BROOKLYN RENAISSANCE PLAZA

                               PROJECT #: 2271400

                               TRADE CODE #: 15050

                          KSW MECHANICAL SERVICES, INC.
                                    H.V.A.C.
                                   SUBCONTRACT


CONSTRUCTION MANAGER:                     MORSE DIESEL INTERNATIONAL, INC.
                                          408 JAY STREET - 5TH FLOOR
                                           BROOKLYN, NY  11201
                                           PROJECT FIELD OFFICE
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                                    I N D E X

                                                                       PAGE

ARTICLE 1.       Subcontract Price; Scope of the Work                   1
ARTICLE 2.       Certain Obligations of the Subcontractor to
                 the Construction Manager and Architect                 2
ARTICLE 3.       Terms of Payment                                       3
ARTICLE 4.       Scheduling                                             5
ARTICLE 5.       Progress                                               7
ARTICLE 6.       Timing                                                 7
ARTICLE 7.       Bonds                                                  8
ARTICLE 8.       Sub-Subcontracts and Purchase Orders                   9
ARTICLE 9.       Certain Warranties and Guarantees                      9
ARTICLE 10.      Insurance                                             10
ARTICLE 11.      Default                                               11
ARTICLE 12.      No Waiver Except in Writing                           13
ARTICLE 13.      Merger                                                13
ARTICLE 14.      Amendments                                            13
ARTICLE 15.      Additional Terms and Conditions                       13
ARTICLE 16.      Captions                                              13
ARTICLE 17.      Notices                                               13
ARTICLE 18.      Miscellaneous                                         14
ARTICLE 19.      No Third Party Beneficiary                            14
ARTICLE 20.      Termination and Assignment                            14

         LIST OF EXHIBITS                                              15
         ARCHITECT:              WILLIAM B. TABLER ARCHITECTS
                                 333 SEVENTH AVENUE
                                 NEW YORK, NY  10001


<PAGE>
SUBCONTRACT

THIS SUBCONTRACT AGREEMENT is entered into as of the 21st day of November, 1996
by and between KSW Mechanical Services, Inc. a New York corporation, as an
independent contractor (the "Subcontractor")., and MORSE DIESEL INTERNATIONAL,
INC., a Delaware corporation (the "Construction Manager").

          WHEREAS, the Construction Manager has entered into a Construction
Management Agreement dated April 30, 1996 (the "Construction Management
Agreement") with Brooklyn Renaissance Plaza, LCC, a limited liability company
(the "Owner"), to provide general contracting services in connection with the
construction of a new mixed-use office building and hotel of approximately
1,322,000 square feet at a site located at 350 Jay Street, Kings County, New
York City (the "Project"); and

          WHEREAS, the Construction Manager has awarded this subcontract for the
Work, as hereinafter defined, to the Subcontractor and the Subcontractor has
agreed to enter into this Agreement and to perform such Work;

          NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants herein contained, the Subcontractor and the Construction Manager agree
as follows:


ARTICLE 1. SUBCONTRACT PRICE; SCOPE OF THE WORK.

          1.1 Subject to all of the terms and conditions herein contained, the
Subcontractor shall receive the total subcontract price of Eleven Million Eight
Hundred Fifty Thousand dollars ($11,850,000) (the "Subcontract Price") (which
price is firm, not subject to escalation, and includes all applicable federal,
state and municipal taxes) for the full and faithful performance and completion
of all of its obligations under this Agreement, including but not limited to the
performance and completion of all construction contemplated by the Subcontract
Documents, as hereinafter defined, including all labor necessary to complete
such construction, all materials and equipment (whether for temporary or
permanent use) incorporated or to be incorporated in such construction and all
other services, facilities, tools and equipment necessary to complete such
construction (the "Work"), all of the foregoing necessary to complete the
following: Heating, Ventilating, and Air Conditioning Work.

          1.2 The foregoing Work shall include, without limitation, the
preparation, delivery and installation or erection, as the case may be, of
materials and machinery, scaffolding, tools, equipment, and all transportation,
cartage, loading and hoisting, patterns, models, surveys, field measurements or
other measurements, shop drawings, temporary light, protection of work and labor
from winter conditions, and payment of royalties. Without limitation of any
provision of the General Conditions, as hereinafter defined, any Work shown on
drawings and not mentioned in specifications, or described in specifications and
not shown on drawings, shall be included in the Work. The Subcontractor shall
faithfully and diligently undertake and complete the Work to comply in every
respect with this Agreement and the other Subcontract Documents.

          1.3 For purposes of this Agreement, the "Subcontract Documents" shall
consist of the drawings and specifications listed on Exhibit A attached hereto
and any addenda or modifications thereto hereafter issued (the "drawings and
specifications") and this Agreement including the Addendum hereto the Schedule B
attached hereto as Exhibit B, the "General Conditions" attached hereto as
Exhibit C, and any supplementary General Conditions or Special Conditions
hereafter issued, and all other schedules and documents attached hereto as
exhibits. For purposes of this Agreement, any reference in the General
Conditions to the "Contract Documents" shall mean the Subcontract Documents as
defined herein and reference therein to the "Contractor" shall mean the
Construction Manager as defined herein.

          1.4 If the Subcontract Documents provide for allowance(s) for
specified item(s) of Work, the Subcontract Price shall be adjusted to reflect
the actual cost of such item(s), it being agreed that all mark-ups and other
costs relating to such item(s) are otherwise included in the Subcontract Price.


ARTICLE 2.  CERTAIN OBLIGATIONS OF THE SUBCONTRACTOR TO THE CONTRACTOR AND
            ARCHITECT.

          2.1 The Subcontractor affirms that it has visited the Project site and
has become familiar with all conditions at the site, and the conditions of all
premises and buildings adjoining or in close proximity to the site (including,
for the purposes hereof, park areas, municipal garage, streets and sidewalks),
has ascertained the depth of cellars, materials and construction of the
buildings and all existing conditions of such premises and the buildings
thereon, and shall be governed thereby for the necessary, thorough, safe and
satisfactory execution and performance of the Work whether or not indicated in
the Subcontract Documents, and shall take those protective measures necessary to
maintain such premises and buildings in the same condition as they were before
commencing the Work. Wherever any portions of the adjoining buildings interfere
with or are interfered with by the Work, the Subcontractor shall make whatever
changes are deemed necessary by the Construction Manager and the Owner, whether
or not indicated in the Subcontract Documents. Without limitation of any other
provision hereof, the Subcontractor shall perform the Work and its obligations
under this Agreement in accordance with and subject to each of the provisions of
the General Conditions to the fullest extent that each such provision is
applicable to the Work, it being intended that the General Conditions supplement
the terms and provisions of this Agreement. In the event of any inconsistency
between the terms and conditions of this Agreement and such General Conditions,
the more restrictive provision, as applied to the Subcontractor, shall govern.

          2.2 The Subcontractor shall undertake and complete the Work under the
direction and supervision of, and to the entire satisfaction of the Construction
Manager and the Architect. The Construction Manager shall provide the
Subcontractor with one (1) set of drawings and specifications for the Work.
Additional copies of drawings and specifications will be provided at the
Subcontractor's expense. The Architect may provide additional drawings, details
and explanations detailing and illustrating the Work, and the Subcontractor
shall conform to and abide by any such drawings, details and explanations.

          2.3 The Subcontractor, if it subcontracts any part of the Work, shall
enter into agreements substantially similar to this Agreement with each sub-tier
subcontractor and shall require that each sub-tier subcontractor read and
expressly agree in writing to be bound by all provisions of the General
Conditions applicable to its work.


ARTICLE 3.  TERMS OF PAYMENT.

          3.1 (a) If the Subcontractor is making satisfactory progress with the
Work (in the Construction Manager's reasonable opinion), is not in default under
this Agreement or under any other Subcontract Document, and is in compliance
with all the documentation requirements of this Agreement and the General
Conditions, the Construction Manager will, subject to the Sections 3.1(b) and
3.2 below, make monthly payments to the Subcontractor of ninety percent 90% of
the value of Work performed during such month. After the Work is fifty percent
(50%) complete, no further or additional retention of payments shall thereafter
be withheld and the Construction Manager shall make payments of one hundred
percent (100%) of the value of Work thereafter performed, unless the
Construction Manager in the exercise if its reasonable business judgment has
good cause to withhold additional retainage.

          (b) (i) It is specifically understood and agreed that the
Subcontractor and Construction Manager acknowledge that there is a risk that the
Owner, in breach of the Construction Management Agreement, may make late
payments or may, under certain circumstances such as insolvency, not make
required payments to the Construction Manager. The parties furthermore
acknowledge their agreement that they shall share the risk of same in proportion
to their entitlement to such portion of the payments due from the Owner to the
Construction Manager for their respective work and fees together with that of
all Subcontractors on the Project and that the Subcontract Price established by
this Agreement, shall be adjusted accordingly when all efforts at collecting
same by the Construction Manager and Subcontractor, independently or in
collaboration, are finally resolved. The Subcontractor agrees to cooperate with
the Construction Manager to achieve payment of the Subcontract Price, or portion
thereof, to the Construction Manager by the Owner including by way of
negotiation, mediation, arbitration, litigation or enforcement of the
Construction Manager's mechanic's lien, if any. Failure to cooperate shall be
deemed a material breach of this Agreement which disentitles the Subcontractor
from any right to payment from the Construction Manager. The Subcontractor
further acknowledges and agrees that the liability of the Owner for the Owner's
obligations under the Construction Management Agreement shall be limited to the
Owner's then equity interest in the Project, and the Subcontractor shall not
look to any of the Owner's other assets seeking to recover payment on account of
the Work.

