<PAGE>

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

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

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

                                   FORM 10-Q

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

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

                 For the quarterly period ended June 30, 2002

                                      or

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

          For the transition period from              to

                          Commission File No. 1-13565

                        Encompass Services Corporation
            (Exact name of registrant as specified in its charter)

                       Texas                   76-0535259
                  (State or other
                  jurisdiction of           (I.R.S. Employer
                 incorporation or
                   organization)         Identification Number)

                         3 Greenway Plaza, Suite 2000
                             Houston, Texas 77046
         (Address of principal executive offices, including Zip Code)

                                (713) 860-0100
             (Registrant's telephone number, including area code)

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

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

   Indicate the number of shares outstanding of the issuer's classes of common
stock as of the latest practicable date.

   Common Stock, par value $0.001 per share: 64,998,700 shares outstanding as
of August 12, 2002.

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

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 ----
<C>     <S>                                                                                      <C>
Part I Financial Information

Item 1. Financial Statements....................................................................   3
           Consolidated Condensed Balance Sheets................................................   3
           Consolidated Condensed Statements of Operations......................................   4
           Consolidated Condensed Statement of Shareholders' Equity.............................   5
           Consolidated Condensed Statements of Cash Flows......................................   6
           Notes to Consolidated Condensed Financial Statements.................................   7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...  14
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................  25

Part II Other Information

Item 1. Legal Proceedings.......................................................................   *
Item 2. Changes in Securities and Use of Proceeds...............................................   *
Item 3. Defaults Upon Senior Securities.........................................................   *
Item 4. Submission of Matters to a Vote of Security Holders.....................................  26
Item 5. Other Information.......................................................................   *
Item 6. Exhibits and Reports on Form 8-K........................................................  26
</TABLE>
--------
*  No response to this item is included herein for the reason that it is
   inapplicable or the answer to such item is negative.

                                      2

<PAGE>

                                    PART I

                             FINANCIAL INFORMATION

Item 1.  Financial Statements.

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED CONDENSED BALANCE SHEETS

                       (In thousands, except par value)

<TABLE>
<CAPTION>
                                                                                    June 30,   December 31,
                                                                                      2002         2001
                                                                                   ----------- ------------
                                                                                   (Unaudited)
                                      ASSETS
<S>                                                                                <C>         <C>
Current assets:
   Cash and cash equivalents...................................................... $   14,575   $   20,572
   Accounts receivable, net of allowance of $31,161 and $45,344, respectively.....    667,300      728,203
   Inventories....................................................................     23,805       26,128
   Costs and estimated earnings in excess of billings on uncompleted contracts....    104,381      101,719
   Deferred tax assets............................................................     19,219       19,219
   Prepaid expenses and other current assets......................................     20,147       25,880
                                                                                   ----------   ----------
       Total current assets.......................................................    849,427      921,721
Property and equipment, net.......................................................    110,969      124,548
Goodwill, net.....................................................................    791,172    1,285,625
Other intangible assets, net......................................................      7,606       13,529
Deferred tax assets...............................................................     40,759           --
Deferred debt issuance costs, net.................................................     20,852       19,577
Other long-term assets............................................................     30,865       36,326
                                                                                   ----------   ----------
       Total assets............................................................... $1,851,650   $2,401,326
                                                                                   ==========   ==========
                       LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Short-term borrowings and current maturities of long-term debt................. $    4,494   $    4,551
   Accounts payable...............................................................    242,490      269,226
   Billings in excess of costs and estimated earnings on uncompleted contracts....    144,968      159,226
   Accrued compensation...........................................................     67,025       88,578
   Other accrued liabilities......................................................     63,856       75,904
                                                                                   ----------   ----------
       Total current liabilities..................................................    522,833      597,485
Long-term debt, net of current portion............................................    798,692      810,263
Deferred tax liabilities..........................................................         --        7,384
Other liabilities.................................................................     19,818       20,461

Commitments and contingencies
Mandatorily redeemable convertible preferred stock, $.001 par value, 50,000 shares
  authorized, 256 shares issued and outstanding...................................    300,487      289,621
Shareholders' equity:
   Common stock, $.001 par value, 200,000 shares authorized, 64,999 and 63,793
     shares outstanding, respectively.............................................         67           65
   Additional paid-in capital.....................................................    624,077      622,783
   Retained earnings (accumulated deficit)........................................   (400,424)      67,307
   Treasury stock, 1,643 shares at cost...........................................    (10,425)     (10,425)
   Accumulated other comprehensive loss...........................................     (3,475)      (3,618)
                                                                                   ----------   ----------
       Total shareholders' equity.................................................    209,820      676,112
                                                                                   ----------   ----------
       Total liabilities and shareholders' equity................................. $1,851,650   $2,401,326
                                                                                   ==========   ==========
</TABLE>

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

                                      3

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

                   (In thousands, except per share amounts)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                            Three Months Ended     Six Months Ended
                                                                                 June 30,              June 30,
                                                                            ------------------  ----------------------
                                                                              2002      2001       2002        2001
                                                                            --------  --------  ----------  ----------
<S>                                                                         <C>       <C>       <C>         <C>
Revenues................................................................... $866,868  $996,551  $1,729,857  $1,989,452
Cost of services...........................................................  759,329   820,528   1,502,021   1,636,734
                                                                            --------  --------  ----------  ----------
    Gross profit...........................................................  107,539   176,023     227,836     352,718
Selling, general and administrative expenses...............................   98,915   107,447     195,007     227,059
Provision for doubtful accounts, net of recoveries.........................     (370)    9,999       2,067      12,313
Amortization of goodwill...................................................       --     9,044          --      18,144
                                                                            --------  --------  ----------  ----------
    Operating income.......................................................    8,994    49,533      30,762      95,202
Other income (expense):
    Interest income........................................................      520       221         657         437
    Interest expense.......................................................  (20,159)  (19,883)    (38,506)    (42,555)
    Other, net.............................................................      292      (278)      1,357        (138)
                                                                            --------  --------  ----------  ----------
Income (loss) from continuing operations before income tax provision
 and cumulative effect of change in accounting principle...................  (10,353)   29,593      (5,730)     52,946
Income tax provision (benefit).............................................   (4,922)   13,716      (2,980)     24,653
                                                                            --------  --------  ----------  ----------
Income (loss) from continuing operations before cumulative effect of
 change in accounting principle............................................   (5,431)   15,877      (2,750)     28,293
Loss from discontinued operations, net of tax..............................     (554)   (7,082)     (1,125)     (5,702)
Loss on disposal of discontinued operations, net of tax....................       --        --      (1,132)         --
                                                                            --------  --------  ----------  ----------
Income (loss) before cumulative effect of change in accounting
 principle.................................................................   (5,985)    8,795      (5,007)     22,591
Cumulative effect of change in accounting principle, net of tax............       --        --    (451,858)         --
                                                                            --------  --------  ----------  ----------
Net income (loss)..........................................................   (5,985)    8,795    (456,865)     22,591
Less convertible preferred stock dividends.................................   (5,481)   (5,107)    (10,866)    (10,124)
                                                                            --------  --------  ----------  ----------
Net income (loss) available to common shareholders......................... $(11,466) $  3,688  $ (467,731) $   12,467
                                                                            ========  ========  ==========  ==========
Basic earnings per share:
    Income (loss) from continuing operations before cumulative effect of
     change in accounting principle........................................ $  (0.17) $   0.17  $    (0.21) $     0.28
    Loss from discontinued operations, net of tax..........................    (0.01)    (0.11)      (0.02)      (0.09)
    Loss on disposal of discontinued operations, net of tax................       --        --       (0.02)         --
                                                                            --------  --------  ----------  ----------
    Income (loss) before cumulative effect of change in accounting
     principle.............................................................    (0.18)     0.06       (0.25)       0.19
    Cumulative effect of change in accounting principle, net of tax........       --        --       (7.04)         --
                                                                            --------  --------  ----------  ----------
    Net income (loss)...................................................... $  (0.18) $   0.06  $    (7.29) $     0.19
                                                                            ========  ========  ==========  ==========
    Weighted average shares outstanding....................................   64,311    64,643      64,175      64,317
                                                                            ========  ========  ==========  ==========
Diluted earnings per share:
    Income (loss) from continuing operations before cumulative effect of
     change in accounting principle........................................ $  (0.17) $   0.17  $    (0.21) $     0.28
    Loss from discontinued operations, net of tax..........................    (0.01)    (0.11)      (0.02)      (0.09)
    Loss on disposal of discontinued operations, net of tax................       --        --       (0.02)         --
                                                                            --------  --------  ----------  ----------
    Income (loss) before cumulative effect of change in accounting
     principle.............................................................    (0.18)     0.06       (0.25)       0.19
    Cumulative effect of change in accounting principle, net of tax........       --        --       (7.04)         --
                                                                            --------  --------  ----------  ----------
    Net income (loss)...................................................... $  (0.18) $   0.06  $    (7.29) $     0.19
                                                                            ========  ========  ==========  ==========
    Weighted average shares outstanding....................................   64,311    64,860      64,175      64,495
                                                                            ========  ========  ==========  ==========
</TABLE>

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

                                      4

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

           CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY

                    For the Six Months Ended June 30, 2002
                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                     Common Stock                 Retained              Accumulated
                                  ------------------ Additional   Earnings                 Other         Total
                                    Shares            Paid-in-  (Accumulated Treasury  Comprehensive Shareholders'
                                  Outstanding Amount  Capital     Deficit)    Stock        Loss         Equity
                                  ----------- ------ ---------- ------------ --------  ------------- -------------
<S>                               <C>         <C>    <C>        <C>          <C>       <C>           <C>
BALANCE, December 31, 2001.......   63,793     $65    $622,783   $  67,307   $(10,425)    $(3,618)     $ 676,112
Shares purchased under stock
  purchase plans.................    1,206       2       1,294          --         --          --          1,296
Net losses on interest rate swaps       --      --          --          --         --      (1,214)        (1,214)
Reclassification adjustments.....       --      --          --          --         --       1,357          1,357
Net loss.........................       --      --          --    (456,865)        --          --       (456,865)
Convertible preferred stock
  dividends......................       --      --          --     (10,866)        --          --        (10,866)
                                    ------     ---    --------   ---------   --------     -------      ---------
BALANCE, June 30, 2002...........   64,999     $67    $624,077   $(400,424)  $(10,425)    $(3,475)     $ 209,820
                                    ======     ===    ========   =========   ========     =======      =========
</TABLE>



