/8
                 4th quarter ended 2/28/97                            2 15/16            1  5/8


         Fiscal Year 1996
                 1st quarter ended 5/31/95                           $1  1/16           $ 21/32
                 2nd quarter ended 8/31/95                              13/16               5/8
                 3rd quarter ended 11/30/95                               7/8               1/2
                 4th quarter ended 2/29/96                              13/16               1/2
</TABLE>


         As of April 30, 1997, there were 541 holders of record of the
Company's common stock.  This number does not include the beneficial owners of
shares held in the name of a broker or nominee.

         The Company has never declared or paid cash dividends on its common
stock.  The Company's loan agreements with two lenders each expressly prohibit
the payment of dividends by the Company.  See Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources, and Note 4 of Notes to Consolidated Financial Statements.





                                     - 10 -
<PAGE>   11
ITEM 6.  SELECTED FINANCIAL DATA.


         The following selected financial data of the Company have been derived
from the consolidated financial statements.  This summary should be read in
conjunction with the consolidated financial statements and related notes
included in Item 8 of this Report.  As of February 28, 1993, the Company
acquired ACR Supply, Inc.; the accounts of ACRS are consolidated in the Balance
Sheet Data presented herein as of such date.  The results of operations of ACRS
are included in the Income Statement Data only for the fiscal years ending
after February 28, 1993.  Effective March 1, 1993, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 109 with respect to
accounting for income taxes.  As a result of implementing SFAS 109, $680,000
was included in net income in fiscal 1994 as the cumulative effect on prior
periods.  The Company has never paid any dividends.

         The Company has not recorded a provision for income taxes other than
alternative minimum taxes and state income taxes for fiscal years 1994 through
1997 because of previously incurred net operating losses for which a tax
benefit had not previously been recorded.  Additionally, the Company determined
in the fourth quarter of fiscal 1997 that a further reduction in the deferred
tax asset valuation allowance was appropriate given expectations of higher
future taxable income and, as a result, recorded an additional tax benefit of
$360,000.





                                     - 11 -
<PAGE>   12
                      (In thousands except per share data)


<TABLE>
<CAPTION>
                                                                                                                        
                                                  Year Ended February 28 or 29,                                   Year Ended     
                                   ---------------------------------------------------------                        June 30,    
 Income Statement Data:               1997           1996            1995            1994           1993 *           1992   
                                   ----------     ----------      ----------      ----------      ----------      ----------
<S>                                <C>            <C>             <C>             <C>             <C>             <C>       
 Sales                             $   78,371     $   56,500      $   41,281      $   30,862      $    3,192      $    5,900
 Gross profit                          15,085         10,721           8,563           6,738             807           1,334
 Operating income (loss)                1,659            765             945             615             185            (635)
                                   ----------     ----------      ----------      ----------      ----------      ----------

 Income (loss) before income
   taxes, extraordinary item
   and cumulative effect of
   an accounting change                   887            199             562             443             219            (267)
 (Provision) benefit for
   income taxes                           258            (15)             (4)             (9)            (71)             --
 Extraordinary item                        --             --              --              --              71              --
 Cumulative effect of an
   accounting change                       --             --              --             680              --              -- 
                                   ----------     ----------      ----------      ----------      ----------      ----------

 Net income (loss)                 $    1,145     $      184      $      558      $    1,114      $      219      $     (267)
                                   ==========     ==========      ==========      ==========      ==========      ==========
 Amounts per share**:
   Earnings (loss) before
     extraordinary item and
     cumulative effect of
     an accounting change          $      .11     $      .02      $      .05      $      .04      $      .02      $     (.04)
   Extraordinary item                      --             --              --              --             .01              --
   Cumulative effect of an
     accounting change                     --             --              --             .07              --              -- 
                                   ----------     ----------      ----------      ----------      ----------      ----------


   Net earnings (loss)             $      .11     $      .02      $      .05      $      .11      $      .03      $     (.04)
                                   ==========     ==========      ==========      ==========      ==========      ==========
</TABLE>

<TABLE>
<CAPTION>
                                                  Year Ended February 28 or 29,                            As of      
 Balance Sheet Data:               -----------------------------------------------------------------      June 30,
                                      1997         1996          1995          1994          1993           1992
                                   ---------     ---------     ---------     ---------     ---------     ---------
<S>                                <C>           <C>           <C>           <C>           <C>           <C>      
 Working capital                   $  11,080     $   8,118     $   5,818     $   3,338     $   1,945     $   1,524

 Total assets                         30,558        22,010        17,131        13,024         9,974         4,755

 Long-term obligations                11,160         6,703         3,728         1,752         1,094           342

 Shareholders' equity                  7,006         5,666         5,482         4,924         3,461         2,680
</TABLE>


*        Transition period from July 1, 1992 to February 28, 1993

**       On a fully diluted basis, earnings per share for the year ended
         February 28, 1997 was $.10 per share.  For all other periods
         presented, fully diluted earnings per share did not differ materially
         from primary earnings per share.





                                     - 12 -
<PAGE>   13
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

Fiscal 1997 Compared to Fiscal 1996

         Operating income increased 117%, from $764,714 in fiscal 1996 to
$1,658,674 in fiscal 1997, as a result of higher sales and gross profit margin,
despite additional costs relating to the startup of new branch operations.
Operating earnings at ACRS and HCS were particularly strong compared to fiscal
1996.  Operating losses and non-recurring costs associated with the opening of
five branches in fiscal 1997 amounted to more than $550,000.  Net income also
increased significantly, from $183,766 in fiscal 1996 to $1,144,788 in fiscal
year 1997, with higher interest costs offset by a reduction in the deferred tax
asset valuation allowance.

         Sales increased 39%, from $56.5 million to $78.4 million, in fiscal
1997 compared to fiscal 1996.  Same store sales at the 18 branches in operation
in the first quarter of fiscal 1996 increased 16% in both fiscal 1997 and 1996,
with the balance of the increase in fiscal 1997 attributable to sales from FCS,
ETI, three branches of TSI purchased or opened in late 1995 and a second branch
of VSI in Memphis.  All but three of the 18 branches recorded an increase in
sales from fiscal 1996, and new branches subtracted sales from two of the
three.  Sales of equipment manufactured by Goodman Manufacturing Company, and
sold under the GMC and Janitrol brand names, continued to escalate, increasing
to $24 million in fiscal 1997 from $16.5 million in fiscal 1996.  Sales at LFI,
which was acquired in January 1997, represented only 1% of the increase in
sales from fiscal 1996 to fiscal 1997.

         The Company's gross margin percentage increased to 19.2% in fiscal
1997 from 19.0% in fiscal 1996, although the margin percentage on GMC/Janitrol
sales declined from 14.2% to 13.9%.  The gross margin percentage at each of the
Company's newest operations, ETI and FCS, is higher than the overall average,
because of minimal HVACR equipment sales during fiscal 1997 at these companies.
In the HVACR industry, the profit margin on sales of equipment, such as
condensing units, furnaces and heat pumps, is generally less than on sales of
parts and supplies.  In addition, ETI provides engineering services in
connection with sales of its control systems, and is able to command a higher
gross margin on its sales with such value-added services.  LFI, which
manufactures most of the products that it sells, also obtains a much higher
gross margin on its sales than the Company's wholesale operations, but because
only two months of LFI's operations were included in the Company's fiscal 1997
results, this factor had little impact on the Company's overall margin in fiscal
1997.

         Selling, general and administrative costs ("SG&A") as a percentage of
sales declined to 17.7% in fiscal 1997, compared to 17.8% in fiscal 1996.  With
payroll costs representing





                                     - 13 -
<PAGE>   14
57% and 56% of SG&A expenses (10.2% and 10.1% of sales) in fiscal 1997 and
1996, respectively, the Company focuses on increasing the sales volume of each
of its branch operations as a means to generate higher gross profit without a
proportional increase in number of employees or amount of non-payroll expenses.
However, SG&A expenses as a percentage of sales are generally high during the
first year of a new branch operation as sales volume gradually increases.  The
costs associated with opening new branches caused SG&A expenses to remain at a
higher percentage of sales in fiscal 1997 than will be expected as such
branches become more seasoned.  Additionally, the Company recorded a
non-recurring charge of $125,000 during fiscal 1997 for performance-based
compensation pursuant to the employment contract of its chief executive
officer.

         Beginning in fiscal 1997, the Company earned commission revenue from a
supplier by providing warehousing and shipping services to another distributor
of the supplier.  This arrangement has been modified by the supplier such that
revenues in calendar 1997 will be earned at a rate approximately equal to 70%
of the rate in calendar 1996.