          (ii) As a consequence of the foregoing understanding and consistent
with that allocation of risk, the Subcontractor agrees that the Construction
Manager's receipt of payment from the Owner on behalf of the Subcontractor's
applications for payment (whether interim applications or final application,
including retainage) shall be, to the fullest extent provided by law, a
condition precedent to the right of the Subcontractor to receive payment from
the Construction Manager. Therefore, the Subcontractor agrees that it shall wait
to receive payment until such time as the Construction Manager is able to obtain
payment from the Owner and that the Subcontractor shall not be entitled to
receive any payment from the Construction Manager which the Construction Manager
has not received from the Owner on behalf of the Work performed by the
Subcontractor.

          (iii) In the event that the Construction Manager is not receiving
proper payment from the Owner on account of the Work of the Subcontractor such
that the Construction Manager is not required to make payment to the
Subcontractor hereunder, the Construction Manager may, in its sole discretion
and to the extent it is legally able to do so, formally and in writing assign to
the Subcontractor the rights of the Construction Manager to pursue claims
against the Owner for the payment due to the Construction Manager on behalf of
the Subcontractor's entitlement under the terms of this Subcontract, which
assignment the Subcontractor shall be obliged to accept in full and complete
liquidation of the payment obligations of the Construction Manager to the
Subcontractor hereunder.

          (iv) The parties further acknowledge that the Subcontractor is
entitled to pursue any and all such rights to which it-may be entitled under the
New York Lien Law in the event that the Construction Manager does not pay the
Subcontractor amounts due hereunder, including non-payment resulting from
delayed payments or non-payment by the Owner to the Construction Manager. In
that regard, the parties agree that this paragraph (b) shall not limit or
restrict the Subcontractor's lien rights or rights to enforce a lien and, to the
extent that this paragraph (b) is inconsistent with such lien rights, this
paragraph is deemed waived for such purpose only. In the event that the
Construction Manager advises the Subcontractor that the Construction Manager is
unable to pay the Subcontractor by reason of the Owner's non-payment to
Construction Manager and that, pursuant to this paragraph (b), the Subcontract
Price shall be adjusted by reason of the Owner's non-payment to the Construction
Manager, the Subcontractor agrees that its filing of a lien in full accordance
with the Lien Law and the complete prosecution of that lien claim to finality in
the courts, and collection therefrom, for the amount due to it shall be a
condition precedent to the right of the Subcontractor to execute upon any
judgment it may obtain against the Construction Manager in connection with the
lien foreclosure action or otherwise.

          (v) Nothing herein is intended to limit or preclude the rights of the
Construction Manager under other terms of this Subcontract to backcharges,
set-offs or other claims against the Subcontractor in regard to the matters
addressed in this paragraph (b) or otherwise. Retention shall be paid to the
Subcontractor in accordance with Paragraph K of Article 15 of the General
Conditions, less in any event any amounts the Construction Manager has applied
to cure any default by the Subcontractor under the Subcontract Documents.

          3.2 In order to receive any payment for the Work, the Subcontractor
must comply with the terms and conditions of Article 15 of the General
Conditions and must furnish such other documentation or information as may be
required by the Construction Manager.

          3.3 Notwithstanding anything to the contrary in this Agreement or the
existence of any performance or labor and material payment bond but without
limitation of the provisions of Article 15 of the General Conditions, the
Construction Manager is hereby empowered but not required at any time to
withhold from the Subcontractor an amount or amounts equal in the opinion of the
Construction Manager to the amounts necessary to complete the entire Work, or
any part thereof, and to pay and fully discharge any claims or liens arising out
of the Work performed under this Agreement that may arise and be unpaid, for
which, if established, the Construction Manager or the Owner may become liable.
Without limitation of any other rights or remedies of the Construction Manager,
the amount of all such payments of the Subcontractor's obligations by the
Construction Manager shall be deducted from the Subcontract Price then unpaid.
If any such obligations, claims or liens exceed the amount of the Subcontract
Price then unpaid, or arise after the Construction Manager has paid or otherwise
satisfied the full Subcontract Price in accordance with and subject to the terms
and conditions hereof, the Subcontractor, immediately upon demand, shall pay to
the Construction Manager all monies that the Construction Manager may have paid
to discharge such obligations, liens or claims with respect to the Project.

          3.4 The Subcontractor expressly agrees that said Subcontract Price
includes (a) all Work provided for in the drawings and specifications, together
with all work reasonably inferable therefrom (consistent with the scope of the
Project described in the General Conditions), and (b) all increases in cost,
foreseen or unforeseen, including, without limiting the generality of the
foregoing, taxes, labor and materials, the cost of all of which is to be borne
solely by the Subcontractor. All loss or damage arising from any of the Work
through unforeseen or unusual obstructions, difficulties or delays which may be
encountered in the prosecution of same or through the action of the elements
shall be borne by the Subcontractor. It is mutually agreed between the parties
hereto that no payment made under this Agreement shall be conclusive evidence of
the performance of this Agreement by the Subcontractor, either wholly or in
part, nor shall it be construed to be an acceptance of defective Work or
materials, or an approval of any of the items in any requisitions made or
invoice rendered. All invoices or requests for payments must be presented in
writing in such form as may be required by the Construction Manager. Provided
payments are made to the Subcontractor as provided for hereunder, the
Subcontractor shall pay all costs necessary for the satisfactory completion of
the Work in accordance with the Subcontract Documents.

          3.5 The Subcontractor shall use the sums advanced to it pursuant to
this Article 3 solely for the purpose of performance of the Work and the
construction, furnishing, and equipping of the Project in accordance with the
Subcontract Documents. Any and all funds paid to the Subcontractor hereunder are
hereby declared to constitute trust funds in the hands of the Subcontractor, to
be applied before application to any other purpose to the payment of (a) claims
of sub-subcontractors, sub-laborers, materialmen or other persons arising out of
the Work and employed by the Subcontractor, (b) to claims for utilities
furnished and taxes imposed, and to the payment of premiums on surety bonds and
other bonds filed and premiums on insurance accruing during the construction of
the Work, and (c) any indemnity obligations of the Subcontractor hereunder.


 ARTICLE 4. SCHEDULING

          4.1 Concurrently with the execution of this Subcontract, the
Subcontractor shall give the Construction Manager a proposed detailed time and
manpower schedule, providing for completion of the Work within the durations set
forth in Schedule B (Exhibit B hereto) taking into account the work of all other
Subcontractors. The Subcontractor also shall furnish, upon request by the
Construction Manager from time to time, cash flow projections, on a month by
month basis, including, without limitation, an estimate of its total
expenditures for labor for its Work (which shall include the estimated payroll
for each of the trades it will employ by subcontract). At the Construction
Manager's request, the Subcontractor shall revise the schedule and such
projections until same are satisfactory to the Construction Manager. The
Construction Manager intends to and shall use the above referenced schedule in
preparing the master Project Schedule to list the dates for completion of the
various segments of the Work. Without limitation of any provision of the General
Conditions, the Subcontractor shall complete the Work in accordance with the
Project Schedule, including any revisions thereto provided by the Construction
Manager. The Construction Manager exclusively shall control scheduling,
including the periodic updating thereof, if any, and the Subcontractor shall
comply therewith. The Construction Manager shall have the right to schedule
other work at the same time and in the same areas as the Subcontractor's Work.
The Subcontractor shall coordinate its Work with any other Subcontractors' work
in such manner as the Construction Manager may direct to avoid conflict or
interference with such work of others, shall participate in the preparation of
coordinated drawings of congested areas and shall conform the Work to the work
of other Subcontractors to prevent discrepancies (and to avoid unnecessary
cutting or patching) with contiguous work. At its sole discretion, the
Construction Manager may schedule Work during a time of, and from time to time
during, winter conditions. The determination of when winter conditions exist
shall rest exclusively with the Construction Manager.

          4.2 (a) The Subcontractor acknowledges that in addition to the Work to
be performed by other Subcontractors, the Construction Manager, the Owner and
Tenants of the Project have the right to perform, or cause to be performed on
their behalf, improvements to the interior portion of the Project and also that
the Project's Central Energy Plant will be constructed by another contractor
hired by the Owner (all persons performing such other work being hereafter
referred to as "Other Contractors"). The Subcontractor shall cooperate with all
Other Contractors and afford them a reasonable opportunity to perform their
work.

             (b) The Subcontractor acknowledges that some of the Other
Contractors will need access to the floors of the Project before substantial
completion thereof and that permanent and temporary building services such as
heating, ventilating, cooling, water, lighting, power, telephones, elevators,
hoists and security will need to be provided to the Other Contractors. The
Subcontractor further acknowledges that the Owner and Tenants may use or occupy
completed or partially completed floors or other portions of the Project before
the Work on such floors or such portions of the Project has been substantially
completed. The Subcontractor shall cooperate fully with the Construction Manager
in providing Other Contractors with access to the floors of the Project and with
such services and in providing the Owner and Tenants with such use and
occupancy.

              (c) The Subcontractor shall provide such assistance as may be
necessary in the initial utilization of any equipment or systems provided and/or
installed as part of the Work, such as start-up or testing, adjusting and
balancing (including without limitation, the testing and start-up of the Central
Energy Plant and cogeneration facility) and shall provide qualified
manufactures' representatives for purposes of training the Owner's personnel for
the operation and maintenance thereof.

ARTICLE  5. PROGRESS.

          5.1 The Subcontractor shall keep itself informed at all times of the
progress of the Project, and of the progress of others whose work may affect, or
who may be affected by, the Subcontractor's progress. At the Construction
Manager's request, the Subcontractor shall inform the Construction Manager about
materials on hand, progress made in the manufacturing and fabricating of
materials for the Work, or any other matters relating to the condition or
progress of the Work. The Construction Manager, the Owner's representatives, and
the Architect at all times shall have free access to the office, shops and yards
of the Subcontractor to verify any information about the Work given by the
Subcontractor.

          5.2 The Subcontractor, upon twenty-four (24) hours' notice, in person
or by duly authorized representative having power to act and acceptable to
Construction Manager, shall attend, at its own expense, all meetings or
conferences that the Owner, Architect or Construction Manager may call, at the
Project site or elsewhere, for the purpose of discussing progress of the Work,
safety at the site, or ways to expedite the completion of the Project.