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


                                      5

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

                                (In thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                      Six Months Ended
                                                                                          June 30,
                                                                                    --------------------
                                                                                       2002       2001
                                                                                    ---------  ---------
<S>                                                                                 <C>        <C>
Cash flows from operating activities:
   Net income (loss)............................................................... $(456,865) $  22,591
   Adjustments to reconcile net income (loss) to net cash provided by operating
     activities:
       Cumulative effect of change in accounting principle, net of tax.............   451,858         --
       Loss from discontinued operations, net of tax...............................     1,125      5,702
       Loss on disposal of discontinued operations, net of tax.....................     1,132         --
       Depreciation and amortization...............................................    18,808     35,560
       Provision for doubtful accounts, net of recoveries..........................     2,067     12,313
       Other non-cash charges......................................................     2,614      1,712
       Changes in operating assets and liabilities:
          Accounts receivable......................................................    40,665     80,269
          Costs and estimated earnings in excess of billings on uncompleted
            contracts..............................................................    (3,897)    (3,911)
          Prepaid expenses and other current assets................................       319     (5,296)
          Billings in excess of costs and estimated earnings on uncompleted
            contracts..............................................................   (13,042)   (30,985)
          Accounts payable and accrued liabilities.................................   (42,264)   (40,065)
          Change in other assets and liabilities...................................     4,168    (22,502)
                                                                                    ---------  ---------
              Net cash provided by operating activities............................     6,688     55,388
                                                                                    ---------  ---------
Cash flows from investing activities:
   Cash paid for acquisitions, net of cash acquired................................      (176)   (10,956)
   Purchases of property and equipment.............................................    (7,800)   (16,378)
   Proceeds from sales of businesses, property and equipment.......................    11,537      4,524
                                                                                    ---------  ---------
              Net cash provided by (used in) investing activities..................     3,561    (22,810)
                                                                                    ---------  ---------
Cash flows from financing activities:
   Net payments on short-term debt.................................................       (52)      (774)
   Payments on long-term debt......................................................  (315,651)  (447,269)
   Proceeds from long-term debt borrowings.........................................   303,600    417,750
   Payment of debt issuance costs..................................................    (4,000)    (4,813)
   Purchase of treasury stock......................................................        --     (2,841)
   Issuance of stock under employee stock purchase and stock option plans..........     1,273      1,798
                                                                                    ---------  ---------
              Net cash used in financing activities................................   (14,830)   (36,149)
                                                                                    ---------  ---------
Net cash flows from discontinued operations........................................    (1,416)    (5,468)
                                                                                    ---------  ---------
Net decrease in cash and cash equivalents..........................................    (5,997)    (9,039)
Cash and cash equivalents, beginning of period.....................................    20,572     10,094
                                                                                    ---------  ---------
Cash and cash equivalents, end of period........................................... $  14,575  $   1,055
                                                                                    =========  =========
Supplemental disclosure of cash flow information:
   Interest paid................................................................... $  34,089  $  43,705
   Income taxes paid (refunded), net...............................................   (10,155)    11,220
</TABLE>

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


                                      6

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

                                  (Unaudited)

1.  BUSINESS AND ORGANIZATION

   Encompass Services Corporation ("Encompass", or the "Company"), a Texas
corporation, provides electrical, mechanical and cleaning systems services to
commercial, industrial and residential customers nationwide, including
construction, installation and maintenance.

   The accompanying unaudited consolidated condensed financial statements of
the Company have been prepared in accordance with Rule 10-01 of Regulation S-X
promulgated by the Securities and Exchange Commission and do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, the
Company has made all adjustments necessary for a fair presentation of the
results of the interim periods, and such adjustments consist of only normal
recurring adjustments. The results of operations for such interim periods are
not necessarily indicative of results of operations for a full year. The
unaudited consolidated condensed financial statements should be read in
conjunction with the separate audited consolidated financial statements and
notes thereto of the Company for the year ended December 31, 2001 as filed in
the Company's Annual Report on Form 10-K/A dated July 1, 2002.

   Certain prior year amounts have been reclassified to conform to the current
year presentation.

2.  CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

   Effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," which established new accounting and reporting requirements
for goodwill and other intangible assets. Under the new standard, goodwill and
intangible assets with indefinite useful lives are no longer amortized to
expense, but instead are tested for impairment at least annually. At January 1,
2002, net goodwill balances attributable to each of the Company's reporting
units were tested for impairment by comparing the fair value of each reporting
unit to its carrying value. Fair value was determined using capitalization of
earnings estimates and market multiples of earnings estimates. Significant
estimates used in the methodologies included estimates of future earnings,
future growth rates, weighted average cost of capital and market valuation
multiples for each reporting unit.

   Based upon these impairment tests performed upon adoption of SFAS No. 142,
the Company recognized a charge of $451.9 million, or $7.04 per share, net of
tax benefit of $48.2 million, at January 1, 2002, which is shown as a
cumulative effect of a change in accounting principle in the consolidated
condensed statement of operations. This non-cash impairment charge has no
impact on the calculation of financial covenants under the Company's debt
agreements.

   Also as prescribed by SFAS No. 142, the Company reclassified the unamortized
balance of its acquired dedicated workforce, which was $5.6 million at January
1, 2002, from intangible assets to goodwill.

   The carrying amount of goodwill attributable to each reportable operating
segment was as follows (in thousands):

<TABLE>
<CAPTION>
                                                        Commercial/     Residential Cleaning
                                                    Industrial Services  Services   Systems      Total
                                                    ------------------- ----------- --------  ----------
<S>                                                 <C>                 <C>         <C>       <C>
Balance at December 31, 2001.......................     $1,101,394       $ 99,126   $ 85,105  $1,285,625
Reclassification of value of dedicated workforce to
  goodwill.........................................          4,430          1,193         --       5,623
Impairment charge..................................       (448,235)            --    (51,841)   (500,076)
                                                        ----------       --------   --------  ----------
Balance at January 1, 2002.........................     $  657,589       $100,319   $ 33,264  $  791,172
                                                        ==========       ========   ========  ==========
</TABLE>

                                      7

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


   The following unaudited pro forma results of operations data for the three
months and six months ended June 30, 2002 and 2001 are presented as if the
provisions of SFAS No. 142 had been in effect for all periods presented:

<TABLE>
<CAPTION>
                                                                     Three Months Ended   Six Months Ended
                                                                         June 30,             June 30,
                                                                     ----------------    ------------------
                                                                       2002       2001      2002      2001
                                                                     -------    -------  ---------  -------
                                                                     (in thousands, except per share amounts
<S>                                                                  <C>        <C>      <C>        <C>
Net income (loss) as reported....................................... $(5,985)   $ 8,795  $(456,865) $22,591
Add: cumulative effect of change in accounting principle, net of
  tax...............................................................      --         --    451,858       --
Add: goodwill amortization..........................................      --      8,450         --   16,956
Add: amortization of acquired dedicated workforce...................      --        444         --      888
Less: tax benefit of deductible goodwill amortization...............      --       (497)        --     (994)
                                                                     -------    -------  ---------  -------
   Adjusted net income (loss)....................................... $(5,985)   $17,192  $  (5,007) $39,441
                                                                     =======    =======  =========  =======
Basic EPS:
   Net income (loss) as reported.................................... $ (0.18)   $  0.06  $   (7.29) $  0.19
   Add: cumulative effect of change in accounting principle, net of
     tax............................................................      --         --       7.04       --
   Add: goodwill amortization.......................................      --       0.13         --     0.26
   Add: amortization of acquired dedicated workforce................      --       0.01         --     0.01
   Less: tax benefit of deductible goodwill amortization............      --      (0.01)        --    (0.01)
                                                                     -------    -------  ---------  -------
       Adjusted net income (loss)................................... $ (0.18)   $  0.19  $   (0.25) $  0.45
                                                                     =======    =======  =========  =======
Diluted EPS:
   Net income (loss) as reported.................................... $ (0.18)   $  0.06  $   (7.29) $  0.19
   Add: cumulative effect of change in accounting principle, net of
     tax............................................................      --         --       7.04       --
   Add: goodwill amortization.......................................      --       0.13         --     0.26
   Add: amortization of acquired dedicated workforce................      --       0.01         --     0.01
   Less: tax benefit of deductible goodwill amortization............      --      (0.01)        --    (0.01)
                                                                     -------    -------  ---------  -------
       Adjusted net income (loss)................................... $ (0.18)   $  0.19  $   (0.25) $  0.45
                                                                     =======    =======  =========  =======
</TABLE>

3.  DISCONTINUED OPERATIONS

   In late 2001, the Company decided to exit certain small non-core markets
with limited growth potential. Accordingly, during the three months ended March
31, 2002, the Company sold three relatively small, marginally profitable
business units in the Northeast region of the Company's Commercial/Industrial
Services Group for aggregate cash proceeds of $9.6 million, resulting in a loss
on sale of approximately $1.1 million, net of tax benefit. In accordance with
the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which was adopted effective January 1, 2002, these business
units are classified as discontinued operations. Accordingly, the accompanying
consolidated condensed statements of operations reflect the historical,
after-tax results of these operations as "Loss from discontinued operations,
net of tax". These businesses generated aggregate revenues and operating income
in 2001 of $80.0 million and $1.1 million, respectively.

                                      8

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


   In September 2001, the Company discontinued its Global Technologies segment.
Aggregate revenues from the discontinued Global Technologies segment and the
businesses sold in 2002 were $6.4 million and $105.7 million for the six months
ended June 30, 2002 and 2001, respectively.