         Net energy services income increased 13% from fiscal 1996 to fiscal
1997 as the Company continued to provide services on a month-to-month basis to
its remaining customer, following the expiration of its energy services
contract in 1996.  Management does not expect to negotiate another contract
with the customer, but the customer is partially dependent on the Company for
the proper operation of its HVACR systems.  Management cannot estimate how long
such an informal arrangement may continue.

         Interest expense increased 44% in fiscal 1997 compared to 1996 as a
result of the Company's increased borrowings.  In 1997, interest expense was
1.2% of sales, compared to 1.1% of sales in 1996.  See Liquidity and Capital
Resources, below.  Other non-operating income increased 94% from fiscal 1996 to
fiscal 1997 as the Company strengthened its policy to collect finance charges
from customers with past due balances.

         Current income tax expense consists principally of state income taxes.
As a result of the Company's substantial tax loss carryforwards, the Company
has minimal liability for Federal income taxes. See Liquidity and Capital
Resources, below.  In the fourth quarter of fiscal 1997, the Company determined
that a further reduction in the deferred tax asset valuation allowance was
appropriate given expectations of higher future taxable income and, as a
result, recorded an additional tax benefit of $360,000.

         In April 1997, the Company acquired the assets and liabilities of ACH
Supply, Inc. ("ACH"), a wholesale distributor of HVACR products with two branch
operations in the Los Angeles area.  ACH had sales of $2.8 million in its
fiscal year ended June 30, 1996.  Management of the Company believes that there
are substantial opportunities to increase the business of ACH by opening new
branch operations or acquiring other small distributors over the next several
years.





                                     - 14 -
<PAGE>   15
         In May 1997, the Company entered into a letter of intent to acquire
Contractors Heating & Supply, Inc. ("CHS"), a Denver-based HVACR distributor.
CHS, which had calendar 1996 sales of $20 million, has three branches in
Colorado and one in New Mexico.  CHS's operations include a sheet metal shop
which fabricates products sold through its distribution branches.  See
Liquidity and Capital Resources, below.

Fiscal 1996 Compared to Fiscal 1995

         Operating income declined 19%, from $945,607 in fiscal 1995 to
$764,714 in fiscal 1996, because of lower gross margins on sales, startup costs
associated with the opening of new branch operations, and increased inventory
shrinkage.  Additionally, higher interest costs associated with borrowings
required to support the sales growth of the Company resulted in a reduction of
net income to $183,766 in fiscal 1996, compared to $558,206 in fiscal 1995, a
decline of 67%.

         Sales increased 37%, from $41.3 million in fiscal 1995 to $56.5
million in fiscal 1996, with each subsidiary reporting a significant increase
in sales.  Same store sales at ACRS increased 16% in fiscal 1996, compared to
13% in fiscal 1995.  Sales at TSI increased 72% in fiscal 1996; aggregate sales
at the two branches that existed at the beginning of fiscal 1996 increased 4%
despite the opening during the year of two additional, larger branches within
the sale metropolitan Atlanta trade area.  TSI also acquired two branch
operations in central and south Georgia which expanded the territory in which
TSI has the distribution right to sell the GMC brand of HVACR equipment to
almost the entire state of Georgia.

         Sales at HCS rose 45% in fiscal 1996, principally because of a
substantial increase in the volume of Janitrol sales to the residential market
sector.  Janitrol equipment sales represented 36% of HCS's sales in fiscal
1996, compared to 9% in fiscal 1995, the first year that HCS distributed
Janitrol equipment.  Sales at VSI increased 80% in fiscal 1996 from fiscal
1995, when VSI first opened.  During fiscal 1996, VSI gradually enlarged its
sales of products other than GMC equipment.  Sales of GMC equipment comprised
85% of VSI's sales in fiscal 1996, compared to 90% in fiscal 1995.  The Company
acquired ETI in January 1995, and its sales for the two-month period ended
February 29, 1996 represented only 2% of the increase in the Company's from
1995 to 1996.

         The Company's gross margin percentage declined to 19.0% in fiscal 1996
from 20.7% in fiscal 1995, as a result of the continually increasing percentage
of consolidated sales that are generated by TSI and VSI.  Because TSI and VSI
sell substantially more HVACR equipment than other products, and because their
primary equipment supplier provides incentives to its distributors to induce a
greater volume of sales at lower gross margins, their sales tend to depress the
Company's consolidated gross margin percentage.  In addition, the increase in
Janitrol equipment sales at HCS, as described above, reduced HCS's gross margin
percentage by almost 4% in fiscal 1996 compared to 1995.  The gross margin
percentage at ACRS also declined 1.6% in 1996, as the company gained market
share in





                                     - 15 -
<PAGE>   16
part by negotiating bulk sales to customers at low margins of products that
could be shipped directly to the customer from the manufacturer.

         SG&A expenses as a percentage of sales declined to 17.8% in fiscal
1996, compared to 18.9% in fiscal 1995, following the expected trend as average
sales per branch operation increase.  Net operating income from energy services
decreased 36% from fiscal 1995 to fiscal 1996.  In 1995, the Company recognized
non-recurring revenue following a review of an energy services contract which
revealed that the Company had not received certain funds due under the terms of
the contract.  Excluding revenues from this contract, net energy service income
declined 15% from 1995 to 1996.  All of the Company's remaining energy services
contracts expired in fiscal 1996.

         Interest expense increased 43% in fiscal 1996 compared to 1995 as a
result of the Company's increased borrowings.  Income tax expense consisted
primarily of state income taxes in fiscal 1996 and 1995.

Liquidity and Capital Resources

         Working capital increased from $8,118,061 at February 29, 1996 to
$11,080,075 at February 28, 1997 as a result of the Company's earnings and
borrowings under the Company's revolving credit facility.  Current assets
increased 32% from 1996 to 1997, principally in accounts receivable and
inventory.  Accounts receivable represented 54 days of gross sales at the end
of fiscal 1997, compared to 49 days of sales in receivables at the end of
fiscal 1996 because of slow sales in February 1997 and extended payment terms
that were provided to certain customers in fiscal 1997.  Of the $3.7 million
increase in inventory, $700,000 was attributable to an increase in pre-season
shipments of air conditioning equipment received by ACRS from its primary
supplier, and $1.9 million was located at operations started up or acquired in
fiscal 1997.  The remainder of the increase in inventory was acquired in
anticipation of greater sales than the preceding year.

         The Company has credit facilities with a commercial bank ("Bank")
which include an $8 million revolving line of credit and a $500,000 term loan
facility for the purchase of capital equipment.  At February 28, 1997, the
Company had fully utilized its line of credit with borrowings of $7.4 million
and $.6 million in standby letters of credit and had outstanding borrowings
under the term loan facility of $355,128.  Borrowings under the revolving
credit facility are secured by accounts receivable and inventory, and the
permitted amount of outstanding borrowings at any time is limited to
percentages of certain accounts receivable and inventory.  Borrowings under the
credit line bear interest at the Bank's prime rate plus  1/2%.  Restrictive
covenants of the loan agreement prohibit the Company from paying dividends,
prepaying its debt to The Catalyst Fund, Ltd. (see Note 4 of Notes to
Consolidated Financial Statements) or incurring other debt without the Bank's
consent, and also require the Company to maintain certain financial ratios.
Additional borrowings under the revolving line of credit during fiscal 1997
were used for working capital necessary to





                                     - 16 -
<PAGE>   17
open new branch locations and to support higher levels of sales at all of the
Company's operations.  See Results of Operations - Fiscal 1997 Compared to
Fiscal 1996, above.

         The revolving line of credit matures on February 28, 1998.  As a
result of the Company's acquisitions during 1997, the Company was not in
compliance with certain financial covenants under the revolving line of credit
at February 28, 1997, and the Company has obtained waivers of such violations
from the Bank through August 31, 1997.  On May 12, 1997, as amended on June 10,
1997, the Company obtained a firm commitment from the Bank to refinance the
existing $8 million revolving line of credit with a new $18 million revolving
credit facility, including a $1 million sub-facility for letters of credit.
The new revolving credit facility provides for borrowings, at the Company's
option, at either the Bank's prime rate plus  1/2% or LIBOR plus 3.00%.
Borrowings under the new revolving credit facility will be limited to 85% of
eligible accounts receivable and 50% of eligible inventory amounts. See Note 4
of Notes to Consolidated Financial Statements.