ARTICLE 6.  TIMING.

          6.1 TIME IS OF THE ESSENCE OF THIS AGREEMENT. The Construction Manager
and/or Owner may sustain financial loss if the whole Project or any part thereof
is delayed because the Subcontractor fails to perform any part of the Work in
accordance with the Subcontract Documents, including, without limitation, a
failure to comply with the Construction Manager's directions or the Project
Schedule. The Subcontractor shall begin the Work at the time directed by the
Construction Manager shall complete the Work within the durations set forth in
Schedule B and shall perform its obligations under this Agreement with diligence
and with sufficient manpower to maintain the progress of the Work as scheduled,
without delaying other trades or areas of work. At the request of the
Construction Manager, the Subcontractor shall perform certain parts of the Work
before other parts, add extra manpower, or order overtime labor in order to
comply with the Project Schedule, all without any increase in the Subcontract
Price (unless otherwise specifically provided in the General Conditions). The
Subcontractor shall be liable to the Construction Manager for all increased
costs and damages resulting from the Subcontractor's failure to complete the
Work within the durations set forth in Schedule B and as provided in the Project
Schedule, including without limitation all liquidated damages for which the
Construction Manager may be liable to the Owner.

          6.2 The Subcontractor shall provide the Construction Manager with
forty-eight (48) hours' advance notice of any activities that will interrupt any
utility service to any portion of the Project site, or any activities that will
significantly disrupt the normal or planned use and occupancy of the Project
including without limitation Tenant fit-out work and hotel space finish work,
and such notice shall include an estimate of the length of time of such
interruption or disruption. The Subcontractor shall cooperate with the
Construction Manager and Owner in rescheduling and considering alternative
actions that may be less disruptive to the use and occupancy of the Project than
those planned by the Subcontractor.

          6.3 (a) If the performance of the Work has not progressed in
accordance with the Project Schedule or reached the level of completion required
by the durations set forth in Schedule B, the Construction Manager shall have
the right, but not the obligation, to order the Subcontractor to take corrective
measures necessary to expedite the progress of the Work, including without
limitation (i) working additional shifts or overtime, (ii) supplying additional
manpower, equipment and facilities and (iii) other similar measures
(collectively "Extraordinary Measures"). Such Extraordinary Measures shall
continue until the progress of the Work complies with the Project Schedule and
the level of completion required by Schedule B. It is further agreed that: (i)
subject to clause (iii) below, the Subcontractor shall not be entitled to an
adjustment in the Subcontract Price in connection with Extraordinary Measures
required by the Construction Manager under or pursuant to this Section 6.3; (ii)
the Construction Manager may exercise its rights pursuant to this Section 6.3 as
frequently as necessary to ensure that the Subcontractor's performance of the
Work will comply with the Project Schedule and the durations set forth in
Schedule B; and (iii) whether or not the progress of the Work has complied with
the Project Schedule and reached the level of completion required by the
durations set forth in Schedule B shall take into account any extensions of time
to which the Subcontractor is entitled pursuant to the terms hereof.


ARTICLE 7.  BONDS.

          The Subcontractor shall furnish a performance bond and a labor and
material payment bond, within five (5) days after execution of this Agreement,
at its own expense. Such bonds shall be with a corporate surety licensed the
State of New York, rated by Best's Key Rating Guide as B + or better and
acceptable to the Construction Manager and Owner, in the amount of the
Subcontract Price and shall name Construction Manager, AMEC Holdings, Inc., AMEC
plc, Brooklyn Renaissance Plaza, LLC, the City of New York and Empire Insurance
Company as co-obligees thereunder. Such bonds shall conform with the bond forms
annexed hereto as Exhibits F-G and shall include provisions to the effect that
the Subcontractor shall faithfully, promptly and with due diligence (i) perform
all of the terms and provisions of this Agreement on its part to be performed,
(ii) pay all of the Subcontractor's obligations to its employees, agents, all
subcontractors, materialmen, suppliers or others relating to the Work, and (iii)
complete the various portions of the Work in accordance with the terms of the
Subcontract Documents, and such bonds shall otherwise be in form and substance
mutually satisfactory to the Construction Manager and Owner. To the extent, if
any, that the Subcontract Price is increased in accordance with the Subcontract
Documents, the Subcontractor shall, upon request of the Owner or Construction
Manager, cause the amount of such bonds to be increased accordingly and shall
promptly deliver satisfactory evidence of such increase to the Construction
Manager. The bonds shall further provide that no change or alteration of this
Agreement (including, without limitation, an increase in the Subcontract Price,
as aforesaid), extensions of time, premature payment or overpayment to the
Subcontractor, will release the surety.


ARTICLE  8.  SUB-SUBCONTRACTS AND PURCHASE ORDERS.

          Within thirty (30) days of the award of this Subcontract, or such
earlier time as the Construction Manager may schedule, Subcontractor shall
execute all purchase orders, enter into all sub-subcontracts for the Work, and
give to the Construction Manager a complete list of all its sub-subcontractors
and suppliers for all parts of the Work. The Subcontractor shall notify the
Construction Manager in writing of any proposed changes in its
sub-subcontractors or suppliers not less than five (5) days prior to such
change, which notice shall specify the reasons for such proposed change. Without
limiting, diminishing or otherwise affecting the Subcontractor's obligations
hereunder, any such change shall be subject to the approval of the Construction
Manager, which approval shall not be unreasonably withheld or delayed.


ARTICLE  9.   CERTAIN WARRANTIES AND GUARANTEES.

          9.1 Promptly upon completion of the Work, the Subcontractor shall
deliver to the Construction Manager or the Owner (as the Construction Manager
may direct) all warranties and guarantees from third parties for materials,
equipment and labor incorporated into or used in connection with the Work.

          9.2 The Subcontractor warrants to the Construction Manager that all
materials and equipment furnished under this Agreement will be new, unless
otherwise specified, and that all Work will be of good quality, free from
improper workmanship and defective materials and in conformance with the
Subcontract Documents.

          9.3 All warranties and guarantees provided by the Subcontractor shall
insure to the benefit of the Construction Manager and Owner and their successors
and assigns and to such Tenants as the Owner may designate and shall be
assignable to the Owner and its assignees (including without limitation Empire
Insurance Company, The City of New York and any lender to the Owner). Warranties
for portions of the Project leased to the Kings County District Attorney of The
City of New York shall extend through full heating and cooling seasons following
occupancy by such Tenant.

          9.4 Without limitation of the foregoing or any other obligation of
Subcontractor provided for in the Subcontract Documents (including, without
limitation, Article 8 of the General Conditions), immediately upon the
Construction Manager's demand, the Subcontractor, at its own expense, shall
repair, replace, restore or rebuild, at the Construction Manager's option, any
Work in which defects in materials or workmanship may appear, or which is
otherwise not in conformance with the other warranties of Subcontractor
hereunder, or to which damage may occur because of such defects or lack of
conformance, within one (1) year, or such longer period as required by the
specifications, from the date of the Owner's and Architect's final acceptance of
the Project. Such repair, replacement, restoration or rebuilding, as the case
may be, shall be carried out by the Subcontractor promptly upon such demand by
the Construction Manager and shall be performed in accordance with Article 13 of
the General Conditions. If the Subcontractor fails to comply, the Construction
Manager may correct such defect or lack of conformance, as the case may be, and
the Subcontractor shall immediately reimburse the Construction Manager therefor.

          9.5 The existence of the foregoing warranties, guarantees and
undertakings by the Subcontractor shall not relieve the Subcontractor of, or
reduce the Subcontractor's liability, for any defects in the Work and shall be
in addition to all of the Construction Manager's other rights and remedies
hereunder, under any other Subcontract Document or under law, and to any other
warranties and or guarantees, whether express or implied.


ARTICLE 10. INSURANCE.

          10.1 Except as set forth in the Owner Controlled Insurance Program
described in Exhibit I hereto, if such program is provided by the Owner, the
Subcontractor, at its own expense, shall obtain and submit to the Construction
Manager, before undertaking any part of the Work, policies and certificates with
receipts for the payment of premiums from Subcontractor's insurance carriers
indicating coverage from companies, in amounts and on such other terms as
provided for hereinafter and in the "Insurance Schedule" attached to this
Agreement as Exhibit I. Any "deductible" with respect to such coverage shall be
submitted to, and must be approved in writing by, the Construction Manager,
provided that any costs not covered by any such approved deductible shall in any
event be borne by the Subcontractor. All such insurance shall be maintained by
the Subcontractor, at its expense, until the Work has been completed and all
obligations of the Subcontractor under the Subcontract Documents have been
satisfied. Any policy of insurance covering the Subcontractor's tools, equipment
or facilities against loss by physical damage, shall provide that the
underwriters waive their rights of subrogation against the Construction Manager,
the Owner, and their respective members, officers, directors, employees, agents
and servants.

          10.2 All policies required of the Subcontractor hereunder shall
provide for notice to the Construction Manager thirty (30) days before any
change in or cancellation of such insurance, and shall otherwise be acceptable
to the Construction Manager. Upon request, the Subcontractor shall furnish the
Construction Manager with evidence of insurance satisfactory to the Construction
Manager for each sub-subcontractor employed by it. The insurance required herein
shall in any event include blanket (broad form) contractual liability insurance.
The existence of insurance shall not be construed to limit Subcontractor's
liability under this Agreement.

          10.3 The Owner is providing the Owner Controlled Insurance Program
described in Exhibit I hereto. Additional insurance credits may be taken against
the Subcontract Price pursuant to the Owner Controlled Insurance Program to the
extent provided in Exhibit I.


 ARTICLE 11. DEFAULT.

          11.1 Any one or more of the following shall constitute an event of
default by the Subcontractor:

             A.       The Subcontractor shall fail or refuse to perform
                      or comply with any term,  condition or provision of
                      this Agreement or of any of the other Subcontract
                      Documents.