4.  DEBT AND RIGHTS OFFERING

   Short- and long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                          June 30,  December 31,
                                                            2002        2001
                                                          --------  ------------
<S>                                                       <C>       <C>
Revolving Credit Facility (8.3% and 7.4%, respectively).. $ 83,800    $ 90,000
Term loans (6.6% and 6.1%, respectively).................  289,613     294,000
Institutional term loan (6.5% and 7.0%, respectively)....   96,785      98,250
10 1/2% Senior Subordinated Notes........................  335,000     335,000
Unamortized discount on 10 1/2% Senior Subordinated Notes   (6,619)     (7,100)
Other borrowings.........................................    4,607       4,664
                                                          --------    --------
                                                           803,186     814,814
Less: short-term borrowings and current maturities.......   (4,494)     (4,551)
                                                          --------    --------
   Total long-term debt.................................. $798,692    $810,263
                                                          ========    ========
</TABLE>

   Effective June 26, 2002, the Company entered into an amended credit facility
(the "Amended Facility"), which provides financial covenant modification
through February 2005. On June 27, 2002, the Company entered into a Securities
Purchase Agreement with affiliates of Apollo Management IV, L.P. ("Apollo"),
whereby Apollo agreed to purchase $35 million of equity securities of the
Company (the "Apollo Investment"). The Apollo Investment is subject to
shareholder approval and the terms and conditions of the Securities Purchase
Agreement.

   The Amended Facility provides for term loans totaling approximately $400
million and a revolving credit facility of $300 million, temporarily limited to
$250 million until funding of the Apollo Investment. In the event the Apollo
Investment is not received by October 15, 2002, the Company will be in
immediate default under the Amended Facility. The $35 million of proceeds from
the Apollo Investment, net of up to $4 million of certain permitted expenses,
are required to be applied against term loans. Borrowings under the Amended
Facility bear interest at variable rates, ranging from 2.0% to 4.25% over the
Eurodollar Rate (as defined in the Amended Facility), and from 0.50% to 2.75%
over the Alternate Base Rate (as defined in the Amended Facility) depending, in
each case, on the Company's total debt-to-EBITDA ratio. In addition, the
Amended Facility places restrictions upon the Company's ability to pay
dividends, make acquisitions and investments and incur capital expenditures and
requires debt prepayment with proceeds from future issuances of debt or equity,
asset sales and excess cash flow, as defined in the Amended Facility.

   The Amended Facility prohibits the payment of cash dividends, which the
Convertible Preferred Stock Agreement requires beginning in April 2003. As a
result, the Company will, in all likelihood, not make its cash dividend payment
in April 2003. If the Company does not make its cash dividend payment in April
2003, the dividend rate on the Convertible Preferred Stock will increase to an
annual rate of 9.25%, and Apollo will have the right to appoint additional
directors to the Company's Board of Directors such that the Apollo-appointed
directors would constitute a majority of the Board of Directors. However, such
events will not trigger a right of acceleration of the Company's redemption
obligation under the Convertible Preferred Stock or any of the Company's debt
instruments.

                                      9

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


   The Company plans to enter into a rights offering in order to effect the
Apollo Investment, whereby holders of common stock, certain options and
warrants, and the Convertible Preferred Stock will receive rights to purchase
up to 75 million shares of common stock at a cash subscription price of $0.55
per share. If the rights offering is fully subscribed, the total amount raised,
including the Apollo Investment, will be $72.4 million. Pursuant to the Amended
Facility, 50 percent of any proceeds received from the rights offering in
excess of the $35 million Apollo Investment, less certain permitted expenses,
will be applied toward permanent reduction of the revolving credit facility and
the term loans on a pro-rata basis. The rights offering is conditioned upon
shareholder approval of the Apollo Investment and customary regulatory
approvals. In the event the shareholders do not approve the Apollo Investment,
or if the Apollo Investment is not received on or before October 15, 2002, the
Company will be in immediate default under the Amended Facility. On August 13,
2002, the closing sale price of the Company's common stock was $0.23 per share.
To the extent that shares continue to be available on the open market at prices
below $0.55 per share, participation in the rights offering, other than the
Apollo Investment, is unlikely. Subject to Apollo's consent, the Company can
elect to terminate the rights offering at any time and have Apollo fund the
Apollo Investment by a different form of investment.

   Pursuant to the Statement of Designation related to the Convertible
Preferred Stock and the Investors' Rights Agreement between Apollo and the
Company, Apollo currently has elected three members to the Company's Board of
Directors. Under the Investors' Rights Agreement, the Company is required to
maintain a debt leverage ratio (total debt to EBITDA, as defined) less than
4.00 to 1. The Company did not maintain a leverage ratio less than 4.00 to 1
during the second quarter of 2002. If such event is deemed both material and
intentional, and so long as the requirements of the covenant are not met,
Apollo is entitled to appoint additional directors to the Company's Board of
Directors such that the Apollo-appointed directors would constitute a majority
of the Board of Directors. Not meeting the total debt leverage covenant does
not trigger a right of acceleration of the Company's obligations under any of
its debt or outstanding preferred stock instruments.

5.  OPERATING SEGMENTS

   The Company has three reportable segments: Commercial/ Industrial Services,
Residential Services and Cleaning Systems. The Company's reportable segments
are strategic business units that, for the most part, offer products and
services to distinct customer groups. They are managed separately because each
segment requires different operating and marketing strategies. Intersegment
transactions are not material.

   The Commercial/Industrial Services Group, which is an aggregation of four
operating segments organized geographically, provides installation and repair
services to the electrical, heating, ventilation and air conditioning ("HVAC"),
plumbing, control and monitoring and process piping systems of commercial and
industrial facilities. The Residential Services Group provides mechanical,
plumbing and other contracting services primarily in single family and low-rise
multifamily housing units. The Cleaning Systems Group provides a wide variety
of facility cleaning and maintenance management services nationwide. From time
to time, management may move business units from one segment to another for
management reporting and evaluation purposes.

   The Company evaluates performance based on income from operations before
amortization of goodwill (applicable to periods prior to January 1, 2002) and
unallocated corporate expenses. While amortization of goodwill was not
considered in evaluating segment performance, the goodwill associated with each
segment is included in the total assets of each segment.

                                      10

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


   Unallocated corporate expenses primarily include corporate overhead and
savings from national purchase agreements relating to materials and
property/casualty insurance. Costs related to group and regional management,
and related operational, sales and marketing, accounting and administrative
support are included in the operating costs of each segment. Corporate assets
primarily include cash, deferred tax assets, deferred debt issuance costs and
other intangible assets, certain computer hardware and software, fixed assets
related to the Company's corporate office, cost-based investments and
miscellaneous non-trade accounts receivable.

<TABLE>
<CAPTION>
                                        Commercial/
                                        Industrial  Residential Cleaning
                                         Services    Services   Systems   Corporate   Total
                                        ----------- ----------- --------  --------- ----------
                                                            (in thousands)
<S>                                     <C>         <C>         <C>       <C>       <C>
THREE MONTHS ENDED JUNE 30, 2002:
   Total revenues...................... $  698,858   $ 91,092   $ 76,918  $     --  $  866,868
   Operating costs.....................    696,572     79,940     79,595     1,767     857,874
                                        ----------   --------   --------  --------  ----------
   Operating income.................... $    2,286   $ 11,152   $ (2,677) $ (1,767) $    8,994
                                        ==========   ========   ========  ========  ==========
   Capital expenditures................ $      738   $    274   $    989  $    129  $    2,130
   Depreciation and amortization.......      6,026        543      1,492     1,474       9,535

THREE MONTHS ENDED JUNE 30, 2001:
   Total revenues...................... $  834,232   $ 90,272   $ 72,047  $     --  $  996,551
   Operating costs.....................    784,711     80,061     68,382     4,820     937,974
                                        ----------   --------   --------  --------  ----------
   Segment operating earnings.......... $   49,521   $ 10,211   $  3,665  $ (4,820)     58,577
                                        ==========   ========   ========  ========
   Amortization of goodwill............                                                  9,044
                                                                                    ----------
   Operating income....................                                             $   49,533
                                                                                    ==========
   Capital expenditures................ $    4,434   $    163   $  1,340  $     41  $    5,978
   Depreciation and other amortization.      6,248        593      1,224       716       8,781

SIX MONTHS ENDED JUNE 30, 2002:
   Total revenues...................... $1,415,609   $165,545   $148,703  $     --  $1,729,857
   Operating costs.....................  1,394,535    150,034    150,816     3,710   1,699,095
                                        ----------   --------   --------  --------  ----------
   Operating income.................... $   21,074   $ 15,511   $ (2,113) $ (3,710) $   30,762
                                        ==========   ========   ========  ========  ==========
   Capital expenditures................ $    1,844   $  2,841   $  2,555  $    560  $    7,800
   Depreciation and amortization.......     11,972      1,117      2,922     2,797      18,808

SIX MONTHS ENDED JUNE 30, 2001:
   Total revenues...................... $1,686,388   $164,189   $138,875  $     --  $1,989,452
   Operating costs.....................  1,587,605    149,928    131,708     6,865   1,876,106
                                        ----------   --------   --------  --------  ----------
   Segment operating earnings.......... $   98,783   $ 14,261   $  7,167  $ (6,865)    113,346
                                        ==========   ========   ========  ========
   Amortization of goodwill............                                                 18,144
                                                                                    ----------
   Operating income....................                                             $   95,202
                                                                                    ==========
   Capital expenditures................ $   12,067   $    778   $  2,249  $  1,284  $   16,378
   Depreciation and other amortization.     12,563      1,186      2,420     1,247      17,416

TOTAL ASSETS:
   As of June 30, 2002................. $1,465,880   $156,483   $ 91,169  $138,118  $1,851,650
   As of December 31, 2001.............  1,980,868    148,394    148,740   123,324   2,401,326
</TABLE>

                                      11

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


6.  EARNINGS PER SHARE

   The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computations for the three-month and six-month
periods ended June 30, 2002 and 2001.