         In connection with its acquisition of LFI, the Company obtained $1.4
million in financing from St. James Capital Partners, L.P. ("St. James"), which
was used to pay the cash portion of the purchase price and various transaction
costs.  The note issued to St. James ("St. James Note") bears interest at 10%
per annum and has an initial maturity date of January 24, 1998.  In connection
with the financing, the Company also issued St. James a warrant to acquire
280,000 shares of the Company's common stock at $1.625 per share.  The Company
may elect to extend the maturity date of the St. James Note for one year past
the initial maturity date, in which case the Company will be required to issue
a warrant for a number of shares equal to 10% of the outstanding indebtedness,
including interest, on the Note.  The Company expects to exercise this option.
None of the principal or accrued interest on the St. James Note is payable
prior to maturity.  The St. James Note is also convertible into common stock of
the Company at $2.40 per share.  The Company also issued a note to an affiliate
of the former owner of LFI for $1,166,662, which bears interest at prime plus
1% and is payable in twelve equal quarterly installments of principal, plus
accrued interest, beginning March 31, 1997.  Both the St. James Note and the
note to the affiliate of LFI's former owner are subordinated to the Bank.  See
Note 4 of Notes to Consolidated Financial Statements.

         The Company made capital expenditures of $1.4 million in fiscal 1997,
of which $410,000 was for land in Las Vegas on which the Company intends to
construct an office/warehouse to replace its existing leased premises, and
$420,000 was for leasehold improvements, equipment and vehicles for new
branches.  The remainder of capital expenditures was principally for the
addition or replacement of vehicles under capital leases.

         The purchase price of the assets and liabilities of CHS is estimated
at $6 million of which $4.8 million will be financed by the Bank under the new
revolving credit facility described above, and $1.2 million will be financed by
the seller.  The Company expects to conclude the acquisition of CHS in the
second quarter of fiscal 1998.  In addition, the





                                     - 17 -
<PAGE>   18
increased facility should provide the funds necessary to finance the expected
growth of existing operations in fiscal 1998.

         Management is engaged in discussions to sell the land that it owns in
Las Vegas and in Temple, Texas to buyers who would construct buildings meeting
the Company's specifications and lease the completed facilities to the Company
under long-term leases.  The purchase of the Las Vegas land was partially
financed by the seller, whose note matures in September 1997.

         The Company has approximately $33 million in tax loss carryforwards
and $1.1 million in tax credit carryforwards.  Such operating loss and tax
credit carryforwards will substantially limit the Company's federal income tax
liabilities in the near future.  Certain provisions of the Internal Revenue
Code ("Code") regulate the amount of additional stock that the Company could
issue without resulting in a change in ownership control, as defined in the
Code.  Should such a change in control be deemed to occur, the Company's
ability to utilize its operating loss and tax credit carryforwards would be
severely restricted.  See Note 6 of Notes to Consolidated Financial Statements.

Seasonality

         The Company's sales volume and, accordingly, its operating income vary
significantly during its fiscal year.  The highest levels of sales occur during
the times of the year when climatic conditions require the greatest use of air
conditioning, since the Company's operations are concentrated in the warmer
regions of the United States.  Accordingly, sales will be highest in the
Company's second quarter ending August 31, and will be lowest in its fourth
fiscal quarter.  The acquisition of CHS, which is based in Denver, may offset
some of the Company's existing seasonality.

Inflation

         The Company does not believe that inflation has had a material effect
on its results of operations in recent years.  Generally, manufacturer price
increases attributable to inflation uniformly affect both the Company and its
competitors, and such increases are passed through to customers as an increase
in sales prices.

Recently Issued Accounting Standards

         In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share," which specifies the computation, presentation
and disclosure requirements for earnings per share.  SFAS No. 128 is effective
for financial statements for periods ending after December 15, 1997, and
earlier adoption is not permitted.





                                     - 18 -
<PAGE>   19
         SFAS No. 129, "Disclosure of Information about Capital Structure," was
issued in February 1997.  This statement is effective for financial statements
for periods ending after December 15, 1997.

         The Company has not yet determined the impact on the consolidated
financial statements from the initial adoption of these standards.





                                     - 19 -
<PAGE>   20
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                      OF ACR GROUP, INC. AND SUBSIDIARIES


<TABLE>
<CAPTION>
                                                                         Page
                                                                         ----
<S>                                                                       <C>
Report of Independent Auditors                                            21
                                                                  
                                                                  
Consolidated balance sheets as of February 28, 1997 and           
February 29, 1996                                                         22
                                                                  
                                                                  
Consolidated statements of operations for the fiscal years        
ended February 28, 1997, February 29, 1996 and February 28, 1995          24
                                                                  
                                                                  
Consolidated statements of shareholders' equity for the           
fiscal years ended February 28, 1997, February 29, 1996           
and February 28, 1995                                                     25
                                                                  
                                                                  
Consolidated statements of cash flows for the fiscal years        
ended February 28, 1997, February 29, 1996 and February 28, 1995          26
                                                                  
                                                                  
Notes to Consolidated Financial Statements                                28
</TABLE>                                                                      
                                                                              




                                     - 20 -
<PAGE>   21
                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Shareholders
ACR Group, Inc.

We have audited the accompanying consolidated balance sheets of ACR Group, Inc.
and subsidiaries as of February 28, 1997 and February 29, 1996 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended February 28, 1997.  Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiaries at February 28, 1997 and February 29, 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 28, 1997 in conformity with generally
accepted accounting principles.  Also, in our opinion, the related financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.




                                                            ERNST & YOUNG LLP


Houston, Texas
June 10, 1997





                                     - 21 -
<PAGE>   22
                        ACR GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                 AS OF FEBRUARY 28, 1997 AND FEBRUARY 29, 1996


                                     ASSETS



<TABLE>
<CAPTION>
                                                        1997               1996    
                                                  ---------------     ---------------
<S>                                               <C>                 <C>            
 Current assets:
   Cash                                           $       412,699     $       348,162
   Accounts receivable, net of allowance
     for doubtful accounts of $584,024 in
     1997 and $459,501 in 1996                          8,914,933           7,188,839
   Inventory                                           13,667,019           9,934,637
   Prepaid expenses and other                             130,142             151,027
   Deferred income taxes                                  347,000             136,000
                                                  ---------------     ---------------
           Total current assets                        23,471,793          17,758,665
                                                  ---------------     ---------------

 Property and equipment, net of
   accumulated depreciation                             3,435,406           2,110,997

 Deferred income taxes                                    693,000             544,000

 Goodwill, net of accumulated amortization
   of $176,361 in 1997 and $121,770 in 1996             2,657,500           1,470,665
 
 Other assets                                             299,911             125,959
                                                  ---------------     ---------------

           Total assets                           $    30,557,610     $    22,010,286
                                                  ===============     ===============
</TABLE>





                                     - 22 -
<PAGE>   23
                        ACR GROUP, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

                 AS OF FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
                                  (CONTINUED)

                      LIABILITIES AND SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                            1997                   1996   
                                                                         -----------            -----------
 <S>                                                                     <C>                    <C>
 Current liabilities:
   Current maturities of long-term debt                                  $ 1,255,631            $   579,485
   Current maturities of capital lease
     obligations                                                             201,969                135,325
   Accounts payable                                                        9,925,146              8,377,600
   Accrued expenses and other liabilities                                  1,008,972                548,194
                                                                         -----------            -----------
           Total current liabilities                                      12,391,718              9,640,604
                                                                         -----------            -----------

 Long-term debt                                                           10,735,064              6,397,722
 Long-term capital lease obligations                                         424,828                305,748
                                                                         -----------            -----------

           Total liabilities                                              23,551,610             16,344,074
                                                                         -----------            -----------

 Contingencies and commitments


 Shareholders' equity:
   Preferred stock, $.01 par, authorized
     2,000,000 shares, none outstanding                                           --                     --
   Common stock - $.01 par, authorized
     25,000,000 shares, issued and
     outstanding 10,371,555 shares in 1997
     and 10,246,555 shares in 1996                                           103,716                102,466
   Additional paid-in capital                                             41,620,770             41,427,020
   Accumulated deficit                                                   (34,718,486)           (35,863,274)
                                                                         -----------            ----------- 
           Total shareholders' equity                                      7,006,000              5,666,212
                                                                         -----------            -----------

           Total liabilities and
             shareholders' equity                                        $30,557,610            $22,010,286
                                                                         ===========            ===========
</TABLE>





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





                                     - 23 -

<PAGE>   24
                        ACR GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

     FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND
                              FEBRUARY 28, 1995


<TABLE>
                                                       1997                1996               1995    
                                                  --------------      --------------      --------------
<S>                                               <C>                 <C>                 <C>           
 Sales                                            $   78,371,020      $   56,500,253      $   41,281,119
 Cost of sales                                        63,285,694          45,779,447          32,717,879
                                                  --------------      --------------      --------------