             B.       The Subcontractor shall fail or refuse to pay any
                      of its sub-subcontractors,  suppliers, or workers
                      for any materials, labor or other things
                      incorporated into,  or used in connection with, the
                      Work when such payments are due; provided,
                      however, that if the Subcontractor disputes the
                      amount due to a worker,  sub-subcontractor or
                      supplier, the Subcontractor, within two (2) days of
                      the  due date of such payment, at its own expense,
                      posts a bond for the disputed  payment in amount
                      and form satisfactory to the Construction Manager
                      as  security for such payments, then such
                      non-payment shall not constitute an  event of
                      default hereunder.

             C.       The Subcontractor shall abandon the Work or reduce
                      its labor force to a  number insufficient, in the
                      Construction Manager's opinion, to complete the
                      Work within the scheduled time.

             D.       Without limitation of the foregoing, any of the
                      events described in Paragraph  5.B.8 of the General
                      Conditions shall occur.

          11.2. If any event of default described in Section 11.1 above occurs,
then the Construction Manager, at its option, at any time may:

             A.       Order the Subcontractor immediately to comply with
                      any term, condition or  provision of this Agreement
                      or such other Subcontract Document;

             B.       Order the Subcontractor, within a specified time,
                      to remove any defective  work or materials and to
                      replace such work or materials with satisfactory
                      work  or materials;

             C.       Accept any defective work or materials and reduce
                      the Subcontract Price  accordingly;

             D.       Perform or arrange to have performed any of
                      Subcontractor's duties hereunder;

             E.       Make any payments to satisfy the Subcontractor's
                      obligations relating to the  Work for labor,
                      materials, equipment, insurance or other items;

             F.       Refuse to make any payments to the Subcontractor
                      for Work performed until  the event of default is
                      cured to the satisfaction of the Construction
                      Manager;  and/or

              G.      Upon three (3) days' written notice to the Subcontractor,
                      terminate this Agreement and take possession of all
                      materials, tools, equipment, and appliances of the
                      Subcontractor and finish the Work by whatever means,
                      method or agency which the Construction Manager, in its
                      sole discretion, may choose, and take any other steps the
                      Construction Manager, in its sole discretion, may choose
                      to secure any labor, materials, equipment and services,
                      and, in such event, the Construction Manager shall have a
                      lien on and may take over all Subcontractor's equipment,
                      tools, appliances and materials (whether on or off-site)
                      and complete the Work; provided, however, that if the
                      default involves any breach of safety laws, regulations or
                      requirements, only one (1) day's notice (whether oral or
                      written) shall be required.

          If the Construction Manager terminates this Agreement, as aforesaid,
the Construction Manager shall have no obligations to pay for any work performed
after such termination, and will have no obligation to make any further payments
to the Subcontractor for work performed before such termination until the
Project has been completed, accepted by the Owner and the Construction Manager
has received full payment for the Project from the Owner, and the Construction
Manager determines to its complete satisfaction that potential expenses, charges
and claims relating to the performance of the Work have been satisfied or
satisfactorily bonded over. Such payments to the Subcontractor shall in any
event be reduced by the amount due to the Construction Manager under the terms
of this Agreement or any of the other Contract Documents.

          11.3. The Construction Manager's choice of any remedy shall not
operate to waive any rights or remedies provided hereunder, or by law, against
the Subcontractor or its surety. The Construction Manager, at his option, may
choose more than one remedy or choose one or more particular remedies at
different times.

          11.4. The Subcontractor shall pay, immediately upon demand therefor,
all costs, losses, damages and expenses, including, without limitation, all
costs and expenses described in Section 11.2 above and all administrative,
management, overhead and other direct or indirect expenses, including reasonable
attorneys' fees (the "Costs") incurred by the Construction Manager in connection
with any default by the Subcontractor or exercise of any right or remedy upon
the Subcontractor's default. If the Subcontractor does not pay the Costs
immediately, the Construction Manager may deduct all Costs from any payments of
the Subcontract Price. If payments due to the Subcontractor for completed
portions of the Work are not sufficient to cover the Costs, the Subcontractor
immediately shall pay to the Construction Manager the full amount of any such
excess with interest thereon until paid in full at four (4) percentage points in
excess of the rate of interest announced from time to time by Chase Manhattan
Bank (or its successor) as its prime rate or if it is less, at the maximum
interest rate permitted by law. The liability of the Subcontractor hereunder
shall extend to and include, without limitation, the full amount of Costs
incurred and obligations assumed by the Construction Manager in good faith under
the reasonable belief that such Costs or obligations were necessary or required,
whether actually necessary or required or not, (i) in completing the Work and
providing labor, materials, equipment, supplies and other items therefor or
resubcontracting the Work, and/or (ii) in settlement, discharge or compromise of
any claims, demands, suits and judgments pertaining to or arising out of the
Work. An itemized statement of such obligations and payments shall be prima
facie evidence of the Subcontractor's liability.


ARTICLE 12.  NO WAIVER EXCEPT IN WRITING.

          No action or failure to act by the Construction Manager shall
constitute a waiver of any default in that or any other instance, except to the
extent the Construction Manager specifically states in writing


ARTICLE 13.  MERGER.

          All previous orders, proposals, letters, oral or written promises and
understandings relating to the subject matter of this Agreement, are hereby
declared to be null and void. This Agreement is complete and shall not be
interpreted by any reference to any previous letter, proposal, document or
understanding, written or oral, or other document or agreement, except as
specifically provided in this Agreement.

ARTICLE 14.   AMENDMENTS.

          No amendment to this Agreement shall change or modify this Agreement
unless it is in writing and signed by both the CONSTRUCTION MANAGER and the
Subcontractor.


ARTICLE 15.  ADDITIONAL TERMS AND CONDITIONS.

          Additional terms and conditions of, and Schedules to, this Agreement,
if any, are provided for on the "List of Exhibits" attached hereto.

ARTICLE 16. CAPTIONS.

          The captions to the provisions of this Agreement are for convenience
only and are not a part of this Agreement.

ARTICLE 17. NOTICES.

          Any notice required to be given by the terms and provisions of this
Agreement or by any law or governmental regulation, either by the Construction
Manager or Subcontractor (or which either party may desire to give hereunder),
shall be in writing and shall be personally delivered or forwarded by registered
or certified mail, return receipt requested, and shall be addressed to the party
hereto to whom directed, at its address, as herein stated to the attention of
John Babieracki, Executive Vice President for the Construction Manager with a
copy to Executive Vice President of Finance and Administration, Morse Diesel
International, Inc., 1633 Broadway, New York, NY 10019; or Floyd Warkol,
Chairman/CEO for the Subcontractor. Either party may change the address to which
any notice referred to herein is to be sent by giving written notice of such
change of address to the other party in the manner provided above. Notice
personally delivered pursuant to this Article 17 shall be effective on the date
of delivery. Notice given by mail shall be effective on the date of receipt
appearing on the return receipt, or, in the absence of a return receipt, the
date of attempted delivery.


ARTICLE 18. MISCELLANEOUS.

          Each of the Exhibits attached hereto is hereby made a part hereof. If
any provision of this Agreement or the application thereof to any person or
situation, to any extent shall be held invalid or unenforceable, the remainder
of said Agreement, and the application of such provision to persons or
situations other than those to which it shall have been held invalid or
unenforceable, shall not be affected thereby, but shall continue valid and
enforceable to the fullest extent permitted by law. All provisions of this
Agreement which by their terms require performance by either party hereto after
termination of this Agreement shall survive any such termination.


ARTICLE 19.  NO THIRD PARTY BENEFICIARY.

          Except as otherwise provided herein, no provision of this Agreement
shall in any way inure to the benefit of any third person (including the public
at large) so as to constitute any such person a third party beneficiary of this
Agreement or of any one or more of the terms hereof or otherwise give rise to
any cause of action in any person not a party hereto.


ARTICLE 20.  TERMINATION AND ASSIGNMENT.

          Except to the extent provided for in Section 20.2 below and without
limitation of any provision of the General Conditions, if the Construction
Management Agreement is terminated for any reason whatsoever, the Construction
Manager may (by notice to the Subcontractor) terminate this Agreement and in
such event, even though the Subcontractor may not be in default hereunder, the
Construction Manager shall only be liable to pay the Subcontractor such amount
as shall be due for that portion of the Work satisfactorily performed by the
Subcontractor prior to the date of termination, reduced, however, by an amount
determined by the Construction Manager to be appropriate compensation for any
damages suffered by reason of any default by the Subcontractor.

          20.1 (a) The Subcontractor shall not assign this Agreement, in whole
or in part, or hypothecate, pledge or assign any payments due it under this
Agreement, without the Construction Manager's prior written approval. Any such
attempted unauthorized assignment shall be null and void. In any event, no
subcontract or approved assignment shall relieve or release the Subcontractor in
any way from its obligations hereunder or under the other Contract Documents.

          (b) This Agreement may, with written notice, be assigned to another
entity designated by the Construction Manager without the need for any further
action by the Construction Manager or approval by the Subcontractor and in such
event the Subcontractor agrees to and shall continue to be bound by this
Agreement and shall look solely to the Owner and to any assignee for payment and
performance hereunder.

          (c) Upon written notice from the Owner that the Construction
Management Agreement has been terminated by reason of a default by the
Construction Manager thereunder and that the Owner has elected to accept this
Agreement, this Agreement shall be assigned to and assumed by the Owner or
another person or entity designated by the Owner without the need for any action
by the Construction Manager or Subcontractor and in such event the Subcontractor
agrees to and shall continue to be bound by this Agreement and, in the event of
such an assignment, the Subcontractor shall look solely to the Owner for payment
and performance hereunder. Upon request of the Owner, the Subcontractor further
agrees that it shall enter into an agreement directly with the Owner
acknowledging the foregoing conditional assignment of this Agreement to the
Owner and agreeing to be bound thereby.

          (d) The Subcontractor shall promptly execute and deliver an Attornment
Letter in the form attached hereto as Exhibit M or such other form that the
Owner may request, in a manner suitable for recording if so requested, and shall
require its sub-subcontractors promptly to execute and deliver similar letters.