<TABLE>
<CAPTION>
                                                                  Three Months Ended    Six Months Ended
                                                                       June 30,             June 30,
                                                                  -----------------   -------------------
                                                                    2002       2001      2002      2001
                                \                                 --------   -------  ---------  --------
                                                                  (in thousands, except per share amounts)
<S>                                                               <C>        <C>      <C>        <C>
Income (loss) from continuing operations before cumulative effect
  of change in accounting principle.............................. $ (5,431)  $15,877  $  (2,750) $ 28,293
Less: convertible preferred stock dividends......................   (5,481)   (5,107)   (10,866)  (10,124)
                                                                  --------   -------  ---------  --------
Income (loss) from continuing operations before cumulative effect
  of change in accounting principle available to common
  shareholders...................................................  (10,912)   10,770    (13,616)   18,169
Loss from discontinued operations................................     (554)   (7,082)    (1,125)   (5,702)
Loss on disposal of discontinued operations......................       --        --     (1,132)       --
Cumulative effect of change in accounting principle..............       --        --   (451,858)       --
                                                                  --------   -------  ---------  --------
Net income (loss) available to common shareholders............... $(11,466)  $ 3,688  $(467,731) $ 12,467
                                                                  ========   =======  =========  ========
Basic earnings per share:
   Income (loss) from continuing operations before cumulative
     effect of change in accounting principle.................... $  (0.17)  $  0.17  $   (0.21) $   0.28
   Loss from discontinued operations.............................    (0.01)    (0.11)     (0.02)    (0.09)
   Loss on disposal of discontinued operations...................       --        --      (0.02)       --
   Cumulative effect of change in accounting principle...........       --        --      (7.04)       --
                                                                  --------   -------  ---------  --------
   Net income (loss) per share--Basic............................ $  (0.18)  $  0.06  $   (7.29) $   0.19
                                                                  ========   =======  =========  ========
   Weighted average shares outstanding--Basic....................   64,311    64,643     64,175    64,317
                                                                  ========   =======  =========  ========
Diluted earnings per share:
   Income (loss) from continuing operations before cumulaive
     effect of change in accounting principle.................... $  (0.17)  $  0.17  $   (0.21) $   0.28
   Loss from discontinued operations.............................    (0.01)    (0.11)     (0.02)    (0.09)
   Loss on disposal of discontinued operations...................       --        --      (0.02)       --
   Cumulative effect of change in accounting principle...........       --        --      (7.04)       --
                                                                  --------   -------  ---------  --------
   Net income (loss) per share--Diluted.......................... $  (0.18)  $  0.06  $   (7.29) $   0.19
                                                                  ========   =======  =========  ========
   Weighted average shares outstanding--Diluted..................   64,311    64,860     64,175    64,495
                                                                  ========   =======  =========  ========
Weighted average shares:
   Weighted average shares outstanding--Basic....................   64,311    64,643     64,175    64,317
   Common stock equivalents from stock options and
     warrants....................................................       --       217         --       178
                                                                  --------   -------  ---------  --------
   Weighted average shares outstanding--Diluted..................   64,311    64,860     64,175    64,495
                                                                  ========   =======  =========  ========
</TABLE>

                                      12

<PAGE>

                ENCOMPASS SERVICES CORPORATION AND SUBSIDIARIES

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS--(Continued)

                                  (Unaudited)


7.  COMPREHENSIVE INCOME

   The following table reconciles net income (loss) to comprehensive income
(loss) for the three-month and six-month periods ended June 30, 2002 and 2001
(in thousands):


<TABLE>
<CAPTION>
                                                           Three Months       Six Months
                                                          Ended June 30,    Ended June 30,
                                                         ---------------  ------------------
                                                           2002    2001      2002      2001
                                                         -------  ------  ---------  -------
<S>                                                      <C>      <C>     <C>        <C>
Net income (loss)....................................... $(5,985) $8,795  $(456,865) $22,591
Other comprehensive income (loss):
   Cumulative effect attributed to adoption of SFAS 133.      --      --         --   (1,488)
   Net losses on interest rate swaps....................    (999)   (179)    (1,214)  (1,634)
   Reclassification adjustments.........................     549     402      1,357      508
                                                         -------  ------  ---------  -------
Total comprehensive income (loss)....................... $(6,435) $9,018  $(456,722) $19,977
                                                         =======  ======  =========  =======
</TABLE>

                                      13

<PAGE>

Item 2.  Management's Discussion and Analysis of Financial Condition and
Results of Operations.

                                 INTRODUCTION

   Encompass Services Corporation ("Encompass," or the "Company") is one of the
largest providers of facilities services in the United States. The Company
provides electrical and mechanical contracting services and cleaning and
maintenance management services to commercial, industrial and residential
customers nationwide, including construction, installation and maintenance.
Encompass operates in three reportable segments: Commercial/Industrial
Services, Residential Services and Cleaning Systems. See Note 5 of Notes to
Consolidated Condensed Financial Statements for a description of each of these
reportable segments.

   A significant portion of the Company's business involves installation of
mechanical and electrical systems in newly constructed commercial, industrial
and residential facilities. Historically, the construction industry has been
highly cyclical, and is in the midst of a downturn, along with the general
economy. The U.S. Department of Commerce construction reports indicate that
private non-residential construction has declined approximately 20% (seasonally
adjusted annual rate) from June 2001 to June 2002, with the largest declines in
the industrial, office building and hotel sectors. Overcapacity in the industry
has resulted in a very competitive pricing environment in many markets,
resulting in downward pressure on profit margins. The Company's profitability
and profit margins have declined accordingly. Operating income margins for the
years ended December 31, 2000 and 2001, and for the six-month period ended June
30, 2002 were 5.2%, 2.3% and 1.8%, respectively. Backlog was approximately $1.4
billion at June 30, 2002, compared to $1.6 billion at December 31, 2001 and
June 30, 2001. The estimated gross profit margin in backlog is approximately 15
basis points lower than at December 31, 2001. Many industry analysts, however,
including F.W. Dodge and FMI, predict increases in non-residential construction
spending in 2003 and 2004 ranging from 4% to 7% per annum. Consequently, the
Company believes that the negative trend in operating margin has stabilized and
that operating margins should improve as demand for the Company's services
increases. In the meantime, the Company is focused on improving profitability
by curbing discretionary spending, while continuing to enhance its sales,
service and project management processes.

Critical Accounting Policies

   Management believes that the Company's most critical accounting policy is in
accounting for long-term construction contracts. Determining the points at
which revenue should be recognized as earned and costs should be recognized as
expenses is a major accounting issue common to all businesses engaged in the
performance of long-term construction contracts. The Company uses the
percentage-of-completion accounting method for construction contracts in
accordance with the American Institute of Certified Public Accountants
Statement of Position 81-1, "Accounting for Performance of Construction-Type
and Certain Production-Type Contracts". Each of the Company's business units
calculates the percentage-of-completion of each contract by dividing the costs
incurred to date by the estimated total contract costs at completion (the
"cost-to-cost" method). This percentage is then applied to the estimated total
contract value (the total amount of revenue expected to be realized from the
contract) in order to calculate the amount of revenue to be recognized to date
on each contract. Provisions are recognized in the statement of operations for
the full amount of estimated losses on uncompleted contracts whenever evidence
indicates that the estimated total cost of a contract exceeds its estimated
total contract value.

   Percentage-of-completion accounting requires considerable reliance on
estimates in determining revenues, costs, profit margins and the extent of
progress toward completion on a contract-by-contract basis. Uncertainties
inherent in the performance of contracts generally include labor availability
and productivity, job conditions, material cost, change order scope and
pricing, final contract settlements and other factors. These uncertainties are
evaluated continually for each contract, and the impact of changes in estimates
of total contract costs, total contract value, and other factors are reflected
in the consolidated financial statements in the period in which the revisions
are determined.

   Company business units enter into contracts primarily through competitive
bids, with the final terms and prices often negotiated with the customer.
Although the pricing terms and conditions of contracts vary

                                      14

<PAGE>

considerably, most of these contracts are known as "fixed-price" (or
"lump-sum") contracts, in which the business unit essentially agrees to perform
all acts under the contract for a stated price. Company business units also
enter into "cost-plus" contracts (costs incurred plus a stated mark-up
percentage or a stated fee) and "time-and-materials" contracts (stated hourly
labor rate plus the cost of materials). Fixed-price contracts inherently
contain higher risk of loss than the other contract types, but management
believes that the Company is generally able to achieve higher gross profit
margins on fixed-price contracts as a result of the expertise and experience of
its business units in bidding and job performance. No assurance can be given,
however, that the Company will not incur significant job losses on contracts in
the future.

   Included in costs and estimated earnings on uncompleted contracts are
amounts the Company seeks or will seek to collect from customers or others for
errors on or changes in contract specifications or design, contract change
orders in dispute or unapproved as to both scope and price, or other
customer-related causes of unanticipated additional contract costs
(collectively referred to as unapproved change orders and claims). These
amounts are recorded at their estimated net realizable value when the amounts
of additional contract revenue are probable and can be reliably estimated.
Claims made by the Company involve negotiation and, in certain cases,
litigation. The Company expenses litigation costs as incurred, although it may
seek to recover these costs as part of its claim. The Company believes that it
has a reasonable legal basis for pursuing recovery of recorded claims, and the
Company intends to pursue and litigate these claims, if necessary, until a
decision or settlement is reached. Unapproved change orders and claims involve
the use of estimates, and it is possible that revisions to recorded amounts may
be made as more information becomes available. Claims against the Company are
recognized when a loss is considered probable and amounts are reasonably
determinable.

   The Company recognizes maintenance, repair and replacement revenues,
including cleaning and maintenance management services, as services are
performed. Service contract revenue is recognized ratably over the life of the
service contract. The Company accounts for revenues from fixed price
installation and retrofit contracts on a percentage-of-completion basis using
the cost-to-cost method.