 Gross profit                                         15,085,326          10,720,806           8,563,240

 Selling, general and
   administrative expenses                           (13,859,797)        (10,082,119)         (7,814,189)
 Commission income                                       290,919                  --                  --
 Energy services income, net                             142,226             126,027             196,556
                                                  --------------      --------------      --------------

 Operating income                                      1,658,674             764,714             945,607
 Interest expense                                       (925,409)           (644,767)           (451,305)
 Other non-operating income                              153,238              78,863              67,404
                                                  --------------      --------------      --------------

 Income before income taxes                              886,503             198,810             561,706
 Provision (benefit) for income taxes:
   Current                                               101,715              15,044               3,500
   Deferred                                             (360,000)                 --                  -- 
                                                  --------------      --------------      --------------

 Net income                                       $    1,144,788      $      183,766      $      558,206
                                                  ==============      ==============      ==============
 Earnings per common share:
   Primary                                        $          .11      $          .02      $          .05
   Fully diluted                                             .10                 .02                 .05
</TABLE>





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





                                     - 24 -
<PAGE>   25
                        ACR GROUP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

     FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29, 1996 AND
                              FEBRUARY 28, 1995



<TABLE>
<CAPTION>
                                                                          Additional
                                       No. of Shares                        Paid-In        Accumulated
                                           Issued         Par Value         Capital          Deficit             Total   
                                        ------------     ------------     ------------     ------------      ------------
 <S>                                       <C>             <C>         <C>            <C>              <C>
 Balance, February 28, 1994               10,246,555     $    102,466     $ 41,427,020     $(36,605,246)     $  4,924,240
   Net income                                     --               --               --          558,206           558,206
                                        ------------     ------------     ------------     ------------      ------------

 Balance, February 28, 1995               10,246,555          102,466       41,427,020      (36,047,040)        5,482,446
   Net income                                     --               --               --          183,766           183,766
                                        ------------     ------------     ------------     ------------      ------------

 Balance, February 29, 1996               10,246,555          102,466       41,427,020      (35,863,274)        5,666,212
 Shares issued as compensation               125,000            1,250          123,750               --           125,000
 Issuance of warrant                              --               --           70,000               --            70,000
 Net income                                       --               --               --        1,144,788         1,144,788
                                        ------------     ------------     ------------     ------------      ------------

 Balance, February 28, 1997               10,371,555     $    103,716     $ 41,620,770     $(34,718,486)     $  7,006,000
                                        ============     ============     ============     ============      ============
</TABLE>





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

                                     -25-




<PAGE>   26
                        ACR GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

          FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29,
                          1996 AND FEBRUARY 28, 1995

<TABLE>
<CAPTION>
                                                 1997               1996               1995   
                                             -------------      -------------      -------------
<S>                                          <C>                <C>                <C>          
 Operating activities:
   Net income                                $   1,144,788      $     183,766      $     558,206
   Adjustments to reconcile net
     income to net cash used in
     operating activities:
       Depreciation and amortization               705,037            542,965            444,803
       Deferred income taxes                      (360,000)                --                 --
       Stock issued as compensation                125,000                 --                 --
       Provision for bad debts                     252,572            326,349            218,052
       (Gain) loss on sale of assets                  (798)             8,395            (20,859)
       Changes in operating assets and
         liabilities:
         Accounts receivable                    (1,772,188)        (2,192,222)          (742,063)
         Inventory                              (3,673,165)        (1,090,047)        (3,367,311)
         Prepaid expense and other
           assets                                 (172,147)           297,499              7,775
         Accounts payable                        1,521,117          1,009,879          1,317,439
         Accrued expenses and other
           liabilities                             425,050             22,058            155,054
                                             -------------      -------------      -------------
 Net cash used in operating activities          (1,804,734)          (891,358)        (1,428,904)
                                             -------------      -------------      -------------

 Investing activities:
   Acquisition of property and
     equipment                                    (754,686)          (956,744)          (445,843)
   Acquisition of businesses, net of
     cash acquired                                (895,651)           (94,813)                --
   Proceeds from disposition of assets              42,951             27,844             30,160
                                             -------------      -------------      -------------

 Net cash used in investing activities          (1,607,386)        (1,023,713)          (415,683)
                                             -------------      -------------      -------------
 Financing activities:
   Proceeds from long-term debt                  4,293,457          3,045,019          2,636,822
   Payments on long-term debt                     (816,800)          (944,531)          (679,769)
                                             -------------      -------------      -------------

 Net cash provided by financing
   activities                                    3,476,657          2,100,488          1,957,053
                                             -------------      -------------      -------------
 Net increase in cash                               64,537            185,417            112,466
 Cash at beginning of year                         348,162            162,745             50,279
                                             -------------      -------------      -------------

 Cash at end of year                         $     412,699      $     348,162      $     162,745
                                             =============      =============      =============
</TABLE>




                                  (continued)





                                     - 26 -
<PAGE>   27
                        ACR GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

           FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29,
                           1996 AND FEBRUARY 28, 1995
                                  (continued)

<TABLE>
<CAPTION>
                                                      1997             1996             1995 
                                                  -----------      -----------      -----------
<S>                                               <C>              <C>              <C>        
 Schedule of non-cash investing and
   financing activities:
   Acquisition of subsidiaries:
     Fair value of assets acquired                $ 1,305,466      $   461,113      $        --
     Fair value of liabilities assumed                (66,932)        (553,814)              --
     Goodwill                                       1,241,426          127,701               --
     Notes payable to sellers                       1,166,662          291,789               --
   Purchase of property and equipment
     (net of cash paid):
     For notes payable                                250,000               --               --
     Under capital leases                             371,118          289,921          119,750
 Supplemental cash flow information:
   Interest paid                                      917,373          635,585          462,237

   Federal income taxes paid                           22,000            6,062            5,000
</TABLE>





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





                                     - 27 -
<PAGE>   28
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1  -     Description of Business and Summary of Significant Accounting Policies

Description of Business

         ACR Group, Inc.'s (the "Company") principal business is the wholesale
distribution of heating, ventilating, air conditioning and refrigeration
("HVACR") equipment, parts and supplies in the southeastern United States,
central and south Texas; and Las Vegas, Nevada.

Principles of Consolidation

         The consolidated financial statements include the accounts of ACR
Group, Inc. and its subsidiaries, all of which are wholly-owned.  All
significant intercompany accounts and transactions have been eliminated.

Use of Estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes.  Actual results could differ from those estimates.

Revenue Recognition

         Revenues are recognized at the time merchandise is shipped or
delivered to the customer.

         Beginning in fiscal 1997, the Company earned commission income from a
supplier by providing warehousing and shipping services to another distributor
of the supplier.

Energy Services

         Revenues from energy service contracts, which expired in 1996 and
continue on a month-to-month basis, are recognized when the related energy cost
savings are billed to the user.  These revenues are insignificant to the sales
of the Company and are presented net of costs to provide such services.

Inventories

         Inventories are valued at the lower of cost or market using the
average cost method. Substantially all inventories represent finished goods
held for sale.  The Company has an arrangement with an HVACR equipment
manufacturer and





                                     - 28 -
<PAGE>   29
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)


1  -     Description of Business and Summary of Significant Accounting Policies
(continued)

Inventories (continued)

a field warehouse agent whereby HVACR equipment is held for sale in bonded
warehouses located at the premises of the Company's operations in Georgia, Las
Vegas, and Memphis, with payment due only when products are sold.  Such
inventory is accounted for as consigned merchandise and is not recorded on the
Company's balance sheet.  The cost of such inventory held in the bonded
warehouses was $15,998,345 at February 28, 1997 and $10,881,771 at February 29,
1996.

         The terms of the consignment agreement with the supplier further
provide that merchandise not sold within a specified period of time must be
purchased by the Company.  The Company believes that substantially all
consigned merchandise will be sold in the ordinary course of business before
any purchase obligation is incurred.

Property and Equipment

         Property and equipment are stated at cost.  Depreciation and
amortization are provided on the straight-line method over the following
estimated useful lives.  Energy management equipment is fully depreciated.

<TABLE>
        <S>                               <C>
        Buildings                         20-40 years
        Leasehold improvements            Primary term of the lease
        Furniture and fixtures            5-7 years
        Vehicles                          3-6 years
        Other equipment                   3-10 years
</TABLE>

Goodwill

         Goodwill represents the excess cost of companies acquired over the
fair value of their tangible assets.  Goodwill is being amortized on a
straight-line basis over 10-40 years.  The carrying value of goodwill is
reviewed if the facts  and circumstances suggest that it may be impaired.  If
this review indicates that goodwill will not be recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the goodwill will be
reduced by the estimated shortfall of the undiscounted cash flows.