          This Agreement may be terminated by the Construction Manager without
cause upon ten (10) days' prior written notice. In the event of such
termination, the Subcontractor shall be reimbursed such amount as shall be due
the Subcontractor for that portion of the Work satisfactorily performed prior to
the effective date of termination.

          20.4 If (a) the Construction Manager fails for thirty-five (35) days
after payment is due hereunder to make any material payment as provided herein
and not disputed in good faith, or (b) the Construction Manager otherwise fails
for seventy (70) days to perform any material obligations as herein provided
which have a material adverse financial consequence to the Subcontractor
(including, without limitations, the failure to approve or disapprove requests
for Change Orders within a reasonable time after submission thereof), or (c) the
Project is abandoned, discontinued or otherwise stops for more than one hundred
twenty (120) consecutive days through no fault of the subcontractor, then, upon
giving the Construction manager thirty- five (35) days to cure by written
notice, and if the Construction Manager does not cure within said thirty-five
(35) days period, the Subcontractor may terminate this Agreement. If, however,
the stoppage or discontinuance of work described in subparagraph (c) above is
caused by any strike, riot, government order, act of God, or other cause beyond
the control of the Construction Manager or Owner, the Subcontractor shall not be
entitled to terminate this Agreement but shall be entitled to an extension of
the durations set forth in Schedule B.

<PAGE>
          IN WITNESS WHEREOF, the parties hereto have executed this Subcontract
Agreement as of the day and year first above written.

CONSTRUCTION MANAGER:                    MORSE DIESEL INTERNATIONAL, INC.
                                         a Delaware corporation

                                         By:
                                             John Babieracki
                                             Executive Vice President


-------------------------------
Witness


-------------------------------
Date

SUBCONSTRUCTION:                         KSW MECHANICAL, INC.
                                         a New York corporation


                                         By: ------------------------------
                                             Floyd Warkol,
                                             Chairman

Witness

-------------------------------
Date

<PAGE>

                            KSW, INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1996 AND 1995
                        (IN THOUSANDS, EXCEPT SHARE DATA)
                            -------------------------


                                             1996                    1995
                                            --------                ------
A S S E T S

Current assets:
 Cash and cash equivalents                 $  4,464              $  5,124
 Accounts receivable, (net of allowance
   for doubtful accounts of 1996: $170;
   1995: $300)                                11,705                 4,783
 Retainage receivable                          5,552                 3,355
 Costs and estimated earnings in excess
    of billings on uncompleted contracts       1,640                 1,513
Deferred income taxes                            126                    68
Prepaid expenses and other receivables           290                   387
                                           ----------              ----------
      Total current assets                    23,777                15,230

Property and equipment, (net of accumulated
   depreciation and amortization of 1996 $752;
     1995 $464)                                  651                   733

Other assets:
  Goodwill, (net of accumulated amortization
      of 1996: $712; 1995: $559)               4,278                  4,431
  Other                                           28                     37
                                           -----------             -----------
      Total assets                           $28,734                 $20,431
                                           ==========              ===========

                                            1996                    1995
                                           --------                ------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                       $  8,602                $  3,561
   Retainage payable                         3,472                   3,335
   Accrued payroll and benefits                916                     971
   Accrued expenses                            345                     539
   Due to contractor                             -                   1,264
   Billings in excess of costs and estimated
      earnings on uncompleted contracts      4,860                     632
                                            ---------               ---------
         Total current liabilities          18,195                  10,302
                                           ==========              ===========


Commitments and contingencies

Stockholders' equity:
   Common stock, $.01 par value, 25,000,000
    shares authorized, 5,542,978 and 5,200,000
    shares issued and outstanding, at 1996
    and 1995, respectively                       55                    52
   Additional paid-in capital                 9,961                 9,450
   Retained earnings                            523                   627
                                            ----------             ----------
         Total stockholders' equity          10,539                10,129
                                            ----------             ------------
         Total liabilities and stockholders'
          equity                             $28,734               $20,431
                                             =========             ============

                   See notes to consolidated financial statements

<PAGE>
<TABLE>
<CAPTION>
                            KSW, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                       -----------------------------------


                                                                   1996                 1995                 1994
                                                                   --------             --------             ------
<S>                                                                <C>                   <C>                 <C>
Revenues:
   Contracts                                                      $ 45,511              $ 41,189             $ 28,775
   Fees from seller                                                    783                 2,795                7,197
   Interest                                                            100                   192                  159
                                                                    ------               ---------            --------
          Total revenues                                            46,394                44,176               36,131

Direct costs                                                        42,600                38,990               30,046
                                                                 ----------             ----------           ----------
Gross profit                                                         3,794                 5,186                6,085

Selling, general and administrative expenses                         3,956                 4,115                4,453
Interest expense                                                        14                    -                    70
                                                                 ----------              ----------           --------
Income (loss) before income taxes                                     (176)                1,071                1,562
Income tax expense (benefit)                                           (72)                  500                  956
                                                                    ---------            ----------           --------
Net income (loss)                                                  $  (104)                  571                  606
                                                                 ===========             ==========           =========
Net income (loss) per common share                                 $  (.02)                  .07                  .08
                                                                 ===========             ==========           ==========

Weighted average common shares outstanding                        5,568,429            7,785,754            7,800,000
outstanding

                         See notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>


                                             KSW, INC. AND SUBSIDIARY

                               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                    (CONCLUDED)

                                   YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                         (IN THOUSANDS, EXCEPT SHARE DATA)
                                            ---------------------------

                                                                                          Additional
                                       DIVISIONAL               COMMON STOCK              Paid-In          Retained
                                       EQUITY            SHARES            AMOUNT         CAPITAL          EARNINGS         TOTAL
<S>                                    <C>               <C>                <C>           <C>              <C>              <C>
Balances, December 31, 1995             -                5,200,000          52            9,450            627              10,129
Sale of common stock to an
 investment banking firm
 and its  managing partner              -                  300,000           3              447             -                  450
Repurchase of common stock              -                  (42,022)         (1)            (126)            -                 (127)
Issuance of common stock
to  executives and consultants          -                   85,000           1              190             -                  191

Net loss                                -                    -               -              -             (104)               (104)
                                      -------            ---------       --------        -------         -----                -----
Balances, December 31, 1996           $  -               5,542,978        $ 55           $9,961          $ 52               $10,539
                                                         =======

                                  See notes to consolidated financial statements
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                             KSW, INC. AND SUBSIDIARY

                                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                                         (IN THOUSANDS, EXCEPT SHARE DATA)
                                             -------------------------
                                                                           1996            1995               1994
                                                                           ----            ----               ----
<S>                                                                        <C>             <C>                <C>

Reconciliation of net income (loss)
to net cash  provided by (used in)
operating activities:
         Net income (loss)                                                 $  (104)        $  571             $  606

  Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:

 Compensation expense paid through issuance of  common stock                   191             -                 607
         Depreciation and amortization                                         441            383                545
         Deferred income taxes                                                (72)             -                  -
         Reduction in allowance for                                          (130)             -                  -
doubtful accounts

         Changes in assets (increase) decrease:
                  Accounts receivable                                      (6,792)           (627)             1,033
                  Retainage receivable                                     (2,197)         (1,617)              (281)
                  Costs and estimated
earnings in excess of   billings on                                          (127)         (1,244)             1,468
uncompleted contracts
                  Receivable from sellers                                     -               894               (475)
                  Prepaid expenses and other receivables                      100             (87)              (329)
                  Other assets                                                 23              43                (45)

         Changes in liabilities increase (decrease):
                  Accounts payable                                          5,041             938                111
                  Retainage payable                                           137           2,410                925
                  Accrued payroll and benefits                               (114)            164               (492)
                  Accrued expenses                                           (138)            383                 (1)
                  Due to contractor                                        (1,264)           (776)              (297)
                  Billings in excess of costs
                    and estimated  earnings on                              4,228            (122)               297
                    uncompleted contracts                                  -------         --------           --------

                                  See notes to consolidated financial statements

                  Net cash provided by (used in) operating
                     activities                                              (777)          1,313               3,672
                                                                            --------       --------           --------

Cash flows from investing activities:
         Receivable from Helionetics                                           -             (167)              (486)
         Cash paid in business acquisition                                     -              (25)               -
         Purchase of property and equipment                                   (206)          (287)               (28)
                                                                           --------        ----------           ---------
            Net cash used in investing activties                              (206)          (479)              (514)
                                                                           --------        -----------          ---------
Cash flows from financing activities:
         Payable to Helionetics                                             $  -            $  -                $ 956
         Capital contribution                                                  -               -                2,000
         Repayment of debt to sellers                                          -               -               (1,706)
         Payment of dividend                                                   -              (550)                -
         Issuance of common stock                                             450               -                  -
         Repurchase of common stock                                          (127)              -                  -
                                                                           --------         ----------         --------
           Net cash provided by (used in financing
               activities                                                     323             (550)              1,250
                                                                           -------          ----------         ---------
Net increase (decrease) in cash and cash equivalents                         (660)             284               4,408
Cash and cash equivalents, beginning of year                                5,124            4,840                 432
                                                                           -------          ---------          ----------

Cash and cash equivalents, end of year                                     $4,464           $5,124             $ 4,840
                                                                           ========        ==========          ==========
Supplemental disclosure of cash flow information:

         Cash paid during the year for:
                  Interest                                                 $   14            $  -                $   70
                                                                           ======         ===========         ============
                  Income taxes                                             $   65           $  765               $   -
                                                                           ======         ===========         ============
</TABLE>

SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES:

On December 20, 1996, the Board of Directors approved the issuance of
up to 85,000 shares of common stock of which 50,000 shares of stock were
allocated to company executives as year end 1996 bonuses and 35,000 shares of
stock were allocated as payments to consultants. The fair market value of the
additional 85,000 shares to be issued was approximately $191 at December 31,
1996.

See Notes 6B and 13A for other non cash financing activities during 1995 and
1994.