   Cost of services consists primarily of salaries, wages, benefits and
insurance of service and installation technicians, project managers and other
field support employees; materials, components, parts and supplies; engineered
equipment; subcontracted services; depreciation; fuel and other vehicle
expenses and equipment rentals. Selling, general and administrative expenses
consist primarily of compensation and related benefits for management,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees.

   Accounts receivable collectibility represents another significant accounting
policy. Company business units grant credit, generally without collateral, to
their customers, which primarily include general contractors, property owners
and developers, governmental agencies, educational and medical institutions,
and commercial and industrial companies in a variety of industries. The Company
is subject to potential credit risk related to changes in business and economic
factors throughout the United States. However, the Company is entitled to
payment for work performed and often has certain lien rights that can be
attached to the work performed. Additionally, management continually monitors
the financial condition of its customers to reduce risk of loss. The Company
provides an allowance for doubtful accounts when future collection is
considered doubtful. Historically, receivables collectibility has not been a
significant issue in the facilities services industry, particularly with
respect to new construction. However, the Company recorded provisions for bad
debts totaling $12.3 million from continuing operations during the first six
months of 2001, compared to $2.1 million in the first six months of 2002. The
significant provision in 2001 is primarily attributable to the collapse of the
telecommunications industry discussed below and, to a lesser extent, the
general economic downturn which contributed to financial difficulties of
certain customers outside the technology sector.

                                      15

<PAGE>

                             RESULTS OF OPERATIONS

Three months ended June 30, 2002 compared to three months ended June 30, 2001

   Operating results for the three months ended June 30, 2002 and 2001 are
summarized as follows (in millions):

<TABLE>
<CAPTION>
                                     Three Months Ended Three Months Ended
                                       June 30, 2002      June 30, 2001
                                     -----------------  -----------------
                                              Operating          Operating
                                     Revenues  Income   Revenues  Income
                                     -------- --------- -------- ---------
      <S>                            <C>      <C>       <C>      <C>
      Commercial/Industrial Services  $698.9    $ 2.3    $834.2    $49.5
      Residential Services..........    91.1     11.2      90.3     10.2
      Cleaning Systems..............    76.9     (2.7)     72.1      3.6
      Corporate.....................      --     (1.8)       --     (4.8)
      Amortization of goodwill......      --       --        --     (9.0)
                                      ------    -----    ------    -----
         Total......................  $866.9    $ 9.0    $996.6    $49.5
                                      ======    =====    ======    =====
</TABLE>

   Segment Results. Commercial/Industrial Services Group revenues decreased 16%
to $698.9 million for the three months ended June 30, 2002 compared to the
comparable period in 2001 primarily as a result of the decline in revenues from
the technology and telecommunications sector and the general economic slowdown.
Commercial/Industrial Services operating income decreased 95% to $2.3 million
in the three months ended June 30, 2002 period compared to income of $49.5
million in the comparable period in 2001, primarily as a result of increased
pricing pressures on projects as a result of deteriorating economic conditions,
reduced levels of work done for customers in the higher margin technology and
telecommunications sector, and job losses totaling $13.3 million on two
specific large fixed-price contracts. Residential Services Group revenues
increased 1% to $91.1 million and operating income increased 9% to $11.2
million, reflecting continued growth in market conditions in key housing
markets and increased penetration of certain markets. Cleaning Systems Group
revenues increased 7% to $76.9 million primarily as a result of an increased
volume of national service contracts. Cleaning Systems operating income
declined to a loss of $2.7 million due primarily to bad debt provisions of $2.8
million on financially struggling retail accounts, service disruption caused by
the bankruptcy filing of a significant retail customer and weak performance in
the group's West Coast contract management operations.

   Revenues. Revenues decreased $129.7 million, or 13%, to $866.9 million for
the three months ended June 30, 2002 from $996.6 million for the three months
ended June 30, 2001. The decrease is primarily attributable to decreases in
revenues from technology and telecommunications customers in the West and
Southwest regions of the Company's Commercial/Industrial Services Group and the
general deterioration in the overall economic environment. The U.S. Department
of Commerce construction reports indicate that private non-residential
construction declined approximately 20% (seasonally adjusted annual rate) from
June 2001 to June 2002.

   Gross profit. Gross profit decreased $68.5 million, or 39%, to $107.5
million for the three months ended June 30, 2002 from $176.0 million for the
three months ended June 30, 2001. This decrease in gross profit is primarily
due to increased pricing pressures on projects as a result of weaker economic
conditions, reduced levels of work done for customers in the higher margin
technology and telecommunications sector, and job losses totaling $13.3 million
on two specific large jobs. Gross profit margin decreased to 12.4% for the
three months ended June 30, 2002 compared to 17.7% for the three months ended
June 30, 2001 for the same reasons.

   Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $8.5 million, or 8%, to $98.9 million for the
three months ended June 30, 2002 from $107.4 million for the three months ended
June 30, 2001. The decrease in these expenses is primarily attributable to
lower volumes of work than in the prior year period, integration-related cost
savings and cost-reduction initiatives. As a percentage of revenues, selling,
general and administrative expenses increased to 11.4% for the three months
ended June 30,

                                      16

<PAGE>

2002 from 10.8% for the three months ended June 30, 2001. This increased
percentage is primarily due to a lower revenue base across which to spread
fixed overhead costs.

   Provision for doubtful accounts, net of recoveries. Provision for doubtful
accounts decreased from a provision of $10.0 million for the three months ended
June 30, 2001 to net bad debt recoveries of $0.4 million in the three months
ended June 30, 2002. The prior year provision is primarily attributable to a
$9.8 million charge recorded in the second quarter of 2001 to reserve certain
accounts receivable from customers in the telecommunications industry.

   Amortization of goodwill. In accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142 effective January 1, 2002, the
Company recorded no goodwill amortization in 2002. See Note 2 of Notes to
Consolidated Condensed Financial Statements for further discussion. Goodwill
amortization for the three months ended June 30, 2001 was $9.0 million.

   Other income (expense). Other income (expense) primarily includes net
interest expense of $19.6 million for the three months ended June 30, 2002,
reflecting a $0.1 million decrease from the three months ended June 30, 2001.
Net interest expense was lower in 2002 primarily as a result of lower average
debt balances and higher interest income, partially offset by the impact of
higher interest rates on debt.

   Income tax provision (benefit). As a result of lower earnings before taxes,
the income tax provision decreased $18.6 million to a $4.9 million benefit for
the three months ended June 30, 2002, compared to a $13.7 million provision for
the three months ended June 30, 2001. The effective tax rate for the three
months ended June 30, 2002 was 47.5% compared to 46.3% for the three months
ended June 30, 2001.

   Loss from discontinued operations, net of tax. During the three months ended
June 30, 2002, the Company recorded a loss, net of tax, of $0.6 million related
to the transition and wind-down of the three business units sold during the
first quarter of 2002, compared to a loss, net of tax, from these discontinued
operations as well as those of the discontinued Global Technologies segment of
$7.1 million for the three months ended June 30, 2001. See Note 3 of Notes to
Consolidated Condensed Financial Statements for further discussion.

Six months ended June 30, 2002 compared to six months ended June 30, 2001

   Operating results for the six months ended June 30, 2002 and 2001 are
summarized as follows (in millions):

<TABLE>
<CAPTION>
                                         Six Months          Six Months
                                     Ended June 30, 2002 Ended June 30, 2001
                                     -----------------   -----------------
                                               Operating           Operating
                                     Revenues   Income   Revenues   Income
                                     --------  --------- --------  ---------
      <S>                            <C>       <C>       <C>       <C>
      Commercial/Industrial Services $1,415.6    $21.1   $1,686.4   $ 98.8
      Residential Services..........    165.6     15.5      164.2     14.2
      Cleaning Systems..............    148.7     (2.1)     138.9      7.2
      Corporate.....................       --     (3.7)        --     (6.9)
      Amortization of goodwill......       --       --         --    (18.1)
                                     --------    -----   --------   ------
         Total...................... $1,729.9    $30.8   $1,989.5   $ 95.2
                                     ========    =====   ========   ======
</TABLE>

   Segment Results. Commercial/Industrial Services Group revenues decreased 16%
to $1,415.6 million for the six months ended June 30, 2002 compared to the
comparable period in 2001 primarily as a result of the decline in revenues from
the technology and telecommunications sector and the general economic slowdown.
Commercial/Industrial Services operating income decreased 79% to $21.1 million
in the six months ended June 30, 2002 period compared to the comparable period
in 2001, primarily as a result of increased pricing pressures on projects as a
result of deteriorating economic conditions, reduced levels of work done for
customers in the higher margin technology and telecommunications sector, and
job losses totaling $13.3 million on two specific large

                                      17

<PAGE>

fixed-price contracts. Residential Services Group revenues increased 1% to
$165.6 million, and operating income increased 9% to $15.5 million, reflecting
improved market conditions in key housing markets and increased penetration of
certain markets. Cleaning Systems Group revenues increased 7% to $148.7 million
primarily as a result of an increased volume of national service contracts.
Cleaning Systems operating income declined to a loss of $2.1 million due
primarily to bad debt provisions of $2.8 million on financially struggling
retail accounts, service disruption caused by the bankruptcy filing of a
significant retail customer and weak performance in the group's West Coast
contract management operations.

   Revenues. Revenues decreased $259.6 million, or 13%, to $1,729.9 million for
the six months ended June 30, 2002 from $1,989.5 million for the six months
ended June 30, 2001. The decrease is primarily attributable to decreases in
revenues from technology and telecommunications customers in the West and
Southwest regions of the Company's Commercial/Industrial Services Group and as
a result of the general deterioration in the overall economic environment. The
U.S. Department of Commerce construction reports indicate that private
non-residential construction declined approximately 20% (seasonally adjusted
annual rate) from June 2001 to June 2002.

   Gross profit. Gross profit decreased $124.9 million, or 35%, to $227.8
million for the six months ended June 30, 2002 from $352.7 million for the six
months ended June 30, 2001. This decrease in gross profit is primarily due to
increased pricing pressures on projects as a result of weaker economic
conditions, reduced levels of work done for customers in the higher margin
technology and telecommunications sector and job losses totaling $13.3 million
on two specific large fixed-price contracts. Gross profit margin decreased to
13.2% for the six months ended June 30, 2002 compared to 17.7% for the six
months ended June 30, 2001, for the reasons mentioned above.

   Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $32.1 million, or 14%, to $195.0 million for
the six months ended June 30, 2002 from $227.1 million for the six months ended
June 30, 2001. The decrease in these expenses is primarily attributable to
lower volumes of work than in the prior year period, integration-related cost
savings and cost-reduction initiatives. As a percentage of revenues, selling,
general and administrative expenses decreased to 11.3% for the six months ended
June 30, 2002 from 11.4% for the six months ended June 30, 2001. This decreased
percentage is primarily due to integration-related cost savings and the
elimination of overhead positions from other cost-reduction initiatives.

   Provision for doubtful accounts, net of recoveries. Provision for doubtful
accounts decreased $10.2 million, or 83%, to $2.1 million in the first six
months of 2002, compared to $12.3 million in the same period of 2001. This
decrease is primarily attributable to a $9.8 million charge recorded in the
second quarter of 2001 to reserve certain accounts receivable from customers in
the telecommunications industry.

   Amortization of goodwill. In accordance with the provisions of SFAS No. 142
effective January 1, 2002, the Company recorded no goodwill amortization in
2002. See Note 2 of Notes to Consolidated Condensed Financial Statements for
further discussion. Goodwill amortization for the six months ended June 30,
2001 was $18.1 million.

   Other income (expense). Other income (expense) primarily includes net
interest expense of $37.8 million for the six months ended June 30, 2002,
reflecting a $4.3 million decrease from the six months ended June 30, 2001. Net
interest expense was lower in 2002 primarily as a result of lower average debt
balances outstanding.

   Income tax provision (benefit). As a result of lower earnings before taxes,
the income tax provision decreased $27.6 million to a $3.0 million benefit for
the six months ended June 30, 2002 from a $24.7 million expense for the six
months ended June 30, 2001. The effective tax rate for the six months ended
June 30, 2002 was 52.0% compared to 46.6% for the six months ended June 30,
2001. The increase in the effective tax rate is due to the effect of
non-deductible expenses making up a larger proportion of pre-tax income (loss)
in 2002 compared to 2001.

                                      18

<PAGE>

   Loss from discontinued operations, net of tax. The Company recorded a
combined loss, net of tax, from three business units sold during the first
quarter of 2002 of $1.1 million for the six months ended June 30, 2002 compared
to a loss, net of tax, from these discontinued operations as well as those of
the discontinued Global Technologies segment of $5.7 million for the six months
ended June 30, 2001. See Note 3 of Notes to Consolidated Condensed Financial
Statements for further discussion.

   Loss on disposal of discontinued operations, net of tax. The Company
recorded a loss on the sale of the three business units sold during the first
quarter of 2002 of $1.1 million, net of related income tax benefit of $0.8
million. These businesses were sold for aggregate net proceeds of $9.6 million.
See Note 3 of Notes to Consolidated Condensed Financial Statements for further
discussion.

   Cumulative effect of change in accounting principle, net of tax. The
cumulative effect of change in accounting principle, net of tax, represents a
non-cash charge for impairment of goodwill, in accordance with the adoption of
the provisions of SFAS No. 142 on January 1, 2002, of $451.9 million, net of
tax benefit of $48.2 million. This non-cash impairment charge has no impact on
the calculation of financial covenants under the Company's debt agreements. See
Note 2 of Notes to Consolidated Condensed Financial Statements for further
discussion.

                        LIQUIDITY AND CAPITAL RESOURCES

   The Company finances its operations and growth primarily with internally
generated funds and borrowings from commercial banks and other lenders. During
the second quarter of 2002, management anticipated that the Company might not
be able to remain in compliance with the financial covenants contained in its
primary bank credit facility (the "Credit Facility") as of June 30, 2002.
Accordingly, the Company entered into negotiations with its senior bank lenders
to amend the financial covenants to avoid a possible default as of the end of
the second quarter. Effective June 26, 2002, the Company entered into an
amended credit facility (the "Amended Facility"), which provides financial
covenant modifications through February 2005. Management anticipates that the
Company's cash flow from operations and existing borrowing capacity under the
Amended Facility will be adequate to fund the Company's normal working capital
needs, debt service requirements and planned capital expenditures for 2002.

   The Amended Facility consists of approximately $400 million in Term Loans
and a $300 million Revolving Credit Facility. Pursuant to the Amended Facility,
the Company is required to sell $35.0 million of voting stock to affiliates of
Apollo Management IV, L.P. ("Apollo") in a rights offering or other investment
(the "Apollo Investment") and to apply $31.0 million of the proceeds to
permanently reduce amounts outstanding under the Term Loans by October 15,
2002. The Revolving Credit Facility is temporarily limited to $250 million,
until the Apollo Investment has been funded. Availability under the Revolving
Credit Facility, after applying available cash and deducting letter of credit
commitments, was $110.6 million at July 31, 2002. The Company is currently in
compliance with all financial covenants under the Amended Facility. Although no
absolute assurance can be given, the Company's internal financial projections
for the balance of 2002 indicate that the Company will remain in compliance
with all financial covenants under the Amended Facility for the duration of the
year.

   On June 27, 2002, the Company entered into a Securities Purchase Agreement
with affiliates of Apollo, whereby Apollo agreed to purchase $35.0 million of
voting stock of the Company, subject to the terms and conditions of the
Securities Purchase Agreement. In connection therewith, the Company plans to
enter into a rights offering whereby holders of common stock, certain options
and warrants, and the Convertible Preferred Stock will receive rights to
purchase up to an aggregate of 75 million shares of Company common stock,
including the Apollo Investment, at a cash subscription price of $0.55 per
share. If the rights offering is fully subscribed, the total amount raised,
including the Apollo Investment, will be $72.4 million. Pursuant to the Amended
Facility, proceeds from the $35.0 million Apollo Investment, net of up to $4.0
million of certain permitted expenses, are required to be applied against the
Terms Loans, and 50 percent of the proceeds received

                                      19

<PAGE>

from the rights offering in excess of the Apollo Investment, net of certain
permitted expenses, will be applied toward permanent reduction of the Revolving
Credit Facility and the Term Loans, on a pro rata basis. The rights offering is
conditioned upon shareholder approval of the Apollo Investment and customary
regulatory approvals. In the event the shareholders do not approve the Apollo
Investment, or if the Apollo Investment is not received on or before October
15, 2002, the Company will be in immediate default under the Amended Facility.
On August 13, 2002, the closing sale price of the Company's common stock was
$0.23 per share. To the extent that shares continue to be available on the open
market at prices below $0.55 per share, participation in the rights offering,
other than the Apollo Investment, is unlikely. Subject to Apollo's consent, the
Company can elect to terminate the rights offering at any time and have Apollo
fund the Apollo Investment by a different form of investment.

   Under the Amended Facility, the Company is required to maintain compliance
with the following financial covenants, measured as of the end of each fiscal
quarter: (1) a minimum Fixed Charge Coverage Ratio (as defined); (2) a maximum
ratio of senior debt to pro forma EBITDA (as defined); (3) a maximum ratio of
Funded Debt (as defined) to pro forma EBITDA (as defined); (4) a minimum amount
of Consolidated Net Worth (as defined); and (5) a maximum amount of capital
expenditures. In addition, the Amended Facility restricts the Company's ability
to pay dividends, make acquisitions and investments and incur capital
expenditures and requires debt prepayment with proceeds from future issuances
of debt or equity, asset sales and excess cash flow (as defined in the Amended
Facility).

   The Company intends to sell certain under-performing or non-strategic
business units, provided that the Company is able to secure prices, terms and
conditions deemed acceptable by the Company. Including the anticipated tax
benefits associated with the sales of some of these businesses, the Company
believes that the aggregate cash benefit to be realized from sales of
businesses will exceed $50 million. Pursuant to the Amended Facility, the
proceeds of any such sales will be used to permanently reduce balances
outstanding under the Term Loans and the Revolving Credit Facility, on a
pro-rata basis. There can be no assurance that the Company will secure
satisfactory offers for any business unit or that some business units will not
be sold at a loss.

   For the six months ended June 30, 2002, the Company generated $6.7 million
of cash from operating activities, compared to $55.4 million for the six months
ended June 30, 2001. Operating cash flow before changes in working capital and
other operating accounts for the six months ended June 30, 2002 provided $20.7
million compared to $77.9 million for the six months ended June 30, 2001. The
decrease in 2002 compared to 2001 is primarily the result of lower
profitability levels in 2002. Net changes in working capital and other
operating accounts used $14.0 million in the six months ended June 30, 2002,
compared to $22.5 million for the same period in 2001. The decrease in working
capital usage in 2002 was primarily a result of management focus on working
capital management and a general business slowdown.

   For the six months ended June 30, 2002, the Company generated $3.6 million
of cash in investing activities, as the $11.5 million of proceeds from the
sales of three businesses and other assets more than offset capital
expenditures of $7.8 million. The Company used cash in investing activities of
$22.8 million during the six months ended June 30, 2001. Capital expenditures
in the six months ended June 30, 2002 totaled $7.8 million, compared to $16.4
million for the comparable period in 2001, as management continues to defer
discretionary capital spending in 2002.

   The Company used $14.8 million of cash for financing activities in the six
months ended June 30, 2002, primarily representing the net repayment of amounts
borrowed under the Revolving Credit Facility. Financing activities used cash of
$36.1 million in the first six months of 2001, which also primarily represented
net debt repayments.

   Borrowings under the Amended Facility bear interest at variable rates,
ranging from 2.0% to 4.25% over the Eurodollar Rate (as defined in the Amended
Facility) and from 0.50% to 2.75% over the Alternate Base Rate (as defined in
the Amended Facility), depending, in each case, on the Company's total
debt-to-EBITDA ratio. At June 30, 2002, the applicable margins for borrowings
under the Revolving Credit Agreement were 4.00% over the Eurodollar Rate and
2.50% over the Alternate Base Rate.