                                     - 29 -
<PAGE>   30
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)



1  -     Description of Business and Summary of Significant Accounting Policies
         (continued)

Income Taxes

         The Company and its subsidiaries file a consolidated federal income
tax return.  The Company uses the liability method in accounting for income
taxes.  Under the liability method, deferred tax assets and liabilities  are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

Earnings Per Share

         Earnings per share are based upon earnings applicable to common shares
and the weighted average number of shares of common stock and dilutive common
stock equivalents (stock options, warrants and other convertible securities)
outstanding.  The primary weighted average number of common and equivalent
shares outstanding was 10,884,495, 10,246,555, and 10,246,555 for 1997, 1996
and 1995, respectively.  The fully diluted weighted average number of common
and equivalent shares outstanding was 10,913,309 for 1997, 10,513,485 for 1996,
and 10,613,038 for 1995.

Stock Options

         In fiscal year 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123 "Accounting for Stock Based
Compensation," which permits the Company to recognize compensation cost related
to stock options using either the intrinsic value method under Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees" or the fair value method under SFAS No. 123.  The Company has
elected to continue to follow APB No. 25 in accounting for stock options.

Supplier/Sources of Supply

         The Company currently purchases a majority of its HVACR equipment and
repair parts from two primary suppliers.  The Company has not encountered any
significant difficulty to date in obtaining equipment and repair parts to
support its operations at current or expected near-term future levels.
However, any disruption in these supply sources could have an adverse effect
upon the Company's operations.





                                     - 30 -
<PAGE>   31
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)



1  -     Description of Business and Summary of Significant Accounting Policies
         (continued)

Long-Lived Assets

         In fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Impairment losses are recognized when indicators of impairment are present and
the estimated undiscounted cash flows are not sufficient to recover the
carrying amount of the assets.  The impairment loss is measured by comparing
the fair value of the asset to its carrying value.  The effect of adopting SFAS
No. 121 was not material to the consolidated financial statements.

Recently Issued Accounting Standards

         In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share," which specifies the computation, presentation
and disclosure requirements for earnings per share.  SFAS No. 128 is effective
for financial statements for periods ending after December 15, 1997, and
earlier adoption is not permitted.

         SFAS No. 129, "Disclosure of Information about Capital Structure," was
issued in February 1997.  This statement is effective for financial statements
for periods ending after December 15, 1997.

         The Company has not yet determined the impact on the consolidated
financial statements from the initial adoption of these standards.

2  -     Acquisitions

         In January 1997, the Company entered into a Purchase Agreement
("Agreement") pursuant to which it acquired all of the issued and outstanding
capital stock of Lifetime Filter, Inc. ("LFI"), a Texas corporation, and
contemporaneously therewith, LFI acquired all of the assets, and assumed all of
the liabilities, of the O'Leary Family Partnership, Ltd.  ("OFP"), a Texas
limited partnership.  Prior to such transactions, Mr. Richard O'Leary
("O'Leary") was the sole shareholder of both LFI and RGO, Ltd., the general
partner of OFP.  LFI is a manufacturer and distributor of electrostatic air
filters and sells its products directly to HVACR contractors.

         As consideration for such acquisitions, the Company paid $1,280,662 to
O'Leary and OFP, and LFI issued a promissory note to OFP for $1,166,662.  All
of the cash paid by the Company came from a portion of the proceeds of a loan
to the Company from St. James Capital Partners, L.P. (see Note 4).  The
Agreement provides that the purchase price may subsequently be reduced if LFI
fails to sell





                                     - 31 -
<PAGE>   32
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)




2  -     Acquisitions (continued)

a specified dollar volume of filters during 1997.  The excess of the purchase
price over the estimated fair value of the net assets acquired amounted to
$1,241,426, which has been recorded as goodwill and is being amortized over 40
years using the straight-line method.

         Unaudited pro forma results of the Company's operations for the years
ended February 28, 1997 and February 29, 1996, as if the acquisitions of LFI
and OFP had occurred as of the beginning of each of such fiscal years, are as
follows:


<TABLE>
<CAPTION>
                                                 1997                    1996   
                                             -----------             -----------
         <S>                                 <C>                     <C>
         Sales                               $80,393,205             $57,880,455
         Net income                            1,399,535                  84,145
         Earnings per common share:
           Primary                                  0.13                    0.01
           Fully diluted                            0.13                    0.01
</TABLE>

         These pro forma results are presented for comparative purposes only
and include certain adjustments to give effect to interest expense on
acquisition debt, amortization of goodwill and additional depreciation expense
as a result of a step-up in the basis of fixed assets, together with related
income tax effects.  They do not purport to be indicative of the results of
operations which actually would have resulted had the combination occurred on
March 1, 1996 or March 1, 1995, as applicable, or of future results of
operations of the consolidated entities.

         In January 1996, the Company acquired all of the outstanding capital
stock of Ener-Tech Industries, Inc.  ("ETI"), a Tennessee corporation, for
$72,947 cash and $291,789 in notes payable to the sellers (see Note 4).  ETI is
an HVACR distributor specializing in commercial and industrial controls.  In
October 1995, the Company acquired for $75,000 cash all of the outstanding
capital stock of Sweet Georgia Air Supply, Inc. ("SGAS"), a Georgia
corporation.  SGAS was an HVACR distributor in south Georgia.  Immediately
following the acquisition, SGAS was merged into Total Supply, Inc., the
Company's subsidiary doing business in Georgia.  The Company recorded goodwill
of $127,701 in connection with the acquisition of SGAS.  Pro forma results of
operations relating to these fiscal 1996 acquisitions are not presented because
the effects of such acquisitions were not significant.

         Each of the acquisitions was accounted for using the purchase method
of accounting, and the consolidated financial statements include the operating
results of each business from the date of acquisition.





                                     - 32 -
<PAGE>   33
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)




3  -     Property and Equipment

         Property and equipment consisted of the following at the end of
February:

<TABLE>
<CAPTION>
                                                      1997               1996 
                                                  -------------      -------------
<S>                                               <C>                <C>          
         Land                                     $     693,246      $      68,593
         Building and leasehold
           improvements                               1,274,429            820,820

         Furniture and fixtures                         119,077            107,925
         Vehicles                                     1,242,964            900,926
         Other equipment                              1,747,913          1,294,909
         Energy management equipment                    260,887            388,612
                                                  -------------      -------------

                                                      5,338,516          3,581,785
         Less accumulated depreciation               (1,903,110)        (1,470,788)
                                                  -------------      -------------

         Net property and equipment               $   3,435,406      $   2,110,997
                                                  =============      =============
</TABLE>

         Capitalized lease assets of $982,377 and $654,359, together with
accumulated amortization of $325,706 and $198,847 are included in property and
equipment as of February 28, 1997 and February 29, 1996, respectively.
Amortization expense is included with depreciation expense.

4  -     Debt

         Debt is summarized as follows at the end of February:

<TABLE>
<CAPTION>
                                                             1997                     1996   
                                                          ----------               ----------
<S>                                                       <C>                      <C>       
     Revolving line of credit                             $7,400,000               $4,900,000
     Note payable - St. James Capital
       Partners, L.P.                                      1,330,000                     -
     Real estate loans                                       629,200                  408,000
     Equipment term loan                                     355,128                  144,266
     Notes payable - Catalyst Fund                           527,250                  718,038
     Notes payable to sellers of
       companies acquired (Note 2)                         1,409,994                  291,789
     Obligation to trade creditor                            114,500                  325,000
     Other                                                   224,623                  190,114
                                                         -----------               ----------

                                                          11,990,695                6,977,207
     Less current maturities                              (1,255,631)                (579,485)
                                                         -----------               ----------  
     Long-term debt, less current
       maturities                                        $10,735,064               $6,397,722
                                                         ===========               ==========
</TABLE>





                                     - 33 -
<PAGE>   34
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)




4  -    Debt (continued)

         The Company has a revolving line of credit arrangement with a
commercial bank ("Bank") pursuant to which the Company may borrow up to $8
million, including amounts outstanding under standby letters of credit.
Borrowings are secured by accounts receivable and inventory, and the permitted
amount of outstanding borrowings at any time is limited to specified
percentages of certain accounts receivable and inventory.  Borrowings under the
line of credit bear interest at the prime rate plus  1/2% (9% at February 28,
1997), payable monthly.  Restrictive covenants of the loan agreement prohibit
the Company from paying dividends, prepaying its indebtedness to The Catalyst
Fund, Ltd. ("Catalyst") or incurring other debt without the Bank's consent, and
also require the Company to maintain certain financial ratios.  As of February
28, 1997, the Company had fully utilized its line of credit with $7.4 million
in outstanding borrowings and letters of credit aggregating $600,000 issued to
secure its trade credit line from a supplier.