                 See notes to consolidated financial statements

<PAGE>
                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                        (IN THOUSANDS, EXCEPT SHARE DATA)
                                -----------------

(1)      PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS:

         The consolidated financial statements for the years ended December 31,
         1996, 1995 and 1994 include the accounts of KSW, Inc. and its
         wholly-owned subsidiary, KSW Mechanical Services, Inc., collectively
         "the Company." All material intercompany accounts and transactions have
         been eliminated in consolidation.

         The Company furnishes and installs heating, ventilating and air
         conditioning systems and processes piping systems for institutional,
         industrial, commercial, high-rise residential and public works
         projects, primarily in the State of New York. The Company also serves
         as a mechanical trade manager, performing project management services
         relating to the mechanical trades and as a constructability consultant.

         Effective November 1, 1993, KSW, Inc. (then a subsidiary of
         Helionetics, Inc., a California corporation ("Helionetics")), acquired
         certain assets and rights, and assumed certain liabilities associated
         with the mechanical contracting business conducted by Kerby
         Saunders-Warkol, Inc. and AFGO Engineering Corp, both subsidiaries of
         JWP Mechanical/Electrical Services East, Inc., itself a subsidiary of
         JWP, Inc. (the "Sellers"), pursuant to an asset purchase agreement
         dated as of October 31, 1993. In connection with this acquisition, the
         Company, for fees, also assumed the responsibility for the management
         of certain contracts of the Seller not acquired by the Company. Through
         January 20, 1994, all transactions of the acquired business were
         recorded through a division of Helionetics (the "KSW Division") on
         behalf of the Company. Helionetics contributed the net assets of the
         KSW Division to the Company on January 20, 1994. The contribution was
         accounted for as a transfer at historical basis in a manner similar to
         a pooling of interests. The accompanying consolidated financial
         statements reflect the operations of the KSW Division of Helionetics
         from January 1, 1994 to January 20, 1994. Such division had no separate
         legal status or existence.

         The acquisition price, as amended in 1995, consisted of $3,314
         including a note of $2,314 (net of discount of $86) payable in 24 equal
         monthly installments commencing in April 1994. Direct acquisition costs
         incurred of $5,076 were comprised of 366,000 shares of Helionetics
         common stock (unregistered, but subject to immediate registration
         rights) valued at $1,863 (approximately $5.00 per share, the estimated
         fair value at the date of acquisition), 128,700 shares of Company's
         common stock owned by a shareholder of Helionetics at the date of
         Distribution valued at $260 and cash of $2,953 (including


<PAGE>


          (1)   PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS - CONT'D:

         finders fees and professional fees incurred in connection with the
         acquisition). The net effect of the final 1995 amendment was a net
         purchase price reduction of $277 and a reduction in the "push-down"
         value of the securities of $302. The final purchase price amounted to
         $8,390.

         The acquisition was accounted for by Helionetics using the purchase
         method of accounting with the purchase price allocated among the assets
         acquired and liabilities assumed on the basis of their estimated fair
         values as follows:

Current assets                                                    $6,364
Property                                                             879
Other assets                                                          44
                                                                 --------
                                                                   7,287

Current liabilities                                               (3,887)
                                                                 ----------
                                                                 ----------
Estimated fair market value of net assets                         $3,400
                                                                 ===========

         The excess of $4,990 of the total acquisition price over the estimated
         fair market value of net assets acquired was allocated to goodwill. In
         accordance with Staff Accounting Bulletin No. 54, the accompanying
         financial statements have been adjusted to "push-down" Helionetics'
         cost of acquisition.

(2)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         (A)     CASH AND CASH EQUIVALENTS:

                 The Company considers highly liquid instruments with remaining
                 maturities of 90 days or less when purchased to be cash
                 equivalents. At December 31, 1996 and l995, all such
                 investments had original maturities of less than seven days.

         (B)     REVENUE AND COST RECOGNITION:

                 Revenue is primarily recognized on the "percentage of
                 completion" method for reporting revenue on long-term
                 construction contracts not yet completed, measured by the
                 percentage of total costs incurred-to-date to estimated total
                 costs at completion for each contract. This method is utilized
                 because management considers the cost-to-cost method the best
                 method available to measure progress on these contracts.
                 Revenues and estimated total costs at completion are adjusted
                 monthly as additional information becomes available and based
                 upon the Company's internal tracking systems.

                 Contract costs include all direct material and labor costs and
                 those other indirect costs related to contract performance
                 including, but not limited to, indirect labor, subcontract
                 costs and supplies. General and administrative costs are
                 charged to expense as incurred.

                 The Company has contracts that may extend over more than one
                 year, therefore, revisions in cost and profit estimates during
                 the course of the work are reflected in the accounting period
                 in which the facts, which require the revisions, become known.

                 Provisions for estimated losses on uncompleted contracts are
                 made in the period in which such losses are determined.

                 Revenues recognized in excess of amounts billed are recorded
                 as a current asset under the caption "Costs and estimated
                 earnings in excess of billings on uncompleted contracts."
                 Billings in excess of revenues recognized are recorded as a
                 current liability under the caption "Billings in excess of
                 costs and estimated earnings on uncompleted contracts."

                 In accordance with construction industry practice, the Company
                 reports in current assets and liabilities those amounts
                 relating to construction contracts realizable and payable over
                 a period in excess of one year.

                 Fees for the management of certain contracts are recognized
                 when services are provided. Continuation of management fees is
                 dependent upon the Company obtaining new consulting agreements
                 from unrelated entities.

          (C)    PROPERTY AND EQUIPMENT:

                 Property and equipment is stated at cost. Depreciation is
                 computed over the estimated useful lives, generally five
                 years, of the assets using the straight-line method. Leasehold
                 improvements are amortized over the lesser of the estimated
                 useful lives of the assets to which they apply or the related
                 lease term. Repairs and maintenance are charged to operations
                 in the period incurred.

         (D)     GOODWILL:

                 Goodwill, which represents the excess of cost over the fair
                 value of net assets acquired, is amortized using the
                 straight-line method over 30 years.

                 Effective January 1, 1995, management revised the amortization
                 period for goodwill from 15 years to 30 years, the effects of
                 which have been adjusted prospectively beginning January 1,
                 1995. Unaudited pro forma effects on net income and net income
                 per share of this change in estimate from 15 years to 30 years
                 for the year ended December 31, 1994 are presented in Note
                 13F.

                 Amortization expense for the years ended December 31, 1996,
                 1995 and 1994 amounted to approximately $153, $153 and $348,
                 respectively.

        (E)      INCOME TAXES:

                 The Company accounts for income taxes under Statement of
                 Financial Accounting Standards No. 109, "Accounting for Income
                 Taxes. " Under Statement 109, the asset and liability method
                 is used in accounting for income taxes. Deferred taxes are
                 recognized for temporary differences between the bases of
                 assets and liabilities for financial statement and income tax
                 purposes. The temporary differences relate primarily to
                 different accounting methods used for depreciation and
                 amortization of property and equipment, goodwill, allowance
                 for doubtful accounts and net operating loss carryforwards. A
                 valuation allowance is recorded for deferred tax assets when
                 it is more likely than not that some or all of the deferred
                 tax assets will not be realized through future operations.

        (F)      NET INCOME (LOSS) PER SHARE:

                 Net income (loss) per share is computed based on the weighted
                 average number of shares of common stock and common stock
                 equivalents outstanding during the year. Common stock
                 equivalents do not have a significant dilutive effect. Per
                 share information presented has been retroactively restated
                 for the 7,800 for 1 stock split (see Note 13C).

        (G)      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 reported
                 amounts of assets and liabilities and disclosure of contingent
                 assets and liabilities at the date of the financial statements
                 and the reported amounts of revenues and expenses during the
                 reporting period. Actual results could differ from those
                 estimates.

        (H)      STOCK-BASED COMPENSATION:

                 In October 1995, the Financial Accounting Standards Board
                 issued Statement of Financial Accounting Standards No. 123,
                 "Accounting for Stock-Based Compensation" (SFAS 123). Under
                 SFAS 123, companies are encouraged, but not required, to adopt
                 a fair value based method of accounting for stock compensation
                 awards. As permitted by SFAS 123, the Company has elected to
                 continue to measure compensation cost using the intrinsic
                 value based method as prescribed in Accounting Principles
                 Board Opinion No. 25, "Accounting for Stock Issued to
                 Employees" and to provide the disclosures required by SFAS
                 123.

(3)      RETAINAGE RECEIVABLE:

         At December 31, 1996, approximately $914 of the retainage receivable is
         not collectible within one year.

(4)      CONTRACTS IN PROGRESS:

         Information with respect to contracts in progress at December 31, 1996
         and 1995 is as follows:

                                                     1996            1995

Expenditures on uncompleted contracts             $75,790         $33,955
Estimated earnings thereon                          5,632           2,021
                                                  --------        ---------
                                                   81,422          35,976
Less billings applicable thereto                   84,642          35,095
                                                  ---------       ---------
                                                  $(3,220)       $   881

Included in the accompanying consolidate
  balance sheets under the following captions:

Costs and estimated earnings in excess of         $ 1,640         $ 1,513
  billings on uncompleted contracts

Billings in excess of costs and estimated          (4,860)          (632)
  earnings on uncompleted contracts

                                                  $(3,220)        $   881

(5)      PROPERTY AND EQUIPMENT

         Property and equipment at December 31, 1996 and 1995 consist of the
         following:

                                                     1996         1995
                                                    -------      -------
Machinery and equipment                              $365         $231
Furniture and fixtures                                300          265
Leasehold improvements                                738          701
                                                    -------      --------
                                                    1,403        1,197

Less accumulated depreciation and amortization        752          464

Net property and equipment                           $651         $733
                                                   ========      ========

         Depreciation and amortization expense relating to property and
         equipment was approximately $288, $230 and $197, respectively, for the
         years ended December 31, 1996, 1995 and 1994, respectively.