                                      20

<PAGE>

   The Company has entered into interest rate swap agreements in the aggregate
notional amount of $90 million to manage its mix of fixed and floating rate
debt to partially hedge its exposure to potential fluctuations in interest
rates. All such agreements are with large creditworthy financial institutions
and result in the Company paying a fixed rate of interest and receiving a
floating rate. At June 30, 2002, the Company's ratio of fixed rate debt to
total debt was 42% and the weighted average interest rate on its total debt was
9.0%, before considering the aforementioned interest rate swap agreements.
After giving effect to the interest rate swap agreements in effect at June 30,
2002, the ratio of fixed rate debt was 53% and the weighted average interest
rate on its total debt was 9.2%.

   The Company has outstanding $335.0 million of 10 1/2% senior subordinated
notes (the "Senior Subordinated Notes"). The Senior Subordinated Notes are
unsecured and guaranteed by the Company's subsidiaries, require interest to be
paid semi-annually on May 1 and November 1 of each year and mature on May 1,
2009.

   The Company may redeem the Senior Subordinated Notes, in whole or in part,
at any time on or after May 1, 2004 at specified redemption prices, plus
accrued interest. Upon a change of control of the Company (as defined in the
indenture for the Senior Subordinated Notes), the Company will be required to
offer to purchase all of the outstanding Senior Subordinated Notes at 101% of
the face amount plus accrued interest. Additionally, the indenture governing
the Senior Subordinated Notes contains certain covenants that restrict, among
other things, the Company's ability to incur indebtedness, pay dividends or
repurchase capital stock, incur liens, sell or otherwise dispose of a
substantial portion of assets or merge or consolidate with another entity.

   The Company has 256,191 shares of Convertible Preferred Stock outstanding,
which are held by Apollo. The Convertible Preferred Stock, if not otherwise
converted, is redeemable in 2012, and is entitled to receive an annual dividend
of 7.25% payable quarterly. Under the terms of the Convertible Preferred Stock
Agreement, until February 22, 2003, dividends on the Convertible Preferred
Stock may be paid in cash on a current basis or accumulated, at the option of
the Company. However, the Amended Facility prohibits the payment of cash
dividends, which the Convertible Preferred Stock Agreement requires beginning
in April 2003. As a result, the Company will, in all likelihood, not make its
cash dividend payment in April 2003. If the Company does not make its cash
dividend payment in April 2003, the dividend rate on the Convertible Preferred
Stock will increase to an annual rate of 9.25%, and Apollo will have the right
to appoint additional directors to the Company's Board of Directors such that
the Apollo-appointed directors would constitute a majority of the Board of
Directors. However, such events will not trigger a right of acceleration of the
Company's redemption obligation under the Convertible Preferred Stock or any of
its debt instruments. The Convertible Preferred Stock is convertible into
shares of the Company's common stock at any time by the holders at a conversion
price of $14 per common share, subject to adjustment under certain
circumstances.

Other Contractual Obligations and Commercial Commitments

   As is common in the facilities services industry, the Company enters into
certain off-balance sheet arrangements in the ordinary course of business,
including non-cancelable operating leases, letters of credit and surety
guarantees. The Company does not own any "special purpose" financing
subsidiaries.

   The Company enters into operating leases for many of its facility, vehicle
and equipment needs. Such lease arrangements enable the Company to conserve
cash by paying monthly lease rental fees for the applicable assets rather than
purchasing them. At the end of the lease period, the Company has no further
obligation to the lessor. If the Company decides to cancel or terminate a lease
prior to the end of its term, the Company is typically obligated to pay the
remaining lease payments over the term of the lease, and in certain cases may
be allowed to sublet the asset to another party.

   The Company is occasionally required to post letters of credit generally
issued by a bank as collateral under certain insurance programs or, on
occasion, to ensure performance under contracts. A letter of credit commits the
issuer to remit specified amounts to the holder, if the holder demonstrates
that the Company has failed to meet its

                                      21

<PAGE>

obligations under the letter of credit. If this were to occur, the Company
would be obligated to reimburse the issuer for any payments the issuer was
required to remit to the holder of the letter of credit. Generally, a letter of
credit is released when the Company has performed its obligations that the
letter of credit is securing. To date, the Company has not had a claim made
against a letter of credit that resulted in a payment made by an issuer or the
Company to the holder.

   Particularly in connection with larger construction contracts, the Company
is often required to post bid and/or performance bonds issued by a financial
institution known as a surety. Such bonds provide a guarantee to the customer
that the Company will perform under the terms of the contract and be able to
pay its subcontractors and vendors. If the Company was to fail to perform its
obligations under the contract, the customer would have the right to demand
payment or services from the surety under the bond. The Company would then be
obligated to reimburse the surety for any expenses or outlays that it incurred
in the matter.

Seasonality and Cyclicality

   A significant portion of the Company's business involves installation of
mechanical and electrical systems in newly constructed commercial, industrial
and residential facilities. The portion of the Company's business related to
new construction is subject to seasonal fluctuations. Specifically, the demand
for the Company's contracting services involving new construction is generally
lower during the winter months, when construction activities are reduced as a
result of inclement weather in many areas of the United States. In addition,
the demand for mechanical maintenance, repair and replacement services also
tends to be lower in the winter months due to lower air conditioning usage
during these months. Accordingly, the Company expects its revenues and
operating results generally will be lowest in the first fiscal quarter of the
year.

   Historically, the construction industry has also been highly cyclical. The
level of new construction in the commercial and industrial sectors is affected
by, among other things, local and national economic conditions, interest rates,
inflationary concerns, levels of corporate and government capital spending,
capital market activities and governmental activities at the regional and
national levels. Factors impacting the level of new residential construction
tend to be regional in nature, and include general employment and personal
income levels, the availability and cost of financing for new home buyers and
the general economic outlook for a given geographic region.

   The Company performs contracting services related to new construction in a
variety of industries including, among others, automotive, heavy industrial,
commercial real estate development, residential housing, retail, healthcare,
education, government/institutional, petrochemical refining, data and
telecommunications, and sports and entertainment. Consequently, management
believes that a temporary slowdown in new construction related to any one of
these industries would not likely have a significant impact on the Company's
financial condition. However, concurrent downturns in new construction in
multiple industries or geographic regions, or prolonged slowdowns (such as the
Company is currently experiencing) in specific industries or geographic
regions, could have (and have had) a negative impact on the Company's business,
including its financial condition, results of operations and liquidity.

New Accounting Pronouncements

   Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets," which establish new accounting and
reporting requirements for goodwill and other intangible assets. Under the new
standard, goodwill and intangible assets with indefinite useful lives are no
longer amortized to expense, but instead are tested for impairment at least
annually. At January 1, 2002, net goodwill balances attributable to each of the
Company's reporting units were tested for impairment by comparing the fair
value of each reporting unit to its carrying value. Fair value was determined
using capitalization of earnings estimates and market multiples of earnings
estimates. Significant estimates used in the methodologies included estimates
of future earnings, future growth rates, weighted average cost of capital and
market valuation multiples for each reporting unit.

                                      22

<PAGE>

   Based upon these impairment tests performed upon adoption of SFAS No. 142,
the Company recognized a charge of $451.9 million, or $7.04 per share, net of
tax benefit of $48.2 million, at January 1, 2002, which is shown as a
cumulative effect of a change in accounting principle in the consolidated
condensed statement of operations. This non-cash impairment charge has no
impact on the calculation of financial covenants under the Company's debt
agreements.

   Also as prescribed by SFAS No. 142, the Company reclassified the unamortized
balance of its acquired dedicated workforce, which was $5.6 million at January
1, 2002, from intangible assets to goodwill. See Note 2 of Notes to
Consolidated Condensed Financial Statements for further discussion.

   In August 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
which supersedes both SFAS No. 121 and the accounting and reporting provisions
of Accounting Principles Board Opinion ("APB") No. 30, for the disposal of a
business. SFAS No. 144 provides a single accounting model for long-lived assets
to be disposed of. Although retaining many of the fundamental recognition and
measurement provisions of SFAS No. 121, the new rules change the criteria to be
met to classify an asset as held-for-sale. The new rules also broaden the
criteria regarding classification of a discontinued operation. The Company
adopted the provisions of SFAS No. 144, as required, effective January 1, 2002.
See Note 3 of the Notes to Consolidated Condensed Financial Statements for
further discussion.

   In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 amends existing authoritative pronouncements to make
various technical corrections, clarify meanings, and describe their
applicability under changed conditions. This statement requires that gains and
losses from the extinguishment of debt be classified as extraordinary items
only if they meet the criteria in APB No. 30. The Company must adopt the
provisions of SFAS No. 145 on January 1, 2003. Management does not believe that
the adoption of SFAS No. 145 will have a material impact on the Company's
financial position or results of operations.

   In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement requires that exit or
disposal costs be recorded when they are "incurred." Commitment to a plan to
exit an activity or dispose of long-lived assets will no longer be sufficient
to record a one-time charge for most anticipated costs. The Company must adopt
the provisions of SFAS No. 146 on January 1, 2003. Management does not believe
that the adoption of SFAS No. 146 will have a material impact on the Company's
financial position or results of operations.

Risk Factors

   The Company has a significant amount of debt in relation to its current
level of operating income, which could limit the Company's flexibility with
respect to obtaining additional financing in the future to fund working capital
growth, debt service requirements or other purposes. This level of debt also
increases the Company's vulnerability to further adverse economic and industry
conditions and higher interest rates, and may place the Company at a
competitive disadvantage compared to competitors with relatively less
indebtedness.

   The Company's ability to satisfy its debt obligations and other cash needs
will depend on, among other things, the Company's future operating performance
and its ability to refinance or exchange debt when necessary, including the
potential issuance of additional common or preferred stock. These factors are,
to a large extent, dependent on economic, capital market, competitive and other
factors beyond the Company's control. The Company's future operating results
are difficult to project and may be affected by a number of factors, including
general economic conditions, the level of new construction of commercial and
industrial facilities, commercial demand for replacement of electrical, HVAC
and plumbing systems, new housing starts, the availability of qualified labor
and project management personnel and other factors in areas in which the
Company operates.