         The revolving line of credit matures on February 28, 1998.  As a
result of the Company's acquisitions during 1997, the Company  was in violation
of certain financial covenants under the revolving line of credit at February
28, 1997.  The Company has obtained waivers of these debt covenant violations
from the Bank through August 31, 1997.  On May 12, 1997, as amended on June 10,
1997, the Company obtained a firm commitment from the Bank to refinance the
existing $8 million revolving line of credit with a new $18 million revolving
credit facility, including a $1 million sub-facility for letters of credit.
The new revolving credit facility provides for borrowings, at the Company's
option, at either the Bank's prime rate plus  1/2% or LIBOR plus 3.00%.
Borrowings under the new revolving credit facility will be limited to 85% of
eligible accounts receivable and 50% of eligible inventory amounts.  The
Company expects to close on the new revolving credit facility by June 30, 1997.
Accordingly, the Company has classified the $7.4 million outstanding under the
revolving line of credit at February 28, 1997 as long-term debt in the
accompanying consolidated balance sheet because the Company intends that at
least that amount would remain outstanding under the new revolving credit
agreement for an uninterrupted period extending beyond one year from February
28, 1997.

         In connection with its acquisition of LFI in January 1997 (see Note
2), the Company obtained $1.4 million in financing from St. James Capital
Partners, L.P. ("St. James").  The note issued to St. James (the "St. James
Note") bears interest at 10% per annum and has an initial maturity date of
January 24, 1998, which can be extended for one year at the Company's sole
discretion.  The Company may elect to extend the maturity date of the St. James
Note for one year past the initial maturity date, in which case the Company
will be required to issue a warrant for a number of shares of the Company's
common stock equal to 10% of the outstanding  indebtedness,  including
interest, on  the  St.  James Note   with





                                     - 34 -
<PAGE>   35

                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)


4  -     Debt (continued)

an exercise price of $1.625 per share of common stock.  The St. James Note is
classified as long-term debt at February 28, 1997 in the accompanying
consolidated balance sheet, because the Company expects to exercise its option
to extend the maturity date to January 24, 1999.  The St. James Note is secured
by certain assets of LFI and by the stock and operating assets of certain of
the Company's other subsidiaries.  St. James has subordinated its security
interests to the Bank and, with respect to certain assets, to Catalyst.  None
of the principal or accrued interest is payable prior to maturity.  The unpaid
balance of the note, including interest, is convertible into common stock of
the Company at $2.40 per share upon demand by St. James at any time during the
term of the loan.  The Company may require St. James to convert the
indebtedness into the Company's common stock at such time as the average price
of the Company's common stock equals or exceeds $3.25 per share for a period of
twenty consecutive business days and the daily average volume of stock traded
during such period equals a specified minimum.  In connection with the
financing, the Company also issued St.  James a warrant to acquire 280,000
shares of the Company's common stock at an exercise price of $1.625 per share
(see Note 7).  The proceeds of the St. James Note were allocated between the
debt and the warrant, resulting in a debt discount of approximately $70,000,
which is being amortized to interest expense over the term of the loan.

         The OFP Note bears interest at the prime rate plus 1% per annum.  The
Note is to be repaid in twelve equal quarterly installments of principal, plus
accrued interest.  The unpaid balance of the OFP Note, together with all
accrued and unpaid interest, is due and payable on December 31, 1999.  The Note
is secured by a first lien on certain production machinery of LFI and the land
and building on which LFI's plant is situated, and by a junior lien on the
accounts receivable and inventory of LFI.  The OFP Note is subordinated to the
Company's indebtedness to the Bank.

         The Company also borrowed funds from the Bank in 1995 to construct a
warehouse and office building that replaced an existing branch facility in the
Houston area.  The note, which has a balance of $379,200 as of February 28,
1997, is being repaid in equal monthly principal installments of $2,400, plus
interest at the prime rate plus 1%, with the unpaid principal balance due at
maturity on April 30, 2000.  The loan is secured by a deed of trust on both the
land and the building.

         The Company also has a term loan facility from the Bank under which
the Company may borrow up to $500,000 for capital expenditures.  Borrowings
under the facility bear interest at the prime rate plus  1/2%, and principal is
to be repaid monthly over an amortization period of 48 months.  During fiscal
1997, the Company borrowed  $130,000 under this facility to purchase land in
Las Vegas  for





                                     - 35 -
<PAGE>   36
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)




4  -     Debt (continued)

the future construction of a new office/warehouse.  The Company also obtained
seller financing for $250,000, which is payable in full in September 1997.

         In 1993, the Company obtained a $1 million loan from Catalyst in
connection with the acquisition of ACR Supply, Inc.  The loan bears interest at
12 1/2% per annum and is secured by the stock and operating assets of certain
of the Company's subsidiaries and an assignment of proceeds from a life
insurance policy on the Company's President.  The loan is being repaid in 60
equal monthly installments of $22,498, including interest, with the final
payment due in May 1999.  In addition, Catalyst received a warrant to purchase
one million shares of the Company's common stock at a price of $.59 per share,
exercisable at any time before May 1999 (see Note 7).  Catalyst has
subordinated its security interests to the Bank.  Covenants of the loan
agreement prohibit dividends and restrict additional borrowings without
Catalyst's consent, and also require the Company to maintain specified
financial ratios.  The Company has obtained amendments of certain covenants in
the Company's loan agreement with Catalyst which cure any non-compliance with
such covenants as of February 28, 1997, and the Company expects to be in
compliance with all covenants during fiscal 1998.

         The notes issued as part of the purchase price of ETI ("ETI Notes")
bear interest at 9% per annum, and are payable in equal quarterly installments,
including interest, to December 2000.  The ETI Notes are unsecured and are
subordinated to the Company's borrowings from the Bank.

         A supplier permitted a subsidiary of the Company to forego payment on
usual terms for certain merchandise purchased and, in 1993, the Company and the
supplier agreed on a repayment schedule such that $650,000 would be repaid in
four annual installments.  The final payment is due in May 1997.  The supplier
has a subordinated security interest in the assets of the subsidiary.

         At February 28, 1997, other debt consists principally of debt assumed
by the Company in connection with its acquisitions during fiscal 1996.  Such
debt was incurred for both working capital and the purchase of capital assets
and includes notes to both individuals and to commercial banks.  Debt
aggregating $66,497 to certain individuals at February 28, 1997 is subordinated
by the lenders to the Company's borrowings from the Bank.

         Based upon the borrowing rates currently available to the Company for
debt instruments with similar terms and average maturities, the carrying value
of long-term debt approximates fair value.





                                     - 36 -
<PAGE>   37
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)




4  -     Debt (continued)

         Future maturities of debt, assuming the refinancing of the line of
credit with the Bank and the exercise of the Company's option to extend the
maturity of the St. James Note, are $1,255,631 in 1998, $2,218,499 in 1999,
$8,065,011 in 2000 and $451,554 in 2001.

5  -     Lease Commitments

         The Company leases warehouse and office equipment and vehicles under
capital leases.  Future minimum lease payments under capital leases are as
follows:
<TABLE>
<CAPTION>
            Year ending February 28 or 29                  Capital lease payments
            -----------------------------                  ----------------------
 <S>                                                                  <C>
                        1998                                          $257,955
                        1999                                           229,266
                        2000                                           158,433
                        2001                                            94,303
                        2002                                             2,764
                                                                      --------
 Total minimum lease payments                                         $742,721
 Less amounts representing interest                                   (115,924)
                                                                      -------- 

 Present value of future minimum
   lease payments                                                      626,797
 Less current maturities of
   capital lease obligations                                          (201,969)
                                                                      -------- 
 Long-term obligations under
   capital leases                                                     $424,828
                                                                      ========
</TABLE>

         Additionally, the Company leases its corporate offices, office and
warehouse space occupied by its HVACR operations, and various office equipment
and vehicles under non-cancelable operating lease agreements that expire at
various dates through 2007.  The leases for its branch facilities often require
that the Company pay the taxes, insurance and maintenance expenses related to
the leased properties.  Certain of the Company's lease agreements include
renewal and/or purchase options.  Future minimum lease payments under such
leases are $1,399,714 in 1998, $946,435 in 1999, $825,199 in 2000, $637,931 in
2001, $358,398 in 2002 and $521,434 after 2002.