(6)      TRANSACTIONS WITH HELIONETICS:

         (A)      TAX SHARING AGREEMENT:

                  The Company had an agreement with Helionetics whereby the
                  Company agreed to pay a share of Helionetics' tax liability
                  due on consolidated tax returns but such payment was not to
                  exceed the tax liability which the Company would have had on a
                  stand-alone basis. For the years ended December 31, 1995 and
                  1994, Helionetics forgave debt of $335 and $343, respectively,
                  relating to income taxes. Such forgiveness is reflected in the
                  accompanying consolidated financial statements as capital
                  contributions. The tax-sharing agreement terminated upon the
                  conclusion of the Distribution, except with respect to the tax
                  liability accrued through the Distribution (see Note 13C).

         (B)      RECEIVABLE FROM HELIONETICS:

                  At December 31, 1994, the Company had a noninterest bearing
                  receivable of $498. During 1995, the Company had paid certain
                  state and local taxes on behalf of Helionetics, as well as
                  certain other costs which, as of December 29, 1995, aggregated
                  $1,098. On December 29, 1995, Helionetics tendered 2,600,000
                  of the Company's common shares in satisfaction of $1,000 in
                  such advances and paid the Company the remaining balance of
                  $98 (see Note 13C).

(7)      TRANSACTION WITH SELLER:

         (A)      DUE TO CONTRACTOR:

                  In connection with the acquisition described in Note 1, the
                  Company assumed a joint venture subcontract agreement with a
                  subsidiary of the Seller to provide services on a specific
                  contract. At December 31, 1995, the Company had $1,264 due to
                  contractor under this agreement. This liability was satisfied
                  during 1996.

         (B)      RECEIVABLE FROM SELLER:

                  At December 31, 1996 and 1995, the Company had an aggregate
                  receivable from the Seller for contract services provided in
                  the ordinary course of business which amounted to $147 and
                  $1,537, respectively. These amounts are included in accounts
                  and retainage receivable in the accompanying consolidated
                  balance sheet.

         (C)      MANAGEMENT FEES:

                  Fees from the Seller for the management of certain contracts
                  not acquired total approximately $783, $2,795 and $7,197, and
                  represented approximately 2%, 6% and 20% of consolidated
                  revenues for the years ended December 31, 1996, 1995 and 1994,
                  respectively.

         (D)      NOTE PAYABLE TO SELLER:

                  In connection with the acquisition, the Company issued a note
                  of $2,314 (net of a discount of $86), payable in 24 equal
                  monthly commencing in April 1994 and bearing interest
                  beginning January 1, 1995. During 1994, such note was paid in
                  full.

(8)               INCOME TAXES:

                  The components of income tax expense (benefit) are as follows:

                              1996                 1995                   1994
Current
  Federal                   $  -                   $335                   $459
  State and local              -                    233                    497
                            ------               ----------            -------
                               -                    568                    956
                            -------              ----------            --------
Deferred

  Federal                      (40)                 (40)                    -
  State and local              (32)                 (28)                    -
                           --------             ----------             --------
                               (72)                 (68)                    -

        Total                 $(72)                $500                   $956
                           =========            ==========             ========

A reconciliation of the statutory Federal income tax rate to the provision for
income taxes is as follows:


                                      1996          1995                 1994

Statutory Federal income tax          (34)%         34%                  34%
rate (benefit)
Compensation expense not
deductible for                          -            -                    10
   income tax purposes

State and local taxes, net of
Federal tax  benefit                  (12)           13                   17
Other                                   5             -                    -

                                      (41)%          47%                  61%
                                     =====          ====                 =====


         The provision for income taxes for the years ended December 31, 1995
         and 1994 represents the Federal, state and local income tax expense
         based on the assumption that separate income tax returns would be
         filed, and the KSW Division or the Company would not be included in
         Helionetics' consolidated tax returns.

         The details of deferred tax assets and liabilities are as follows:

         Deferred income tax asset:

                                                        1996             1995
                                                        ----             ----
           Property, plant and equipment                $135             $ -
           Allowance for doubtful accounts                68              140
           Net operating loss/credit carryforward
              and other                                   58               -
                                                         -----             ---
           Total deferred income tax assets              261              140
             Valuation allowance                          -                 -
                                                        ------            ---
                 Net deferred income tax asset           261             140

           Deferred income tax liabilities:
              Amortization of goodwill                   121              72

                Total net income tax asset              $140            $ 68
                                                       ======           ======

         At December 31, 1996, the long-term portion of the net deferred tax
         assets totalling $14 is included with other assets in the accompanying
         balance sheet.

         At the December 31, 1996, the Company has a net operating loss
         carryforward of approximately $78 expiring through 2012.

(9)      COMMITMENTS AND CONTINGENCIES:

         (A)    PERFORMANCE BONDS:

                The Company is contingently liable to a surety under a general
                indemnity agreement. The Company agrees to indemnify the surety
                for any payments made on contracts of suretyship, guaranty or
                indemnity. Management believes that all contingent liabilities
                will be satisfied by performance on the specific bonded
                 contracts involved.

         (B)    OPERATING LEASES:

                The company is obligated under noncancelable operating leases,
                including a lease with its chief executive officer, for office
                space and transportation equipment with future rental payments
                at December 31, 1996 as follows:

Year ending                                 Amount
               ------------------------------------------------------------
December 31,   NONAFFILIATED             RELATED PARTY           TOTAL
   1997            $264                     $103                  $367
   1998              95                      103                   198

                   $359                     $206                  $565
                   ======                   ======               =======

                  Rent expense for the years ended December 31, 1996, 1995 and
                  1994 amounted to approximately $351, $345 and $339,
                  respectively, including $103 to a related party in each year.

         (C)      EMPLOYMENT AGREEMENTS:

                  KSW Mechanical Services, Inc. has entered into employment
                  agreements with two of its officers for the period January
                  1994 through December 1998. These agreements provide for
                  aggregate base annual compensation of $775 increasing by $37
                  in 1995 and 1996 and by $50 in 1997 and 1998. The officers are
                  also entitled to medical insurance, disability insurance, life
                  insurance, club dues and bonuses, if, and when, declared by a
                  two-thirds vote of the Company's Board of Directors.

         (D)      ENVIRONMENTAL REGULATION:

                  The Company must comply with certain Federal, state and local
                  regulations involving contract compliance as well as the
                  disposal of certain toxins. In management's opinion, there
                  have been no violation of laws which could have a material
                  adverse impact on the financial condition of the company.

                  Employees of the Company have occasion to work in the vicinity
                  of hazardous materials, such as lead. The Company has
                  purchased a $5,000 Contractor's Pollution insurance policy
                  insuring against losses resulting from exposure to hazardous
                  materials.

         (E)      CONSULTING AGREEMENTS:

                  The Company has entered into two agreements for independent
                  advisory and consulting services. The term of the first
                  agreement is from June 1994 through December 1997 with annual
                  payments totalling $95. The second agreement was entered into
                  on January 1, 1996 and expires in December 1998 with annual
                  payments totalling $75. This agreement also provides the
                  consultant with 15,000 options to purchase shares of the
                  Company's common stock at $1.50 per share. The options were
                  issued pursuant to the 1995 Stock Option Plan (see Note 13E).

                  During December 1996, under a Board of Directors Resolution,
                  the Company approved the issuance of 85,000 shares of common
                  stock of which 35,000 shares are to be issued to these
                  consultants in lieu of cash payments with a fair market value
                  of approximately $79. This transaction has been reflected in
                  the Company's consolidated financial statements for the year
                  ended December 31, 1996 (see Note 13D).

         (F)      HELIONETICS' LITIGATION:

                  Helionetics is defendant in a class action lawsuit seeking
                  substantial damages allegedly resulting from the purported
                  violation of Federal securities laws. KSW, Inc. is not a party
                  to this action. The ultimate outcome of this action is not
                  presently determinaable; however, in the opinion of management
                  of KSW, Inc., the ultimate outcome of this action will not
                  have a material adverse impact on the Company's consolidated
                  financial statements.

                  The wife of the Chairman of the Board of Helionetics has
                  irrevocably pledged 500,000 of the shares of stock she
                  received in the Distribution to the Company as collateral for
                  any payment of any claims by KSW, Inc. against Helionetics in
                  connection with the December 28, 1995 distribution of KSW,
                  Inc. stock by Helionetics, Inc.

(10)     CONCENTRATION RISKS:

         (A)      CREDIT RISK:

                  Financial instruments, which potentially expose the Company to
                  concentrations of credit risk, consist primarily of cash and
                  cash equivalents and trade accounts and retainage receivables.

                  The Company maintains its cash and cash equivalents accounts
                  at balances which exceed Federally insured limits for such
                  accounts. The Company limits its credit risk by selecting
                  financial institutions considered to be highly creditworthy.
                  At December 31, 1996, such excess amounted to approximately
                  $4,467.

                  Trade accounts and retainage receivables are due from
                  government agencies, municipalities and private owners located
                  in the New York metropolitan area. The Company does not
                  require collateral in most cases, but may file statutory liens
                  against the construction projects if a default in payment
                  occurs.

         (B)      LABOR CONCENTRATIONS:

                  The Company's direct labor is supplied primarily by unions
                  through collective bargaining agreements expiring primarily
                  during June 1999. Although the Company's past experience was
                  favorable with respect to resolving conflicting demands with
                  these unions, it is always possible that a protracted conflict
                  may occur which will impact the renewal of the collective
                  bargaining agreements

         (C)      CONTRACT REVENUE/SIGNIFICANT CUSTOMER:

                  The Company earned approximately 53%, 16% and 12% of its
                  contract revenue during the year ended December 31, 1996 from
                  three customers. Accounts receivable and retainage receivable
                  from these respective customers totaled approximately $13,037
                  as of December 31, 1996. Revenues from one contract accounted
                  for 61% of consolidated revenues during 1995. A different
                  contract accounted for 52% of consolidated revenues for 1994.
                  Accounts receivable and retainage receivable from the
                  respective contracts were $3,573 and $2,306 as of December 31,
                  1995 and 1994, respectively.