                                      23

<PAGE>

   Particularly in connection with larger construction contracts, the Company
is often required to post bid or performance bonds issued by a financial
institution known as a surety. The surety industry has become an unsettled and
volatile market in recent months, in the aftermath of certain notable corporate
bankruptcies with significant surety exposure, other recent loss exposures and
other factors. Collectively, these events have caused certain reinsurers and
sureties to reevaluate their committed levels of underwriting and required
returns. The ultimate impact of these developments, if any, on the surety
market in general, or the Company specifically, cannot be determined at this
time. Historically, as needed in the normal course of operations, the Company
has been able to secure bid and performance bonds. The Company continues to
seek opportunities to expand its surety relationships and monitors bonding
requests from its business units in order to manage the dollar volume and
optimize the value of outstanding surety bonds. Given the uncertainty in the
current surety market, there can be no assurance that the Company's available
bonding capacity will be sufficient to satisfy its future bonding requirements.

   The Company has grown substantially by acquiring other companies in its
industry. The Company's future success depends in part on its ability to
integrate the businesses it has acquired into one enterprise with a common
operating plan. Most of these acquired businesses have recently changed or, in
certain cases, are in the process of changing their past operating processes
and systems, such as accounting, employment, purchasing, sales, estimating and
project management. There can be no assurance that the Company will be able to
successfully complete the integration of these businesses.

   Included in our customer base are a number of companies involved in the
telecommunications industry, including fiber-optic network companies, wireless
phone companies and high-speed Internet providers. The telecommunications
industry has suffered a significant downturn during the past eighteen months,
resulting in numerous bankruptcies involving Company customers. During the six
months ended June 30, 2001, the Company recorded $9.8 million in continuing
operations and $9.0 million in the discontinued Global Technologies operations
to reserve certain accounts receivable from customers in the telecommunications
industry. The Company continues to perform services in the telecommunications
industry and total net receivables from identified telecommunications customers
as of June 30, 2002, were less than $25 million.

   As the holder of the Company's Convertible Preferred Stock, Apollo is able
to exert significant influence over the election of the Company's directors and
matters submitted to shareholders, as well as over the Company's business
operations. So long as Apollo beneficially owns at least 25% of the Company's
common stock underlying the Convertible Preferred Stock, Apollo has the right
to purchase for cash any common stock equivalent that the Company offers in a
private placement and the right to preclude the Company from entering into
various types of transactions or making certain changes in capital structure or
management without Apollo's consent.

   Pursuant to the Statement of Designation related to the Convertible
Preferred Stock and the Investors' Rights Agreement between Apollo and the
Company, Apollo currently has elected three members to the Company's Board of
Directors. Under the Investors' Rights Agreement, the Company is required to
maintain a debt leverage ratio (total debt to EBITDA, as defined) less than
4.00 to 1. The Company did not maintain a leverage ratio less than 4.00 to 1
during the second quarter of 2002. If such event is deemed both material and
intentional, and so long as the requirements of the covenant are not met,
Apollo is entitled to appoint additional directors to the Company's Board of
Directors such that the Apollo-appointed directors would constitute a majority
of the Board of Directors. Not meeting the total debt leverage covenant does
not trigger a right of acceleration of the Company's obligations under any of
its debt or outstanding preferred stock instruments.

   Because of these and other factors, past financial performance should not
necessarily be considered an indicator of future performance. Investors should
not rely solely on historical trends to anticipate future results and should be
aware that the trading price of the Company's common stock may be subject to
wide fluctuations in response to quarterly variations in operating results,
general conditions in the construction industry, analyst recommendations and
earnings estimates, or other events.

                                      24

<PAGE>

Forward Looking Statements

   This report may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are based on
the Company's current expectations and involve risks and uncertainties that
could cause the Company's actual results to differ materially from those set
forth in the statements. The Company can give no assurance that such
expectations will prove to be correct. Factors that could cause the Company's
results to differ materially from current expectations include: non-approval by
the Company's shareholders of the Apollo Investment; the level of demand for
the Company's services by multi-site customers; the level of interest rates,
which affects demand for the Company's services and its interest expense; the
potential impact of any acquisition, disposition, merger, joint venture or any
other significant financial transactions of material financial nature that
could occur in the future; working capital requirements; and general economic
conditions; as well as other factors listed in the Company's Annual Report on
Forms 10-K and 10-K/A for the year ended December 31, 2001.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

   The table below provides scheduled principal payment and fair value
information about the Company's market-sensitive financial instruments as of
June 30, 2002. The Company's major market risk exposure is interest rate
volatility. The Company has entered into interest rate swap agreements in the
aggregate notional amount of $90 million to manage its mix of fixed and
floating rate debt to partially hedge its exposure to potential fluctuations in
interest rates. All items described below are stated in thousands of U.S.
dollars. This information constitutes a "forward looking statement."

<TABLE>
<CAPTION>
                                                                                                    Fair Value at
         June 30, 2002             2002     2003     2004     2005     2006    Thereafter   Total   June 30, 2002
         -------------            ------  -------  -------  -------  --------  ---------- --------  -------------
<S>                               <C>     <C>      <C>      <C>      <C>       <C>        <C>       <C>
Debt:
   Revolving Credit Facility..... $   --  $    --  $    --  $83,800  $     --   $     --  $ 83,800    $ 83,800
      Average rate (a)...........                               8.3%                           8.3%
   Term Credit Facilities........ $2,000  $ 4,000  $ 4,000  $ 4,000  $280,113   $ 92,285  $386,398    $386,398
      Average rate (a)...........    6.5%     6.5%     6.5%     6.5%      6.5%       6.5%      6.5%
   Senior Subordinated Notes..... $   --  $    --  $    --  $    --  $     --   $335,000  $335,000    $190,950
      Average rate...............                                                   10.5%     10.5%
   Other Borrowings.............. $  494  $ 1,613  $ 2,500  $    --  $     --   $     --  $  4,607    $  4,607
      Average rate...............    9.5%     6.0%     7.5%
Interest Rate Swaps:
   Notional amounts-variable to
    fixed........................ $   --  $50,000  $40,000       --        --         --  $ 90,000    $ (6,491)
   Average pay rate..............     --      6.7%     6.7%      --        --         --       6.7%
   Average receive rate (a)......     --      1.9%     1.9%      --        --         --       1.9%
</TABLE>
--------
(a) Represents weighted average rate at June 30, 2002.

                                      25

<PAGE>

                                    PART II

                               OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders.

   Pursuant to the Investors' Rights Agreement relating to the 7.25%
Convertible Preferred Stock of the Company (the "Convertible Preferred Stock"),
Apollo Management IV, L.P. and certain of its affiliates ("Apollo"), as holders
of all the Convertible Preferred Stock outstanding, were entitled to elect
three of the ten directors to be elected to the Board of Directors of the
Company at the 2002 Annual Meeting of Shareholders. By written consent, Apollo
cast all of its 256,191 shares of Convertible Preferred Stock (21,293,269
shares of common stock equivalent) to elect Andrew Africk, Michael Gross and
Scott Kleinman as directors to serve for a term to expire at the 2003 Annual
Meeting of Shareholders.

   The Company held its Annual Meeting of Shareholders on June 26, 2002 (the
"Annual Meeting") for the purpose of electing seven additional directors for a
term expiring at the Company's 2003 Annual Meeting of Shareholders and
approving the appointment of independent public accountants for the year 2002.
The following summarizes the shareholder voting results.

      (a) Election of directors (in addition to those elected by Apollo) for a
   term to expire at the 2003 Annual Meeting of Shareholders:

<TABLE>
<CAPTION>
                                             For     Withheld
                                          ---------- ---------
                 <S>                      <C>        <C>
                 Vincent W. Eades........ 73,835,815 1,192,435
                 Joseph M. Ivey, Jr...... 73,753,153 1,275,097
                 Donald L. Luke.......... 73,763,478 1,264,772
                 J. Patrick Millinor, Jr. 68,326,923 6,701,327
                 Lucian L. Morrison...... 73,858,341 1,169,909
                 William M. Mounger, II.. 73,856,706 1,171,544
                 John M. Sullivan........ 73,836,529 1,191,721
</TABLE>

      (b) Approval of the appointment of KPMG LLP as independent accountants
   for Encompass for the year 2002:

<TABLE>
<CAPTION>
                              For     Against Abstain
                              ---     ------- -------
                           <S>        <C>     <C>
                           73,557,223 987,928 483,099
</TABLE>

Item 6.  Exhibits and Reports on Form 8-K.

   (a) Exhibits.

<TABLE>
<CAPTION>
Exhibit
  No.                                        Description of Exhibit
  ---                                        ----------------------
<C>     <S>

 10.1   Fifth Amendment dated effective as of June 26, 2002 to Credit Agreement dated as of February 22,
        2000 among Encompass, the subsidiaries of Encompass named therein, JPMorgan Chase Bank,
        Wachovia Bank National Association, Bank of America, N.A. and the banks named therein.

 10.2   Securities Purchase Agreement dated as of June 27, 2002 between Encompass and the investors
        named therein.
</TABLE>

   (b) Reports on Form 8-K.

   A Report on Form 8-K was filed on June 28, 2002, whereby the Company filed
its press release, announcing, among other things, a stock rights offering and
an amendment to the Company's credit facility.

                                      26

<PAGE>

                                  SIGNATURES

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


Date: August 14, 2002
                                              ENCOMPASS SERVICES CORPORATION

                                              By:     /s/ Darren B. Miller
                                                  -----------------------------
                                                        Darren B. Miller
                                                    Senior Vice President and
                                                     Chief Financial Officer
                                                  (principal financial officer)

Date: August 14, 2002

                                              By:       /s/ L. Scott Biar
                                                  ------------------------------
                                                    Vice President and Chief
                                                       Accounting Officer
                                                  (principal accounting officer)

                                      27