         Rental expenses were $1,292,999, $994,251 and $747,353 in 1997, 1996
and 1995 respectively.





                                     - 37 -
<PAGE>   38
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)




6  -     Income Taxes

         The Company recognizes a tax benefit from a net operating loss
carryforward if it is more likely than not that such benefit will ultimately be
realized.  Such a tax benefit is recorded on the balance sheet as a deferred
tax asset.  To the extent that it cannot be determined that such tax benefit
will more likely than not be realized, a valuation allowance is established
against the deferred tax asset.  The deferred tax asset is classified as
current to the extent that a tax benefit is expected to be realized in the next
fiscal period.

         The income tax benefit for the fiscal year ended February 28, 1997
consists primarily of a change in the valuation allowance offset by a provision
for current state income taxes and federal alternative minimum taxes.  Income
tax expense for the fiscal years ended February 29, 1996 and February 28, 1995
consists principally of current state income taxes and federal alternative
minimum taxes.  The difference between the income tax provision computed at the
statutory federal income tax rate and the financial statement provision for
taxes is summarized below:

<TABLE>
<CAPTION>
                                                                                           Fiscal Year Ended             
                                                                            ---------------------------------------------
                                                                            February 28,     February 29,    February 28,
                                                                                1997             1996            1995    
                                                                            ------------     ------------    ------------
<S>                                                                           <C>              <C>             <C>
Tax at statutory rate                                                         $ 301,411        $ 67,595        $190,980
Increase (reduction) in tax
  expense resulting from:
  Change in valuation allowance                                                (668,578)        (93,539)       (222,501)
  Nondeductible expenses                                                         48,725          39,640          31,521
  Other                                                                          60,157           1,348           3,500
                                                                              ---------        --------        --------

Actual income tax provision
  (benefit)                                                                   $(258,285)       $ 15,044        $  3,500
                                                                              =========        ========        ========
</TABLE>

         As of February 28, 1997 and February 29, 1996, the Company has net
operating loss carryforwards of approximately $32.7 million and $34.3 million,
respectively, which are available to offset future taxable income.  If unused,
such carryforwards will expire from 2000 to 2007.  In addition, as of February
28, 1997 and February 29, 1996, the Company has investment and research and
development tax credit carryforwards of approximately $1.1 million expiring on
various dates through 2000.  For financial reporting purposes, the Company has
recognized a valuation allowance of $11.7 million and $12.4 million as of
February 28, 1997 and February 29, 1996, respectively, to offset the deferred
tax





                                     - 38 -
<PAGE>   39
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)




6  -     Income Taxes (continued)

assets related primarily to the loss carryforward and the credit carryforwards.
The decrease in the valuation allowance from February 29, 1996 to February 28,
1997 was principally due to the recognition of net operating loss carryforwards
which had previously not been recognized.  There are no other significant
components of the Company's deferred tax assets and liabilities as of February
28, 1997.

7  -     Stock Option Agreements and Equity Transactions

         Pursuant to an employment contract, the President of the Company was
granted 125,000 shares of the Company's common stock, valued at $125,000,
during fiscal 1997.  The contract also provides that he is to receive options
for up to 425,000 shares of the Company's stock based upon attainment in the
future of certain levels of consolidated net income as defined in the contract.
The exercise price of all options issued thereunder is the market price of the
Company's stock at the time the options are granted.  Of such options, 50,000
(none in fiscal 1997 and 25,000 in fiscal 1996), which expire 25,000 in each of
May 1999 and June 2000, have been granted at an average exercise price of $.77
per share.  Options for 75,000 shares will be granted in fiscal 1998 based upon
the Company's results of operations in fiscal 1997.  The President also holds
options to purchase 8,437 shares at $.13 per share that expire in August 1997,
and 325,000 shares at $.49 per share that expire in February 1998.  All such
options granted are currently exercisable.

         In connection with its financing provided to the Company, St. James
Capital Partners, L.P. ("St. James") received a warrant to acquire 280,000
shares of the Company's common stock at an exercise price of $1.625 per share,
exercisable at any time before January 2002.  In connection with its loan to
the Company, the Catalyst Fund, Ltd.  ("Catalyst") received a warrant to
purchase one million shares of the Company's common stock at a price of $.59
per share, exercisable at any time before May 1999.  See Note 4.  During 1997,
Catalyst sold 250,000 of such warrants to St. James.

         In March 1994, the Company entered into an employment contract with
the general manager of a subsidiary and concurrently awarded him options to
purchase 25,000 shares of common stock at $.55 per share that expire in
February 1999.  Pursuant to his contract, which expired at the end of February
1997, the Company awarded him options in fiscal 1996 to purchase 15,000 shares
at $.70 per share which expire in April 2000.  All such options granted are
currently exercisable.





                                     - 39 -
<PAGE>   40
                        ACR GROUP, INC. AND SUBSIDIARIES     
                                                             
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 (CONTINUED)




7  -     Stock Option Agreements and Equity Transactions (continued)

         In fiscal 1997, the Company established the 1996 stock option plan for
key employees and directors of the Company and its subsidiaries.  The plan
provides for the granting of non-qualified stock options and/or incentive stock
options.  No options were granted in fiscal 1997 and 500,000 shares of common
stock were available for future grants at February 28, 1997.

         Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS
No. 123.  The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model.  Based upon the Company's
calculations, net income and earnings per share, using this fair value method,
would not be materially different from the amounts reported.  The weighted
average fair value of options granted during 1996 was $0.33.

8  -     Profit Sharing Plan

         The Company has a qualified profit sharing plan ("Plan") under Section
401(k) of the Internal Revenue Code.  The Plan is open to all eligible
employees.  The Company matches 50% of the participant's contributions, not to
exceed 3% of each participant's compensation.  Company contributions to the
Plan were $111,609, $94,247 and $71,986 for fiscal 1997, 1996 and 1995,
respectively.

9  -     Subsequent Events

         In April 1997, the Company acquired for approximately $70,000 the
assets and liabilities of ACH Supply, Inc.  ("ACH"), a wholesale distributor of
HVACR products with two branches in the Los Angeles area.  ACH had sales of
$2.8 million for its fiscal year ended June 30, 1996.  In April 1997, the
Company also borrowed an additional $450,000 from Catalyst, the proceeds of
which were used principally to provide working capital for ACH.  The payment
terms and the interest rate of the additional borrowings are substantially the
same as for the Company's previously existing loan from Catalyst (see Note 4).

         In May 1997, the Company entered into a letter of intent to acquire
the operating assets and related liabilities of Contractors Heating & Supply,
Inc. ("CHS"), a Denver-based HVACR distributor with three branches in Colorado
and one in New Mexico.  CHS had sales of approximately $20 million for the year
ended December 31, 1996.  The purchase price of the assets and liabilities of
CHS is estimated at $6 million, of which $4.8 million will be borrowed from the
Bank under the new revolving credit facility (see Note 4), and $1.2 million
will be financed by the seller.  The Company expects to conclude the
acquisition of CHS in the second quarter of fiscal 1998.





                                     - 40 -
<PAGE>   41
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

                 None



                                    PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Incorporated by reference.


ITEM 11. EXECUTIVE COMPENSATION.

         Incorporated by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Incorporated by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Incorporated by reference.





                                     - 41 -
<PAGE>   42
                                    PART IV



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


(a)(1)   Financial Statements included in Item 8.

         See Index to Financial Statements of ACR Group, Inc. set forth in Item
8, Financial Statements and Supplementary Data.


(a)(2)   Index to Financial Statement Schedules included in Item 14.

         The following financial statement schedule for the years ended
February 28, 1997, February 29, 1996 and February 28, 1995 is included in this
report:

         Schedule II - Valuation and Qualifying Accounts

         All other schedules are omitted because they are not applicable or the
required information is included in the financial statements or notes thereto.


(a)(3)   Exhibits

         The following exhibits are filed with or incorporated by reference
into this report.  The exhibits which are denoted by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from,
either (a) Form S-1 Registration Statement under the 1933 Act for Registrant,
Registration No. 2-86049 filed August 24, 1983, as amended by Amendment No. 1
filed September 8, 1983, as amended by Amendment No. 2 (post-effective) filed
September 12, 1984 (referred to as "RS 2-86049"), or (b) Annual Report on Form
10-K for Fiscal Year Ended June 30, 1991 (referred to as "1991 10-K"), or (c)
Annual Report on Form 10-K for fiscal year ended February 28, 1993 (referred to
as "1993 10-K"), or (d) Annual Report on Form 10-K for fiscal year ended
February 28, 1994 (referred to as "1994 10-K"), (e) Annual Report on 10-K for
fiscal year ended February 28, 1995 (referred to as "1995 Form 10-K"), (f)
Annual Report on 10-K for fiscal year ended February 29, 1996 (referred to as
"1996 Form 10-K"), (g) Form S-8 Registration Statement under the 1933 Act for
Registrant, Registration No. 333-16325 filed November 18, 1996 (referred to as
"RS 333-16325"), or (h) Current Report on Form 8-K dated January 24, 1997.