(11)     RETIREMENT PLANS:

         (A)      PROFIT-SHARING/401(K) PLAN:

                  The Company sponsors a profit-sharing/401(k) plan covering
                  employees not covered under collective bargaining agreements
                  who meet the age and length of service requirements of the
                  plan. The Company may make discretionary contributions to the
                  plan. The total of employee contributions may not exceed
                  Federal government limits. The Company accrued approximately
                  $51 as a discretionary contribution for the year ended
                  December 31, 1996.

         (B)      MULTIEMPLOYER PENSION PLANS:

                  The Company has made contributions to multiemployer pension
                  plans that cover its various union employees. These plans
                  provide benefits based on union members' earnings and periods
                  of coverage under the respective plans. It is not cost
                  effective to accumulate information regarding the pension
                  expense under these plans.

(12)     LINE OF CREDIT - BANK

        Effective July 1, 1996, the Company obtained an uncommitted line of
        credit with a bank, which provides borrowings of up to $2,500 with
        interest at the bank's prime lending rate
        plus 1% expiring May 31, 1997. The line requires the Company to meet
        certain financial covenants and ratios. At December 31, 1996, there are
        no outstanding borrowings on the line of credit.

(13)     COMMON STOCK:

         (A)      ISSUANCE OF COMMON STOCK:

                  In January 1994, the Company issued 780,000 shares of its
                  common stock to two officers for no consideration. Prior to
                  the Distribution discussed below, under the terms of a
                  stockholders' agreement, if either officer received a bona
                  fide offer from a third party to purchase all of such shares,
                  Helionetics had an option to purchase the shares at a price
                  equal to 25% of the Tangible Book Value (as defined) of such
                  shares. The Company determined the value of the shares to be
                  $607 based on the purchase price paid by Helionetics and a
                  discount for minority ownership. Such amount has been recorded
                  as compensation expense for the year ended December 31, 1994.

                  In 1994, Helionetics contributed $2,000 in cash to the Company
                  as reflected in the accompany consolidated statement of
                  stockholders' equity.

                  On January 31, 1996, the Company sold 300,000 shares
                  of its common stock for  $1.50 per share to an
                  investment banking firm and its managing partner. (See
                   Note 13C)

         (B)      REPURCHASE OF COMMON STOCK:

                  During April 1996, the Company purchased 42,022 shares of its
                  common stock as a result of a tender offer to shareholders
                  whom held under 50 shares of stock. These shares were
                  purchased at a cost of $3 per share.

         (C)      THE DISTRIBUTION:

                  Effective December 29, 1995, the Company filed a Registration
                  Statement on Form 10 with the Securities and Exchange
                  Commission, under the provisions of the Securities and
                  Exchange Act of 1934, as amended, for the purpose of
                  distributing up to 4,189,900 shares of common stock (the
                  "Distribution"). The Distribution was to the shareholders of
                  record as of December 4, 1995 of Helionetics at a rate of one
                  share of the Company's common stock for every twelve shares of
                  Helionetics stock held. The purpose of the Distribution was to
                  separate the Company from Helionetics and to enable the
                  Company to gain independent access to equity markets to fund
                  future operations. Subsequent to the Distribution, Helionetics
                  has no ownership interest in the Company. Neither Helionetics
                  nor the Company received any cash or other proceeds upon
                  execution of the Distribution. There are no material pro forma
                  adjustments necessary to the accompanying statements of
                  operations as a result of the Distribution because the Company
                  was operated as an autonomous entity for all periods
                  presented.

                  In connection with the Distribution, the following occurred:

                           .        The Board of Directors of the Company
                                    approved a 7,800-for 1 stock split of issued
                                    and outstanding common shares, increased its
                                    authorized shares to 25,000,000 and
                                    authorized the issuance of 1,000,000 shares
                                    of preferred stock.

                           .        The Company declared and paid a cash
                                    dividend of $550 to shareholders of record
                                    on December 4, 1995.

                           .        The Company acquired and retired 2,600,000
                                    shares of its common stock from Helionetics
                                    in exchange for forgiveness by the Company
                                    of $1,000 due from Helionetics.

                           .        The Board of Directors of the Company
                                    adopted the 1995 Stock Option Plan (the
                                    Plan). The Plan enabled the Company to offer
                                    an incentive-based compensation system to
                                    its employees, officers, directors and
                                    consultants.

                           .        Bonuses totaling $375 for two officers of
                                    the Company were  accrued at December 31,
                                    1995.

                           .        Immediately following the Distribution, the
                                    Company issued and  sold a total of 300,000
                                    shares of common stock for $1.50 per share
                                    to an investment banking firm and its
                                    managing partner during  1996. (See Note
                                    13A)

                           .        Pursuant to the Distribution Agreement,
                                    Helionetics agreed to the  following: (i)
                                    payment of $98 to the Company in repayment
                                    for  sums previously advanced by KSW, Inc.
                                    to a Helionetics  consultant; (ii) transfer
                                    128,700 and 101,400 shares of the  Company's
                                    common stock in satisfaction of agreements;
                                    and (iii)  Helionetics documented the
                                    account receivable due and owing  from AIM
                                    Energy, Inc. (AIM) with respect to advances
                                    from the  Company to AIM in the form of a
                                    note receivable for $50. The  note will be
                                    payable upon receipt by Helionetics or AIM
                                    of cash as  a result of any transaction
                                    involving AIM.

         (D) ISSUANCE OF COMMON STOCK - EXECUTIVES AND CONSULTANTS:

                  On December 20, 1996, under a Board of Directors Resolution,
                  the Company was authorized to issue 35,000 shares of stock to
                  two consultants in lieu of cash payments (see Note 9(E)) and
                  50,000 shares to executives as year end bonuses. The
                  consolidated financial statements reflect the effect of 85,000
                  shares to be issued per this resolution. The fair market value
                  of these shares at December 31, 1996 was approximately $ 191.

         (E)      STOCK OPTION PLAN:

                  The Board of Directors of the Company adopted the 1995 Stock
                  Option Plan (the Plan). The Plan enabled the Company to offer
                  an incentive-based compensation system to its employees,
                  officers, directors and consultants.

                  A total of 750,000 shares were authorized for issuance under
                  the Plan. Options to purchase 610,000 shares at $1.50 per
                  share were issued (of which, 535,000 shares were issued to
                  officers and directors of the Company and its subsidiary). The
                  Plan requires that the exercise price of options be set at not
                  less than the fair market value of the common stock on the
                  date of grants. In the case of the initial options, the price
                  of $1.50 was determined to be in excess of the fair market
                  value in light of the contingencies facing the Company prior
                  to completion of this Distribution. Options awarded vest
                  one-third on each anniversary of the date of grant and are
                  fully vested three years after grant and expire ten years from
                  the date of the grant. Additional credit towards vesting is
                  given in the event of death (six months) or disability (three
                  months). Any shares which are subject to an award but are not
                  used because the terms and conditions of the award are not
                  met, or any shares which are used by participants to pay all
                  or part of the purchase price of any option may again be used
                  for awards under the Plan. The Plan provides that no shares
                  may be issued to officers or directors in excess of the
                  750,000 shares originally planned to be authorized unless the
                  Company's shareholders approve an increase in the number of
                  shares which may be used for that purpose.

                  Holders of shares issued pursuant to the Plan are
                  entitled to registration of such  shares annually,
                  subject to restrictions in any underwriting agreement.

                  During 1996, no options under the Plan were granted or
                  exercised.

                  The Corporation has adopted the disclosure-only provisions of
                  Statement of Financial Accounting Standards No. 123,
                  "Accounting for Stock-Based Compensation." Accordingly, no
                  compensation cost has been recognized for the stock option
                  plan. Had compensation cost for the Company's stock option
                  plan been determined based on the fair value at the grant date
                  consistent with the provisions of SFAS No. 123, the
                  Corporation's net loss and net loss per common share would
                  have been increased to the pro forma amounts indicated below:

                                                                      1995

Net income - as reported                                           $    571
Net income - pro forma                                             $    386
Net income per common share - as reported                          $    .07
Net income per common share - pro forma                            $    .05

                  The fair value of each option grant is estimated on the date
                  of grant using the Black-Scholes option-pricing model with the
                  following weighted-average assumptions used for grants in
                  1996: dividend yield of 0.%; expected volatility of 0.3720%;
                  risk-free interest rate of 7.68%; and expected lives of 6
                  years.

         (F)      PRO FORMA NET INCOME PER SHARE:

                  Pro forma net income per share after giving effect to the
                  2,600,000 shares acquired by the Company for the note
                  receivable, and the effects of changing the estimated periods
                  to be benefited for goodwill from 15 years in 1994 to 30 years
                  in 1995 is as follows:

                                               1995                    1994

Weighted average common shares               7,785,754               7,800,000
Shares acquired from Helionetics            (2,600,000)             (2,600,000)
                                            -----------             -----------

Pro forma weighted average                   5,185,754               5,200,000
common shares                                ==========              ==========

Net income as reported                       $      571             $       606
                                             ==========             ===========

<PAGE>

                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                        (IN THOUSANDS, EXCEPT SHARE DATA)
                                -----------------


                            KSW, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONCLUDED)

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
                    (in thousands, except share and per share data)


         (F) PRO FORMA NET INCOME PER SHARE - CONT'D:

                                                 1995                 1994

Pro forma net income per share                  $  0.11              $  0.12
                                               ----------           ----------

Net income as reported                                               $   606
Pro forma weighted average                                               174
common shares                                                        ---------

Pro forma net income                                                $     780
                                                                    =========

Pro forma net income                                                $    0.15
                                                                    ----------


(14)     RECLASSIFICATIONS:

         Certain amounts in the 1995 and 1994 consolidated financial statements
         have been reclassified for comparative purposes to conform with the
         1996 presentation. These reclassifications did not affect net income or
         working capital, as previously reported.