                                     - 42 -
<PAGE>   43
Exhibit Number            Description


       *3.1    Restated Articles of Incorporation (Exhibit 3.1 to 1991 10-K)

       *3.2    Articles of Amendment to Articles of Incorporation (Exhibit 3.2
               to 1993 10-K)

       *3.3    Amended and Restated Bylaws (Exhibit 3.2 to 1991 10-K)

       *3.4    Amendment to Bylaws dated December 8, 1992 (Exhibit 3.4 to 1993
               10-K)
 
       *4.1    Specimen of Common Stock Certificate of ACR Group, Inc. (Exhibit
               4.1 to 1993 10-K)

      *10.1    Restricted Stock Option Plan, as amended (Exhibit 10.2 to RS
               2-86049)

      *10.2    Employment Agreement between the Company and Alex Trevino, Jr.
               dated May 17, 1993 (Exhibit 10.4 to 1993 10-K)

      *10.3    Amendment to Employment Agreement between the Company and Alex
               Trevino, Jr. dated as of February 28, 1995 (Exhibit 10.3 to 1995
               10-K)

      *10.4    Stock Option Agreement between the Company and Alex Trevino, Jr.
               dated as of February 28, 1993 (Exhibit 10.11 to 1993 10-K)

      *10.5    Note Agreement between The Catalyst Fund, Ltd., as Lender, and
               the Company, ACR Supply, Inc., Fabricated Systems, Inc. and
               Heating and Cooling Supply, Inc., as Borrowers, dated as of May
               27, 1993 (Exhibit 10.18 to 1993 10-K)

       10.6    Warrant for the Purchase of 750,000 Shares of Common Stock of
               the Company issued to The Catalyst Fund, Ltd. dated April 14,
               1997

       10.7    Warrant for the Purchase of 250,000 Shares of Common Stock of
               the Company issued to St. James Capital Partners, L.P. dated
               April 14, 1997





                                     - 43 -
<PAGE>   44
Exhibit Number            Description


      *10.8    Registration Rights Agreement between The Catalyst Fund, Ltd.
               and the Company dated May 27, 1993 (Exhibit 10.20 to 1993 10-K)

      *10.9    Loan Agreement by and between the Company and NationsBank of
               Texas, N.A. dated as of March 8, 1994 (Exhibit 10.11 to 1994
               10-K)

      *10.10   First Amendment to Loan Agreement by and between the Company and
               NationsBank of Texas, N.A. dated as of October 27, 1994 (Exhibit
               10.11 to 1995 Form 10-K).

      *10.11   Second Amendment to Loan Agreement by and between the Company
               and NationsBank of Texas, N.A. dated as of March 27, 1995
               (Exhibit 10.12 to 1995 Form 10-K)

      *10.12   Third Amendment to Loan Agreement by and between the Company and
               NationsBank of Texas, N.A. dated as of February 20, 1996
               (Exhibit 10.11 to 1996 Form 10-K)

      *10.13   Purchase Agreement by and among the Company, Richard O'Leary,
               Lifetime Filter, Inc. and O'Leary Family Partnership, Ltd.
               (Exhibit 2.1 to Form 8-K dated January 24, 1997)

      *10.14   1996 Stock Option Plan of ACR Group, Inc. (Exhibit 4 to RS
               333-16325)

       10.15   Agreement of Purchase and Sale by and between the Company and
               St. James Capital Partners, L.P. dated as of January 24, 1997

       10.16   10% Convertible Promissory Note of the Company issued to St.
               James Capital Partners, L.P. dated as of January 24, 1997

       10.17   Warrant to Purchase 280,000 Shares of Common Stock of the
               Company issued to St. James Capital Partners, L.P. dated January
               24, 1997





                                     - 44 -
<PAGE>   45
Exhibit Number            Description


       10.18   Registration Rights Agreement between St. James Capital
               Partners, L.P. and the Company dated January 24, 1997

       10.19   Commitment Letter for $18 Million Credit Facility Issued by
               NationsBank of Texas, N.A. for ACR Group, Inc. and Subsidiaries
               dated May 12, 1997, as amended effective June 10, 1997

       21.1    Subsidiaries of the Company

       23.1    Consent of Independent Auditors



(b)      Reports on Form 8-K

                 A report on Form 8-K dated January 24, 1997 was filed to
         report the acquisition by the Company of Lifetime Filter, Inc.

(c)      Exhibits

                 See Item 14(a)(3), above.

(d)      Financial Statement Schedule





                                     - 45 -
<PAGE>   46
                                                                     SCHEDULE II

                                ACR GROUP, INC.

                       VALUATION AND QUALIFYING ACCOUNTS

          FOR THE FISCAL YEARS ENDED FEBRUARY 28, 1997, FEBRUARY 29,
                          1996 AND FEBRUARY 28, 1995

<TABLE>
<CAPTION>
                                                                 Additions         
                                                            -----------------------
                                           Balance at         Charged    Charged to                        Balance
                                           Beginning        to Costs and    Other                           at End
Description                                of Period          Expenses    Accounts    Deductions          of Period 
-----------                                ----------       ------------ ----------   ----------          ----------
<S>                                             <C>            <C>        <C>            <C>                    <C>
Year ended February 28, 1997:
         Allowance for doubtful
                 accounts:
                 Accounts receivable            $459,501       $252,572   $25,000(2)    $153,049(1)         $584,024


Year ended February 29, 1996:
         Allowance for doubtful
                 accounts:
                 Accounts receivable             415,455        326,349    70,451(2)     352,754(1)          459,501


Year ended February 28, 1995:
         Allowance for doubtful
                 accounts:
                 Accounts receivable             293,176        218,052        -          95,773(1)          415,455
</TABLE>





(1)      Accounts/notes and related allowance written off.
(2)      Allowance related to accounts receivable of acquired companies.





                                     - 46 -
<PAGE>   47
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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.

                                  ACR GROUP, INC.


Date:  June 13, 1997              By: /s/ Anthony R. Maresca                
                                      -------------------------------------
                                      Anthony R. Maresca
                                      Senior Vice President and
                                      Chief Financial Officer

         Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature
<S>                                                <C>                                                      <C>
/s/ Alex Trevino, Jr.                              Chairman of the Board,                                   June 13, 1997
-------------------------------------                                                                                    
Alex Trevino, Jr.                                  President and
                                                   Chief Executive Officer
                                                   (Principal executive officer)

/s/ Anthony R. Maresca                             Senior Vice President,                                   June 13, 1997
-------------------------------------              Chief Financial Officer
Anthony R. Maresca                                 and Director
                                                   (Principal financial and
                                                   accounting officer)

/s/ A. Stephen Trevino                             Director                                                 June 13, 1997
-------------------------------------                                                                                    
A. Stephen Trevino

/s/ Ronald T. Nixon                                Director                                                 June 13, 1997
-------------------------------------                                                                                    
Ronald T. Nixon
</TABLE>





                                     - 47 -
<PAGE>   48
                                 EXHIBIT INDEX

Exhibit Number            Description


       10.6    Warrant for the Purchase of 750,000 Shares of Common Stock of
               the Company issued to The Catalyst Fund, Ltd. dated April 14,
               1997

       10.7    Warrant for the Purchase of 250,000 Shares of Common Stock of
               the Company issued to St. James Capital Partners, L.P. dated
               April 14, 1997

       10.15   Agreement of Purchase and Sale by and between the Company and
               St. James Capital Partners, L.P. dated as of January 24, 1997

       10.16   10% Convertible Promissory Note of the Company issued to St.
               James Capital Partners, L.P. dated as of January 24, 1997

       10.17   Warrant to Purchase 280,000 Shares of Common Stock of the
               Company issued to St. James Capital Partners, L.P. dated January
               24, 1997

       10.18   Registration Rights Agreement between St. James Capital
               Partners, L.P. and the Company dated January 24, 1997

       10.19   Commitment Letter for $18 Million Credit Facility Issued by
               NationsBank of Texas, N.A. for ACR Group, Inc. and Subsidiaries
               dated May 12, 1997, as amended effective June 10, 1997

       21.1    Subsidiaries of the Company

       23.1    Consent of Independent Auditors

       27      Financial Data Schedule